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Building Materials Cost Increases Likely To Remain Moderate.

Overall inflation increased at a faster rate through May, but growth in multifamily housing construction costs moderated. Producer prices for all finished goods, a broad measure of inflation, rose at an annual rate of 4.7 percent from January through May. Last year they rose 1.8 percent.

Inflation in multifamily construction over the same period moderated to a 1.4 percent annual rate of increase in the U.S. Department of Labor's price index over the first five months of this year. The index rose 2.2 percent last year.

Sharp increases in oil and natural gas prices were the major factor in the faster rates of increase in overall inflation. Moderation in the rate of increase in multifamily construction costs may have been partly caused by the labor component since materials and component costs increased at a higher rate than last year.

Materials and components costs for construction rose 2.1 percent over the first five months of this year, versus a 1.4 percent increase in 1999,

Average costs of construction materials alone have risen 2.7 percent this year, versus one percent a year ago.

Oil prices increases also helped produce higher building materials prices. Price increases in building materials this year are the highest in three petroleum based products - plastic plumbing products up 24.6 percent, prepared asphalt roofing 11.5 percent and plastic construction products up 8.4 percent annually. Prepared paint has a significant component of petroleum-based products, and their prices rose 5.3 percent.

Two cement/concrete categories of the construction materials sector have experienced above average price increases this year. Construction gravel and crushed stone prices rose at 8.2 percent and concrete products rose 5.4 percent.

Portland cement prices over the same period declined slightly. Demand for all of these products has been strong for several years. Increased highway construction has been a major factor in demand for cement and concrete products.

During the last two years, demand has intensified as office building construction revived markedly. Demand is so strong that cement shipments to final customers has set records for the past two years.

Shipments rose seven percent in each of the last two years and have been growing at rates of more than five percent annually since 1992. The supply situation would be worse if imports had not more than doubled since 1996. Imports accounted for more than 20 percent of shipments last year. Demand for cement and concrete products is likely to remain strong given the increased federal funds available for highway construction and the general economic health of state and local governments. Significant price increases in cement, concrete products, and construction gravel and crushed stone could last well into next year, even if residential construction slows.

Softwood lumber and plywood are on the other end of the price change scale. Prices of softwood lumber dropped 6.5 percent in actual terms, 14.9 percent annually, from December-May. Plywood prices declined 3.9 percent and 9.2 percent annually.

Softwood lumber and plywood prices are subject to wide swings over short periods.

Lumber prices declined throughout 1998 and into early 1999 as a result of the Asian crises that dampened demand. The strong domestic construction markets overcame the effects of Asian economies and prices began to rise. There was also an expectation that the Asian economies would begin to recover strongly, but this did not occur.

Recently rising interest rates have impacted the lumber markets with the expectation that they will reduce construction and the demand for lumber. The expected softening in housing starts will lead to further easing in lumber and plywood prices.

Gypsum product prices dropped 5.4 percent and 12.5 percent annually from December-May. This decline is more of a pause than the result of demand or supply factors.

Gypsum prices rose 17 percent last year, have more than doubled since 1991 and are highly cyclical. Prices of gypsum products dropped by more than 35 percent from the peak of the last construction cycle in 1986 to the trough in 1991. A moderation in housing starts will produce further declines in gypsum product prices.

There is growing evidence that the U.S. economy is slowing from the tighter monetary policy that has produced higher mortgage interest rates. The long expected softening in housing starts should be seen soon. Pressure on building material prices in turn will moderate.

Price trends in building materials are not monolithic and the trends will vary as the economy slows. Materials closer to commodities, such as lumber, will see their prices moderate sooner and in a more pronounced manner.

Price trends in products higher up the manufacturing chain, such as major appliances, show more modest cyclical change and tend to occur with longer lags than changes in construction activity.

Percent Change Producer Price Indexes Selected Building Materials 1 2/99 to 05/00
 1990 1991 1992 1993
Producer Prices Finished
 Goods 4.9% 2.1% 1.2% 1.2%
Multi-unit Residential 1.8% 1.4% 2.6% 5.0%
All Construction Materials 0.1% 0.7% 1.7% 5.0%
Materials & Components for
 Const. 1.2% 1.3% 1.6% 4.3%
Plastic Plumbing Products -8.6% -6.5% -7.7% 8.3%
Prepared Asphalt Roofing 0.1% 0.5% -2.0% 0.6%
Plastic Construction
 Products -2.5% -1.7% -2.1% 3.5%
Construction gravel &
 crushed stone 2.1% 2.6% 1.6% 2.6%
General Millwork 2.2% 4.6% 5.9% 8.3%
Flat Glass -0.6% -1.5% 0.6% 0.8%
Concrete Products 2.1% 2.7% 0.5% 2.6%
Prepared Paint 4.4% 4.1% 1.3% 1.2%
Hardwood Lumber 2.2% 1.9% 9.5% 16.1%
Wood Kitchen Cabinets 1.3% 2.9% 3.2% 4.6%
Heating Equipment 5.2% 1.9% 2.4% 2.3%
Residential Light Fixtures 4.6% 0.8% 1.4% 1.0%
Lighting Fixtures 3.7% 1.1% 1.2% 1.9%
Construction machinery &
 Equipment 3.8% 3.0% 2.8% 2.6%
Wood Doors Interior &
 Exterior 1.5% 2.8% 3.9% 11.0%
Builders Hardware 4.1% 3.8% 2.4% 2.5%
Hard Surface Floor
 coverings 2.4% 4.7% 2.0% 2.3%
Portland Cement 1.6% 3.0% -0.5% 5.1%
Major Appliances 1.6% -0.4% -0.1% 1.3%
Roof Trusses -0.2% -0.3% 7.9% 17.1%
Power Driven Hand Tools 0.2% 2.8% 2.2% 1.8%
Ceramic Tile 1.8% -1.1% 1.1% 0.7%
Insulation Materials 1.6% 2.2% -7.7% 3.4%
Electronic Computers &
 Equipment NA NA 17.7% -15.0%
Softwood Plywood -3.7% 1.0% 21.9% 15.3%
Gypsum Products -4.4% -5.6% 0.6% 8.4%
Softwood Lumber -2.6% 1.5% 18.2% 29.9%

 1994 1995 1996 1997
Producer Prices Finished
 Goods 0.6% 1.9% 2.7% 0.4%
Multi-unit Residential 3.4% 3.2% 1.2% 2.2%
All Construction Materials 4.0% 3.7% 0.6% 1.8%
Materials & Components for
 Const. 3.5% 4.0% 1.1% 2.0%
Plastic Plumbing Products 9.1% 8.2% -5.2% -0.8%
Prepared Asphalt Roofing -2.1% 5.3% -0.4% -0.9%
Plastic Construction
 Products 5.4% 8.9% -2.2% -2.1%
Construction gravel &
 crushed stone 2.9% 3.2% 2.3% 1.8%
General Millwork 3.2% 1.1% 1.5% 1.9%
Flat Glass 3.0% 2.4% -2.8% 1.5%
Concrete Products 3.7% 3.9% 2.9% 2.1%
Prepared Paint 1.6% 5.2% 3.4% 3.3%
Hardwood Lumber 3.1% -0.8% -1.9% 6.2%
Wood Kitchen Cabinets 4.1% 4.1% 2.7% 2.3%
Heating Equipment 1.5% 3.5% 2.5% 0.8%
Residential Light Fixtures 1.2% 2.7% 0.8% -0.6%
Lighting Fixtures 0.6% 2.3% 0.9% 0.1%
Construction machinery &
 Equipment 1.3% 2.2% 2.3% 1.7%
Wood Doors Interior &
 Exterior 7.4% 1.4% 0.5% 0.8%
Builders Hardware 2.1% 3.6% 2.1% 1.2%
Hard Surface Floor
 coverings 1.6% 3.9% 0.4% 0.3%
Portland Cement 7.0% 7.2% 4.6% 4.0%
Major Appliances -0.1% 0.3% -0.5% -2.4%
Roof Trusses 8.1% -4.2% 3.5% 7.4%
Power Driven Hand Tools 2.6% 1.7% 1.4% 0.8%
Ceramic Tile 1.5% 1.8% 0.2% 0.1%
Insulation Materials 5.9% 6.1% 0.1% -1.0%
Electronic Computers &
 Equipment -8.4% -8.3% -12.9% -13.9%
Softwood Plywood 4.1% 6.5% -7.7% 1.0%
Gypsum Products 25.7% 13.5% -0.3% 10.9%
Softwood Lumber 2.6% -9.9% 6.2% 9.0%

 1998 1999 05/00 Ann.
 Rate
Producer Prices Finished
 Goods -0.8% 1.8% 1.9% 4.7%
Multi-unit Residential 0.1% 2.2% 0.6% 1.4%
All Construction Materials -0.5% 1.0% 1.1% 2.7%
Materials & Components for
 Const. 0.2% 1.4% 0.9% 2.1%
Plastic Plumbing Products -4.2% 4.9% 9.6% 24.6%
Prepared Asphalt Roofing -0.8% -0.5% 4.6% 11.5%
Plastic Construction
 Products -1.6% 1.4% 3.4% 8.4%
Construction gravel &
 crushed stone 3.1% 2.9% 3.3% 8.2%
General Millwork 0.2% 1.9% 3.2% 7.9%
Flat Glass -1.2% -0.7% 2.8% 6.9%
Concrete Products 2.9% 2.6% 2.2% 5.4%
Prepared Paint 1.8% 1.6% 2.2% 5.3%
Hardwood Lumber 2.6% -0.8% 2.1% 5.1%
Wood Kitchen Cabinets 1.9% 1.8% 1.4% 3.4%
Heating Equipment 0.5% 0.5% 1.0% 2.5%
Residential Light Fixtures -0.3% -1.1% 0.8% 2.0%
Lighting Fixtures 0.8% 0.6% 0.8% 2.0%
Construction machinery &
 Equipment 2.1% 1.4% 0.7% 1.6%
Wood Doors Interior &
 Exterior -0.1% 2.4% 0.7% 1.6%
Builders Hardware 1.5% 0.7% 0.5% 1.2%
Hard Surface Floor
 coverings -0.2% -0.6% 0.3% 0.6%
Portland Cement 4.5% 3.4% -0.2% -0.5%
Major Appliances -1.6% -0.7% -0.4% -0.9%
Roof Trusses -3.9% 3.5% -0.4% -1.0%
Power Driven Hand Tools 1.4% 0.7% -0.7% -1.7%
Ceramic Tile -3.0% 0.4% -1.3% -3.2%
Insulation Materials 1.7% 10.0% -2.2% -5.2%
Electronic Computers &
 Equipment -16.6% -13.6% -3.6% -8.3%
Softwood Plywood -0.3% 18.4% -3.9% -9.2%
Gypsum Products 4.0% 17.1% -5.4% -12.5%
Softwood Lumber -11.5% 7.3% -6.5% -14.9%



Robert J. Sheehan Mr. Sheehan is president of Regis J. Sheehan Data and Forecasting Service in McLean, Va., and serves as NAA's consulting economist.
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Author:SHEEHAN, ROBERT J.
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Date:Jul 1, 2000
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