Construction Input Prices Are Up 21% from a Year Ago, Says ABC

The Fed's policy of monetary tightening and raising interest rates to fight inflation will "quite likely drive the economy into recession either later this year or at some point in 2023," according to the Associated Builders and Contractors (ABC) association.

The Federal Reserve raised interest rates by 75 basis points yesterday, the biggest rate hike since 1994. The Fed also hinted to more rate hikes in the future as it intensifies the fight against inflation. This is the third time the central bank has raised interest rates this year.

"Inflationary pressures show no signs of abating," said ABC Chief Economist Anirban Basu. "For months, economists and others have been expecting inflation to peak and then subside. Instead, the Russia-Ukraine war has disturbed markets, driving energy prices higher. Those elevated energy prices are now circulating across the economy, affecting manufacturing and distribution, and there is little prospect for inflation to meaningfully subside during the weeks ahead."

The Fed most directly affects demand for goods and services, not supply, Basu pointed out. The Fed's approach will suppress demand over the rest of the year, and eventually suppliers will respond to diminished demand—ultimately leading to recession, he added.

"Based on the historical lag between the performance of the economy and nonresidential construction spending, more difficult times could be ahead for contractors in 2024 or 2025," said Basu. "Looking at the most recent reading of ABC's Construction Confidence Index, contractors are already seeing momentum slow. The likely exception is public contractors, who will continue to benefit from stepped-up infrastructure spending."

Construction input prices rose 2.3% in May compared to the previous month, according to ABC's analysis of U.S. Bureau of Labor Statistics Producer Price Index data released today. Nonresidential construction input prices also increased 2.3% for the month.

Construction input prices are up 21.4% from a year ago, while nonresidential construction input prices are 21.9% higher. Year on year, input prices rose in 10 of 11 subcategories in May. Softwood lumber was the only category in which prices decreased, falling 21.7%. The largest price increases were in natural gas (174%) and unprocessed energy materials (101.1%).

-Diana Mota, NACM editor in chief