General construction cost indices and Input price indices that do not track whole building final cost do not capture the full cost of inflation on construction projects. Residential increased 1%, Non-Bldg is up, but the biggest change is to Nonresidential Bldgs, up several points. These inputs revise 2022 construction inflation as shown here: 2022 Residential Inflation 12.8%, Nonres Bldgs 9.4%, Non-bldg Infra Avg 5.6%. Among several inputs, there is a recent BLS update to the Final Demand indices. 2022 Residential Inflation 11.7%, Nonres Bldgs 6.3%, Non-bldg Infra Avg 5.5%Įdit 8-12-22 Much more information from a number of reliable sources is now available regarding recent inflation.2021 Residential Inflation 13.2%, Nonres Bldgs 6.7%, Non-bldg Infra Avg 7.5%.2020 Residential Inflation 4.5%, Nonres Bldgs 2.6%, Non-bldg Infra Avg -0.3%.Looking back, we now see nonresidential buildings inflation is 7%, the highest since 2006-2007 and residential inflation is 13%, the highest since 1977-1979, in part driven by the highest rates of increase in materials on record. In Jan 2021, I predicted Inflation for nonresidential buildings near 4% and Residential inflation at 5% to 6%. No one predicted 2021 construction inflation. That means it now takes more jobs to put-in-pace volume of work. But we gained back far more jobs than volume. During two years of the pandemic recession, volume reached a low down 8% and jobs dropped a total 14%. That was at a time when business volume dropped 33% and jobs fell 30%. Only twice in 50 years have we experienced construction cost deflation, the recession years of 20. Almost all gains in 2021 spending are due to the 23% gain in residential.ĭeflation is not likely. Spending for 2021 is up 8%, but nonresidential buildings spending is down 4%. Jobs growth without volume growth to support those jobs is a productivity decline, increasing inflation. That should impact jobs, but we haven’t seen jobs react to volume losses as would be expected. Total All Volume, spending minus inflation, is expected to again reach the same bottom in mid-2022 as in 2021. Nonresidential construction volume appears now will experience only slight dip mid-2022, the maximum downward pressure from the pandemic is past. Res +10%, Nonres Bldgs +18%, Nonbuilding +2%. Res +22%, Nonres Bldgs +18%, Nonbuilding +8%. Res +6%, Nonres Bldgs -18%, Nonbuilding -15%. The most unexpected change was that residential spending continues a strong increase. Those lower starts reduced nonresidential construction spending in 2020, but more-so in 2021, and in some markets will extend lower spending into 20. Last time that happened was 20, the only two other times that happened in the last 35 years.Ī significant impact of the pandemic on construction is the loss of spending due to the massive reduction in nonresidential construction starts in 2020. Spending for 2021 was up 8%, but after adjusting for inflation, real volume after inflation was down. In this case the starts declined in 2020, but that 2020 decline was so broad and so deep, even with an increase in starts in 2021, backlog to start 2022 has not yet recovered (to the start of 2020). Backlog is rarely down and then usually when starts have been down the previous year. Construction starts were up in 2021, but backlog leading into 2022 is down. The construction data leading into 2022 is unlike anything we have ever seen. Update 5-8-22 This article AND the attached PDF downloadable document have been updated to include changes in inflation in PPI factors. Update 5-3-22 This article AND the attached PDF downloadable document have been updated to include 1st qtr 2022 inflation updates. The level of activity has a direct impact on inflation.Ģ-10-22 See the bottom of this post to download a PDF of the complete article. When activity is high, there is a greater opportunity to submit bids on more work and bid margins may be higher. When the activity level is low, contractors are all competing for a smaller amount of work and therefore they may reduce margins in bids. One of the best predictors of construction inflation is the level of activity in an area. However, the level of construction activity has a direct influence on labor and material demand and margins and therefore on construction inflation. The most watched indicators of the rate of inflation are the costs of various construction materials and the labor needed to install them.
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