Building Materials Prices and Supply Chain Routes

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Prices paid for goods used in residential construction decreased 0.5% in February (not seasonally adjusted) according to the latest Producer Price Index (PPI) released by the Bureau of Labor Statistics.

Building materials prices are just 0.6% higher than they were 12 months ago and have been remarkably stable since then, with an average monthly increase of 0.05%. In fact, the PPI for [goods] inputs to residential construction has remained within a two-percent band since March 2019 and has only increased or decreased by more than 1.0%, month-over-month, four times in the past 24 months.

Such long-run price stability is inextricably tied to the reliability of international as well as wholly domestic supply chains. In an upcoming Eye on Housing post, we will unveil the results of an exhaustive analysis of the nominal amount and share of total imports of building materials by country and commodity. That article will examine nearly 700 imports used in residential construction and more than 200 countries of origin.

In this post, however, we focus on the following high-level, aggregate findings:

  • Imports of goods used as inputs to residential construction (as defined by BLS) totaled $120 billion in 2019.
    • China (19.0%), Canada (15.3%) and Mexico (12.4%) accounted for the largest shares of imports.
  • Excluding crude oil and gasoline as well as other goods not typically considered building materials (such as fertilizers and fertilizer ingredients) that are included in the BLS Index, 2019 imports totaled $65 billion.
    • Only three countries accounted for more than 6.0% of this total:
      • China (31.0%)
      • Mexico (16.1%)
      • Canada (16.0%)
  • The Inputs to Residential Construction (Goods) Producer Price Index

    “Inputs to Residential Construction, Goods” is, admittedly, a proxy index for building materials writ-large. As NAHB’s Eye on Housing posts on building materials prices tend to focus on this index, it makes sense to explain—at least briefly—how the index is constructed. This way, readers will be better positioned to ascertain how and to what extent our focus on the index is relevant to their business decisions or area of research.

    To this end, we have provided answers to some common questions regarding the index for [goods] inputs to residential construction (the Index) after the sections on February’s Producer Price Index report (click here to skip to the FAQs).

    February 2020 Producer Price Index

    Gypsum Products

    Prices paid for gypsum products fell 5.2% in February (seasonally adjusted), the largest percentage decrease since seasonally adjusted data became available in 2012. The price index for gypsum products is 5.5% lower than it was in January 2018 and is at its lowest level since January 2017.

    Ready-Mix Concrete

    Prices paid for ready-mix concrete (RMC) advanced 0.7% in February (seasonally adjusted), following a 0.6% increase in January. The RMC index has increased 6.5% since January 2018.

    Softwood Lumber

    The PPI report shows that softwood lumber prices rose 2.0% (seasonally adjusted) in February, following a 1.1% decrease in January 2020. The increase is in line with the expectations we published in January’s PPI blog post: “The discrepancy [between the BLS and Random Lengths data was] likely due to timing differences [in January],” and “…the softwood lumber PPI [would rebound in February, which] would be consistent with the reconciliation of prior differences.”

    Other Items

    The PPI for lumber and plywood climbed 2.1% in February, while inputs to residential maintenance and repair—goods, asphalt, unleaded gasoline, and #2 diesel declined by 0.7%, 1.2%, 6.5%, and 10.0%, respectively.
     

    Frequently Asked Questions: PPI for Goods Used in Residential Construction

    What goods are used to calculate the Index?

    The Bureau of Labor Statistics uses 103 line-items from its detailed PPI table to calculate the monthly Index. Some of these items—such as softwood lumber, particleboard, and domestic (i.e. household) water heaters—are goods one would expect to be used in the Index. However, the list also includes products such as unleaded gasoline, ingredients of fertilizers, parts of air conditioners, and wooden office furniture. The full list of goods used to calculate the Index can be viewed here.

    Do price changes of different goods affect Index values to the same degree?

    No, each BLS producer price index assigns weights to each input. For instance, the five goods weighted most heavily in the index for residential construction inputs (goods) are:

    1. Ready-mix concrete (5.5%)
    2. General millwork (3.0%)
    3. Unleaded regular gasoline (2.5%)
    4. Paving mixtures and blocks (2.5%)
    5. Construction sand, gravel, and crushed stone (2.4%)

    The full list of weights can be found here.

    Are the prices of goods and services equally important?

    No, changes in prices paid for services affect the Index slightly more than changes in the price of goods. The list of goods referred to above comprises roughly 49.4% of the producer price index for inputs to residential construction, excluding capital investment, labor, and imports. Service prices make up the remaining 50.6%. The full list of services included in the relative importance table of the Index can be found here.

    Why does the relative importance table for the Index include goods that are not generally thought of as building materials?

    The methodology employed to generate the PPIs for inputs to industries was revised in February 2015. Prior to this change, only material inputs were accounted for in these indexes.

    According to BLS, the methodology was “expanded to include: (1) services and construction inputs and (2) inputs to selected goods and services industries.” This is how “inputs to inputs” became part of the equation.



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2 replies

  1. No comment…I would just like to be notified of new posts please.

  2. This is amazing! Thank you very much for giving me a detailed article. This will be a great help when I discuss with the local contractor here.

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