Economist Predicts Rise in Construction Costs

“Construction cost increases slowed markedly in the last half of 2006. But the relief is likely to be short-lived and may have ended already," said Kenneth Simonson, chief economist for the Associated General Contractors of America, while speaking at the association's 88th annual convention in San Antonio, Texas. "By the end of 2007, materials costs could be rising again at a 6-to-8 percent rate, with wages rising at a 5 percent pace."

In AGC's fourth Construction Inflation Alert released today, Simonson explained that construction is vulnerable to high price increases because the industry has little ability to avoid using materials that are in strong demand and for which supplies increase irregularly.

Simonson points to greater volatility in petroleum, concrete and metals products, which implies that highway and other heavy construction projects are more likely to experience large price jumps again than are building construction segments. But he warns, "Even building construction is at risk of much higher materials cost increases than the general rate of inflation."

In terms of labor, Simonson said, "The industry also may be entering an era of accelerating wage and salary costs." From February 1997 to February 2007, the construction industry created one out of every 10 new jobs in the U.S. economy, double the industry's share of overall employment. Construction employment increased by nearly 2 million, or 33 percent, while total non-farm payroll employment rose barely one-third as fast, or 13 percent.

Demand for skilled craft workers, supervisors, estimators and managers is growing as the volume of nonresidential construction increases. However, low unemployment throughout the economy means there are fewer applicants to choose from while more skilled construction workers are reaching retirement age.