PPI shows ongoing cost squeeze; recent price moves are mixed; Reed says starts sag

The producer price index (PPI) for finished goods increased 0.3%, not seasonally adjusted (0.4%, seasonally adjusted), in September and 4.0% over the past 12 months, the Bureau of Labor Statistics (BLS) reported on Thursday. The PPI for inputs to construction, a weighted average of materials used in every type of project plus items consumed by contractors (such as diesel fuel), fell 0.1% for the month but increased 3.8% over 12 months. The year-over-year rise adds to an ongoing squeeze on contractors, as PPIs for finished nonresidential buildings and subcontractors' work, which include overhead and profit, have fallen or have risen less than materials costs. The PPI for new office construction fell 0.2% in September and 0.4% year-over year; warehouses, 0 and -0.3%; industrial buildings, 0 and +0.4%; and schools, -0.1% and 1.0%. For new and repair work on nonresidential buildings, the PPI for roofing contractors was flat for the month and sloped down 2.7% over 12 months; concrete contractors, 0.4% and +0.1%; electrical, -0.2% and +0.1%; and plumbing, 0 and +2.8%. Materials with year-over-year increases included diesel fuel, -1.5% for the month but up 18% from September 2009; steel mill products, 1.2% and 14%; aluminum mill shapes, 2.0% and 7.9%; lumber and plywood, -1.3% and 6.5%; copper and brass mill shapes, 5.1% and 5.9%; and asphalt paving mixtures and blocks, -0.3% and 5.1%. PPIs fell for gypsum products, -2.6% and -2.3%; and concrete products, 0 and -0.8%. Prices for construction inputs have moved in both directions since BLS collected information from producers around September 13. The Energy Information Administration (www.eia.doe.gov) reported on Tuesday that the national retail average price of on-highway diesel fuel was $3.07 on Monday, up 4% from September 13 and up 18% from a year ago. Comex copper futures closed Thursday at $3.81 per pound, up 34% from a year ago. Steel prices have fluctuated narrowly. Thompson Research Group (www.thompsonresearchgroup.com) reported on October 8 that its October survey of gypsum wallboard distributors "confirmed the trend we saw last month-that much of the May price increase has been lost and continues to slip." The value of nonresidential construction starts in September sagged "about 25%," seasonally adjusted (39%, not seasonally adjusted), Reed Construction Data Chief Economist Jim Haughey reported on Wednesday, based on data it compiled. "September starts were only marginally higher than in June 2009, the low point for starts in this building cycle" and were 28% below last September. The largest monthly declines were for highways and bridges, education, and water, sewer and civil projects. "Government office starts also fell significantly...Public starts will remain depressed for several more months. Developer-financed starts fell...But except for the small hotel market, the monthly decline was mostly seasonal or the reversal of large August gains." "Cities' finances continue to weaken under the strain of the recession, resulting in cities being less able to meet their fiscal needs in 2011 and beyond," the National League of Cities (www.nlc.org) found in an annual survey released on October 6. "Financial officers report the largest spending cuts and loss of revenue in the 25-year history of the survey....Financial pressures are forcing [69% of respondents' cities to] delay or cancel capital infrastructure projects." New orders for U.S. manufactures (excluding semiconductor manufacturing) fell 0.5%, seasonally adjusted, in August, reversing a 0.5% gain in July, Census reported on October 4. Orders for construction materials and supplies fell 0.5% and 2.6%, respectively. Orders for construction machinery, which tend to be volatile, slipped 3.5% after a 24% leap. Retail and food services sales rose 0.6%, seasonally adjusted, in September, the Census Bureau announced today, following an upwardly revised 0.7% increase (initially estimated as 0.4%) in August. For now, retail construction dollars appear to be heading into small stores and remodeling more than big-box stores and news shopping centers. "Capital expenditures for Walmart U.S. next year will be flat when compared to the current year, as will square footage growth," Bill Simon, Walmart U.S. president and CEO, said Wednesday in a press release. "We also are allocating capital to continue converting discount stores to supercenters, which add no square footage, but are expected to increase sales. Of the 155 to 165 supercenters we will add next year, 45 to 50 will be new units, with the remainder conversions. Neighborhood Markets will make up the bulk of the medium format stores, and there will be some pilots of the small store format included in next year's plan. By the end of the current fiscal year, more than 550 U.S. stores will have been remodeled. Walmart U.S. plans to remodel more than 500 stores next fiscal year. Remodeling costs will be lower next year, due to changes in design and schedules. The time to remodel a store will decrease by 40%." The release also stated, "Sam's Club's plan for capital spending next fiscal year is similar to the current year. Sam's will continue to spend approximately $1 billion per year in capital, with the majority committed to remodeling. Sam's plans to add between 7 and 12 new, expanded, or relocated clubs next year in the United States. Remodels are expected to be completed on 60 to 70 clubs next year." The Wall Street Journal reported on October 6, that London-based supermarket retailer Tesco "expects to have 400 stores in the U.S. by [February 2013], up from 159 as of August 28. Tesco said [on October 5] that in November it would ‘mothball' 13 stores in [Nevada, Arizona and California] by boarding them up or subletting them." Tesco "plans to open 19 stores in the U.S. during the next six months, open about one store per week thereafter."