Price decreases last reported in October of 2020
WASHINGTON, D.C. – October 26, 2022 – Engineering and construction costs increased again in October, according to IHS Markit, now a part of S&P Global, and The Procurement Executives Group (PEG). The headline IHS Markit PEG Engineering and Construction Cost Index, a leading indicator measuring wage and material inflation for the engineering, procurement and construction sector, fell to an index level of 60.0 this month from 63.9 in September. October’s reading is still above the breakeven 50 mark, indicating rising prices. The headline index has recorded increasing prices for the past two years, with the index last recording price decreases in October 2020. The subcontractor labor index dropped 13.6 index points in October to 71.7, while the sub-index for materials and equipment costs rose 0.4 index points to 55.1.
The equipment and material index rose for the 23rd consecutive month. Among the 12 indicators, prices for six fell, five increased and one remained unchanged. Most notably, the sub-indexes for ocean freight continued to see declining price pressure this month with ocean freight – Asia to U.S. and ocean freight – Europe to U.S. both falling to 30.8. The shifting sentiment in current ocean freight prices comes after 28 months of noticed price increases. This drop comes after both indices reached a high of 83.3 in June, followed by flat to elevated pricing only two months ago. Heat exchangers rose from 55.6 to 69.2 in October.
The sub-index for current subcontractor labor costs came in at 71.7 in October, down from September’s 85.3. According to survey responses, labor costs continued to rise in all regions of the United States and Canada. This index has not seen values below 80.0 since March 2022 and has not been below 70.0 since October 2021.
“Construction activity in the U.S. is slowing, though labor market shortages are still widespread. High interest rates will continue to discourage residential and commercial spending, eventually leading to layoffs,” said Emily Crowley, Associate Director, Pricing and Purchasing, S&P Global Market Intelligence. “However, the Infrastructure Investment and Jobs Act and the Inflation Reduction Act will create demand for workers in the heavy and civil engineering space, as well as support job growth in construction occupations linked to renewables, limiting any downside correction in wages. Expect hiring conditions to improve through 2023, though it will take until 2024 for construction labor markets to find balance bringing more stability to wage growth.”
The six-month headline expectations for future construction costs index also rose, recording an index reading of 65.3 in October. The six-month expectations index for materials and equipment came in at 57.5, 11.9 index points lower than last month’s figure, showing signs that fewer organizations are expecting price hikes ahead. Additionally, ocean freight – Asia to U.S. went flat to an index of 50.0, while ocean freight – Europe to U.S. saw declines to 46.2, indicating that costs are expected to decrease in six months.
The six-month expectations index for sub-contractor labor decreased 8.9 index points this month to 83.3. Steel-related commodities remained flat to down in the six-month expectations index, while every other index besides the ocean freight reported expectations for rising prices, with electrical equipment registering the highest index figure. Although labor costs saw a noticeable jump last month, this month’s index figure displayed deceleration in 12 out of the 18 subcomponents.
Respondents continued to report material shortages in October, particularly for electrical equipment and labor.
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