WASHINGTON, D.C. – January 25, 2023 – Engineering and construction costs increased again in January, according to the Engineering and Construction Cost Indicator from PEG and S&P Global Market Intelligence. The headline Engineering and Construction Cost Indicator, a leading indicator measuring wage and material inflation for the engineering, procurement and construction sector, increased to a level of 61.8 this month from 56.1 in December, indicating price increases in January were more widespread than in December. The sub-indicator for materials and equipment costs rose 8.9 points in January to 55.7, reversing the December decline that pushed the indicator below 50. The subcontractor labor indicator fell to 76.2, removing 1.4 points in January, showing minor deceleration in sector growth.
The equipment and materials indicator rose back above the breakeven point of 50 in January, after entering contraction territory for the first time in two years in December. Readings for five of the 12 components saw declines, with the three steel categories and the two freight rates in contractionary territory. Weak demand has undercut steel pricing, with the well-supplied market shifting leverage to buyers in recent months. Meanwhile, soft global trade activity continues to push ocean freight prices lower. The transformers and electrical equipment components remain high, with supply chain issues and long backlogs maintaining a tight market.
“The forecasts for base metal prices have been revised higher over the first half of 2023, reflecting an upward revision to the global demand outlook and further softening in the dollar,” said Amanda Eglinton, associate director of economics, S&P Global Market Intelligence. “While demand has been stronger than expected in recent months, consumption growth will slow in the months ahead in Europe and the United States and still faces a number of headwinds in mainland China. Meanwhile, elevated prices will incentivize a supply-side response from both primary and secondary sources, driving a downward correction in nonferrous metal prices in the process.”
The sub-indicator for current subcontractor labor costs came in at 76.2 in January, down from December’s 77.6. According to survey responses, labor costs continued to rise in all regions of the United States and Canada. This indicator has not seen values below 70.0 since October 2021.
The six-month headline expectations for future construction costs indicator decreased slightly, to a reading of 64.2 in January. The six-month expectations indicator for materials and equipment came in at 57.1, 3.6 points higher than last month’s figure. Additionally, the three steel categories saw sharper declines in their respective indicators, while the two ocean freight rates have both increased considerably back up to the 50-point mark, indicating survey respondents expected lower pricing and supply chain recovery in six months. The six-month outlook readings for shell and tube heat exchangers, ANSI pumps and compressors and gas/steam turbines moved back above 50, suggesting expectations are for elevated pricing through the near term. The six-month expectations indicator for sub-contractor labor registered 80.6, indicating nearly all survey respondents expect higher labor costs in six months; the subcontractor indicator for every region increased.
Respondents continued to report material shortages in January, particularly for transformers, electrical equipment, and labor.
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Kate Smith, S&P Global Market Intelligence
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