The Federal Reserve’s Federal Open Market Committee (FOMC) voted unanimously today to lower its target for the federal funds rate 50 basis points (0.5 percentage points) to 4.75%. “Economic growth was moderate during the first half of the year, but the tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally. Today’s action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time,” the FOMC explained. “Readings on core inflation have improved modestly this year. However, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully. Developments in financial markets since the Committee’s last regular meeting have increased the uncertainty surrounding the economic outlook. The Committee will continue to assess the effects of these and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth.” So far, replies by Data DIGest readers suggest there has been little change in lending for nonresidential construction since the credit market turmoil began in July.
The producer price index (PPI) for finished goods fell 1.4% in August, seasonally adjusted, the Bureau of Labor Statistics (BLS) reported today. Over the past 12 months, the finished-goods PPI rose a modest 2.2%. The PPI for inputs to construction industries dropped 0.8% for the month and rose just 1.6% over 12 months. However, since December 2003, when construction materials prices started jumping, the cumulative change in the construction inputs PPI was 28%, compared to 15% for the finished-goods PPI and 13% (through July) for the consumer price index for all urban consumers (CPI-U; the August CPI-U will be released tomorrow).
Major contributors to the declines in August were the PPIs for diesel fuel, down 3.3% for the month and 5.9% over 12 months; gypsum products, -2.6% and -22%; steel mill products, -2.7% and -0.6%; copper and brass mill shapes, -1.2% and +2.6%; and lumber and plywood, -1.5% and -0.4%. Concrete products prices were unchanged in August and up 3.5% over 12 months. All construction segments had price declines in August and increases of 2% or less over the past 12 months. But the cumulative increases since December 2003 varied more widely.
The PPI for inputs to highway and street construction rose the most, 43%, reflecting the large cumulative jumps in diesel fuel (140%), steel mill products (61%), asphalt paving mixtures and blocks (49%), and concrete products (32%). The PPI for other heavy construction, which also relies heavily on these inputs, rose a cumulative 36%. The PPIs for multi-unit and nonresidential buildings each rose 27%, and the index for single-unit buildings climbed 22%. The building indexes were tempered by a cumulative 2.8% drop in the PPI for lumber and plywood and moderate increases for insulation materials (11%), brick and structural clay tile (20%), and gypsum products (28%).
The relief for construction may be short-lived. The Energy Information Administration (EIA) reported on Monday that the retail price of on-highway diesel fuel rose another four cents this week to $2.96 per gallon, 11 cents (4%) above the August 13 level, when prices were gathered for the August PPI, and 25 cents (9%) higher than a year ago. Furthermore, the price of crude oil futures on the New York Mercantile Exchange (Nymex) has risen steeply in the past month, and had a record close yesterday of $80.57 per barrel, which makes further increases likely for diesel fuel and other products.
EIA’s Short-Term Energy Outlook, released on September 11, predicted an average diesel price of $2.89 this quarter and next, rising to $3 by the second quarter of 2008 before falling slightly in the second half of next year. Copper futures prices, which closed at $3.42 yesterday on the Comex division of the Nymex, are close to year-ago levels but 40% higher than in January 2007, meaning the 12-month PPI change is likely to be much higher over the next several months. Diesel and copper are much more heavily weighted in the construction PPIs than the finished-goods PPI.
Two private indicators of future construction that were released today declined. The American Institute of Architects’ Architectural Billings Index slipped to a four-month low in August, although it continued to show more architectural firms reported an increase in billings than a decrease, compared to July. The subindex for firms with commercia/industrial practices broke the all-time (12-year) high set last month. The mixed-practice subindex also rose, but the institutional and residential subindexs fell to just above and below breakeven respectively. The Natonal Association of Home Builders said its index of homebuilders’ confidence dropped for the seventh straight month in September, tying the all-time (22-year) low set in January 1991. The subindex gauging current single-famly home sales declined and the subindex gauging sales expectations for the next six months fell sharply. The subindex gauging traffic of prospective buyers held steady but at a very low level.
