... buildings, although not enough to offset a construction employment loss of 437,000 jobs nationwide during the last year, according to the U.S. Bureau of Labor Statistics.

“What is worrisome is that housing starts in the fourth quarter are expected to fall below an annualized rate of a million units to a level we have not seen since 1945, and we still have not found the bottom of that market,” says Mothersole. “There is no way to tell what kind of risk some of these financial firms are exposed to until housing prices stabilize.”

Crunch vs. Spike

The fallout from the current financial crisis will temporarily knock the wind out of inflation, which was gaining momentum, says Mothersole. “I think the Federal Reserve Board’s concerns for inflation have evaporated and that it will focus on the financial system as the real threat to the economy,” he says. “Core rates of inflation are still flashing red, but raw commodity prices are moving lower on expectations that consumption will be falling, and that should give the Fed a little breathing space on the inflation issue.” He notes that although commodity prices for oil, steel and copper are easing, they will remain at historically high levels.

“The credit crunch will take the froth off of inflation,” says Julian Anderson, principal with Rider Levett Bucknall, Phoenix. The RLB cost index has already eased from 8.4% last quarter to 7% now. “Demand will certainly be off and take some pressure off prices,” he says.

Any inflation break stemming from the recent financial woes may be short. “It’s a hard call how this will impact inflation because we have seen some significant pressure on prices,” Murray says. However, in the “long term, there is a concern that the amount of money the federal government is spending on the huge bailout for so many firms will be a force for greater inflation over the next three to five years,” he says.

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“The Fed will have to turn its attention back to inflation by the end of 2009,” says Edward Sullivan, chief economist for Portland Cement Association, Skokie, Ill. He believes the long term, “structural” pressures on inflation are not going away. They include more government support systems, lack of import competition due to the weak dollar and strong global demand for energy.

“There’s no predictability in the market,” says Wade Martin, a vice president with U.S. Cost, Atlanta. Oil prices have dropped considerably, but reductions in oil-based products are not showing up. “Traditionally, you would expect some reduction in related materials prices, but that’s not happening,” he says.

That is due in part to the large number of oil refineries installing cokers to increase the production of high-end products. “Once you put a coker in there is no asphalt coming out,” says one source.

As for other commodities, steel prices are starting to level off as of September, but upward pressure from global demand remains, says Steven Kufrovich, director of preconstruction services for Gilbane Building Co.’s southeast region, Atlanta. Certain types of specialty steel are still rising. Tube steel, for example, has “really gone off the charts,” he says. While prices for rebar are easing, they are still $1,000 a ton more than a year ago, he notes. To compensate, owners are turning more to construction-manager at-risk procurement and are agreeing to “early release” of key packages like structural steel, so that subcontractors can lock in pricing with mills and suppliers, Kufrovich says.

Cement prices may be poised for the largest price cuts. “We have not adjusted our forecast for cement shipments yet, but it will be lower due to the deepening credit crunch,” says PCA’s Sullivan. He had estimated that cement shipments would decline 12% this year, followed by another 6% decline in 2009.

“That was before we knew the financial markets were going to be as bad as they are,” he says. “Right now that 6% decline looks optimistic.”

Even a 6% decline in 2009 translates to a 30-million-ton decline from peak to trough. In addition, cement producers are set to bring on 9.5 million tons of new capacity next year, which represents a 10% increase in total capacity, not including any older plants that may be phased out, says Sullivan. Falling shipments and rising capacity is the classic recipe for weak prices.