(Illustration by Guy Lawrence for ENR)

Deflation of key materials prices has set the tone for ENR's cost indexes in recent years. In 2002, the materials component of ENR's indexes declined 3.2%. This follows annual declines of 3.3 and 3.0% during the previous two years. Economists are calling for construction markets to soften in 2003 and ENR believes that will translate into a fourth annual decline for the index's materials component. However, multiyear collective bargaining agreements set at the peak of the recent expansion will continue to push wages up and they will carry ENR's cost indexes with them.

By December of next year, ENR forecasts its Construction Cost Index will increase 3.1% and its Building Cost Index 2.3%. This will be slightly more than this year's 2.7% increase in the CCI and 1.8% increase in the BCI, which were just 0.3% and 0.5%, respectively, below what ENR predicted.

The most critical element in forecasting ENR's indexes is labor costs. It accounts for 80% of the CCI and 64% of the BCI. In 2002, ENR found union wage and fringe benefits averaged annual gains of 4.5% for skilled workers and 4.2% for laborers. This tracks closely with the 4.2% national average increase reported by The Construction Labor Research Council, Washington, D.C. Multiyear collective bargaining agreements tracked by CLRC call for another 4.0% increase next year. ENR believes the labor cost component of its indexes will follow suit and predicts a 4.0% increase for its Skilled Labor Index and a 4.1% increase for the Common Labor Index.

The outlook for materials costs next year hinges on chronic overcapacity problems that plague both the lumber and steel industries. Despite strong demand and a 27% tariff on Canadian lumber imports, U.S. mills were cranking out so much lumber that prices fell through most of 2002. With housing starts expected to decline next year, ENR is looking for lumber prices to fall another 4.5% in 2003.

Structural steel prices did not share the benefit of tariff protection afforded many sheet products and as a result, ENR's average price fell 4.2% this year. However, ENR believes that structural steel prices have bottomed out and predicts a modest 1% rebound in prices by the end of next year.

The Portland Cement Association, Skokie, Ill., is forecasting cement shipments to slip 1.1% in 2003, after falling 3.7% this year. ENR expects cement prices to follow this year's pattern and predicts a 1.5% price increase in 2003.

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