Engineering And Construction Costs Slow In September, Dampened By Steel Prices

The Engineering and Construction Cost Indicator declined to 58.6 in September from 63.0 in August, driven by a decrease in subcontractor labor costs to 66.0 from 68.5, while materials and equipment costs concurrently rose by 5.2 points to 55.5. Despite the headline indicator's fall, overall engineering and construction costs continued to show gains, with the observed component decreases in September being notably larger than recent trends, suggesting a complex and still inflationary cost environment for the sector.

Analysis

The Engineering and Construction Cost Indicator registered a notable deceleration in September, falling to 58.6 from 63.0 in August. Despite this decline, the indicator remains firmly above the 50-point expansionary threshold, signaling that while the rate of cost increases has slowed, overall costs continue to rise. The pullback was driven primarily by a moderation in subcontractor labor costs, with that sub-index decreasing to 66.0 from 68.5. In a counteracting trend, the sub-indicator for materials and equipment costs increased by 5.2 points to 55.5, highlighting a divergence in cost pressures within the sector. This suggests that while labor market tightness may be easing slightly, supply chain and commodity-driven inflation for physical goods remains a persistent and even accelerating challenge for engineering and construction firms.

Key Decisions for Investors

• Investors in engineering and construction firms should monitor gross margins closely, as the benefit from moderating labor costs may be partially or fully offset by accelerating material and equipment expenses.
• The rising materials cost sub-index to 55.5 signals continued pricing power for suppliers to the sector, presenting a potentially favorable data point for investors with exposure to industrial equipment and raw material producers.
• The indicator's overall level, despite the monthly drop, still points to a healthy expansionary environment, suggesting that a defensive rotation out of the infrastructure sector may be premature; instead, focus should be on companies best able to manage divergent input costs.