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Construction materials suppliers cut production 0.8% in September after several months of dipping orders and shipments. This was enough to keep their inventory steady but not enough to keep their inventory/sales ratio from rising from 1.38 to 1.39. The ratio reached 1.59 in January 2009 but then fell steadily until May of this year. Manufacturers are targeting an inventory/sales ratio no higher than 1.3. Further small production cutbacks are expected late in 2010 as construction spending is expected to be at best steady for the rest of the year.

Materials prices fell 0.1% in September from August are now 1.0% below three months earlier. This decline is the consequence of the still slowly declining construction market and would have been larger without the renewed decline in the exchange value of the $US in the last few months. A few more months of steady to slightly falling materials prices is expected before rising international commodity prices again cause a spike in US construction materials costs. And a turnabout in construction spending at yearend or in early 2011 will progressively add more inflation pressure.

Construction Materials

  Percent Change in…   1 month 3 months 12 months 3 years Production -0.8 -0.3 5.2 -20.8 Prices -0.1 -1 4 7.8 Orders -1 -3 0.1 -15.6 Shipments -0.9 -3.2 0.4 -14 Unfilled Orders 0.8 1.7 9.4 7.5 Inventory 0 0.1 2.7 -11.4 Inv/Sales Ratio 0.9 3.4 2.2 3

Sources: US Dept. of Labor, US Dept. of Commerce, Federal Reserve Board

Construction Materials — Inv/Sales Ratio Jan 2007 – Sept 2010

Source: US Dept. of Labor Forecast: Reed Construction Data

CAUTION: The Census Bureau indexes for construction materials are overstating the size of the market. The indexes are constructed by dividing the use of materials between construction, manufacturing and other end markets. This allocation uses the historical shares of purchases of steel, plastics, glass and other materials by each end market. The Census Bureau has no specific information on the share of steel production shipped to the construction market. As a result, the abrupt rise in manufacturing activity beginning in the late spring 2009, especially for motor vehicles, causes too much material sales to be assigned to construction.

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