The weak year for the construction sector continued in November, with activity contracting once again, according to the latest AIB Construction Purchasing Managers’ Index (PMI).
The PMI fell to 46.7 last month, down from 48.1 in October. That is now pretty far below the neutral level of 50. The sector has shrunk for the last seven months, with all three subsectors of commercial construction, housing and civil engineering seeing declines in the period.
PMIs are an important economic indicator, and for good reason. Unlike traditional measures such as gross domestic product (GDP) or unemployment, PMIs are seen as a leading indicator of the state of the economy. Economic stresses are often picked up here well before they show up in the main data points.
In this case, it does not paint a pretty picture of the construction industry, and with good reason. At the bottom of the PMI report is what should be a worrying bit of detail.
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“Construction firms experienced a build-up of inflationary pressures. The pace of increase in input costs quickened for the second month running to the fastest since March,” it says. “Panellists reported that their suppliers had upped their charges during the month.”
[ Home rebuild prices up 7%, driven by labour costs and skills competition – SCSIOpens in new window ]
That should be a concern for the Government. With so much focus on costs and housing at the moment, there is clearly little prospect of construction costs for new homes being reined in. It also raises a fundamental question about the housing crisis and what the Government can or cannot do about it.
After all, it doesn’t take a genius to realise that if construction costs are rising, then inevitably that will feed through eventually to new home prices.
Builders are hardly going to eat the increase in input costs at the expense of their margins, after all. In short, there is little prospect of homes becoming more affordable any time soon and there is also little prospect of other development projects getting any cheaper any time soon.
It seems clear that spiralling housing costs are going to, well, keep on spiralling.
