Building Materials and Labor Cost Outlook Amy Carneal Economist, Industry Practice 202-481-9252 January 2003

But why were costs restrained during the housing boom? Building Environment Material costs were up just 1% during the past year Construction wage growth slowed But why were costs restrained during the housing boom? Nonresidential construction declined Material producers expanded capacity

Building Costs Are Tame

Nonresidential Construction Weakened

Lumber 2003 will be another tough year for U.S. producers Tariffs are not helping domestic sawmills Canadian exports remain at high levels Non-Canadian imports continue to grow Market fundamentals will not improve in 2003 Housing starts look to weaken Output must be scaled back to avoid a price correction

Canadian Imports Slip Back to Comfortable Levels After Soaring During Duty-Free Window

Fundamentals Suggest Soft Lumber Prices This Year

Cement Shipments fell in the second half of 2002 and will continue to slip in 2003 Significant capacity expansion allowed producers to grab back some domestic market share Production must be cut by closing older plants Leading to modest price escalation [again] this year

Cement Utilization Rates Slip As Capacity Continues to Expand

Cement Imports Are Falling Off, Along With Shipments

Gypsum Wallboard Wallboard producers faired well in 2002 However, sales growth will slow throughout this year Robust capacity growth raises potential of a price correction Excess supply has already begun to soften prices Boardmakers must respond by cutting production Price escalation is expected to slow in 2003

Sluggish Wallboard Sales Growth Causes Slump in Prices

Rapid Capacity Expansion Could Spell Problems for Wallboard Producers

Labor Costs Construction employment slipped in 2002 for the first time in a decade Sector unemployment rate hovered around 9-10% Resulting in slower wage growth for laborers last year Further deterioration in labor market fundamentals is expected Global Insight expects even slower wage escalation in 2003