Construction Industry Faces Difficult Outlook

The construction industry has been buffeted by an array of headwinds in 2025, including high interest rates, strict borrowing standards, tariffs and rising input costs, reemerging labor shortages, and policy uncertainty. As a result, the industry has thoroughly exhausted its momentum, stalling out as of the middle of 2025.

Construction spending has declined in 10 of the past 11 months and is now down more than 3.0% from the April 2024 all-time high. While much of that decline reflects faltering homebuilding activity – residential construction spending is down 5.1% year over year – nonresidential activity has also started to decline in recent months.

Private sector nonresidential construction has been particularly weak, falling 0.5% in July, and that weakness has been widespread across subsegments. Only two private nonresidential categories have posted year-over-year spending increases: power, a result of booming data center construction and its insatiable demand for power, and religious.

Importantly, construction spending data is not adjusted for inflation, and real construction activity has fallen at an even faster pace due to recent increases in materials prices. While construction input prices were flat throughout 2024, tariffs on key inputs like steel and aluminum have caused a spike in cost escalation. Nonresidential construction input prices have risen at a 5.8% annualized rate since January, and that pace is likely to increase given the recent implementation of even higher tariff rates.

As a result of higher materials costs and less construction activity, contractors have started to trim their staffing levels. Construction employment fell for a third straight month in August and is up by just 6,000 positions over the first eight months of the year. While the residential side of the industry has been shedding jobs for several quarters, weakness has spread to the nonresidential segment in recent months as well.

Despite weak demand for workers, construction labor shortages are reemerging as immigration policy weighs on the industry’s labor supply. The construction unemployment rate fell to 3.2% in August, matching the lowest level ever, and industrywide job openings – while still relatively low – have jumped to the highest level in over a year. With the construction workforce increasingly constrained, industrywide labor costs surged in August, rising $0.25 for the month or 2.5 times faster than wages across all private industries.

Interest rates are likely to decline over the next several months. While that may boost industry activity at the margins, many of the other aforementioned headwinds will remain firmly in place, restraining momentum through the end of the year. Forward looking indicators like the AIA/Deltek Architecture Billings Index (ABI), which uses shifts in architecture firms’ billings to predict future construction activity, support this assessment; the ABI has now indicated contracting activity in 31 of the past 34 months, and the decline is widespread across regions.

Because many of the factors weighing on construction activity are broad-based, industry activity has slowed in virtually every region of the country, albeit at slightly different paces. Certain regions, like the Great Lakes, have ongoing manufacturing megaprojects, and those continue to fuel construction hiring even as other segments struggle.

Activity has also held up somewhat better in the southern and southwestern United States, where booming population growth has fueled both stronger-than-average homebuilding and commercial construction activity. The opposite is true in the west, northeast, and Mid-Atlantic regions, where construction employment has actually declined on a year-over-year basis.

Looking ahead, the industry likely faces a difficult few quarters that will be defined by rising operating costs and weakening activity. If borrowing costs begin to decline, however, there is ample pent up demand – especially for homebuilding – that will eventually be unleashed.