Construction Industry Faces Mixed Signals as Economic Headwinds Mount

Written by:

Steve Marcinuk

Date:

22 Aug 2025

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The construction industry finds itself at a crossroads, with contractors maintaining cautious optimism while facing mounting economic pressures that have put numerous projects on hold. Despite survey data showing optimism across 15 of 17 construction categories for 2025, industry leaders are reporting a more complex reality on the ground.

Ken Simonson, Chief Economist, Associated General Contractors of America, has observed this disconnect firsthand during his travels. “The most common theme I hear is that developers and owners have put projects on hold,” Simonson explains. “Many firms do have full order books, but they’re just not being given the green light to start on projects.”

This cautious stance is reflected in employment metrics. According to the Bureau of Labor Statistics’ Job Openings and Labor Turnover Survey, construction hires in June were the third-lowest for that month in 25 years. Job openings have also dropped sharply, signaling reduced demand for workers.

However, one metric offers a glimmer of hope: layoffs remain at historically low levels. “That does suggest contractors still remain optimistic about the workers they’ll need in a few months,” Simonson notes. “Even if they’re not hiring now, they’re still expecting things will improve.”

Tariff Uncertainty Creates Project Delays

Among the most significant headwinds is uncertainty surrounding tariffs. The sudden imposition of steep tariffs—as high as 50% on certain products from countries like Brazil—has created a ripple effect across sectors.

“We’re seeing reports affecting many industries that the uncertainty over tariffs is causing companies to say, ‘Wait a minute, we shouldn’t be building a new plant or expanding if we’re suddenly not going to be competitive,'” Simonson explains. The impact extends beyond direct import-export businesses to sectors like hospitality and retail, particularly in border regions experiencing drops in Canadian visitors.

The tariff impact is also being felt in material costs. After a period of stability, the Producer Price Index for inputs to new non-residential construction has begun climbing again, with a June-to-June increase of 2.6%—the largest jump in two years.

“Now that more of these tariffs are sticking, I expect to see that producer price index cost go up,” Simonson warns. “People shouldn’t assume that a mild PPI report in the next month or two means there’s nothing to worry about. I think we are headed to higher prices.”

Multifamily Market Shows Signs of Stabilization

The multifamily housing sector, hard hit over the past year, may be showing early signs of stabilization. Census Bureau data reveals that while completed units remain high—flooding markets like Phoenix, Austin, and Nashville—the relationship between starts and completions has begun to shift.

“The number of units under construction and number completed have been outrunning the number started. That’s changed in the last three or four months,” Simonson observes. “Starts and building permits have picked up.”

However, he cautions that multifamily permits don’t translate as directly to construction activity as single-family permits do. Developers typically wait for favorable leasing conditions before breaking ground, even after obtaining permits.

The sector faces additional challenges from reduced immigration, which had been a key driver of housing demand. “Last year the population grew almost 1%, the most since 2001, but 84% of that growth came from net immigration,” Simonson explains. “Now that seems to have gone to zero or even negative, and many markets that had demand for housing, schools, and retail suddenly don’t have as many people.”

Regional Variations Paint Complex Picture

Construction employment data reveals significant regional variations. While 31 states out of 50—showed year-over-year increases from July 2024 to July 2025 in construction employment, notable exceptions include West Coast states, Nevada, most Northeast states, and some southeastern markets.

At the metropolitan level, only 184, or 51%, of 360 metro areas experienced employment increases, indicating a more scattered recovery. National construction employment growth has slowed to 1.2% year-over-year, down from the 2-3% of previous years.”

Higher Education and Healthcare Sectors Under Pressure

The education and healthcare sectors, traditionally stable sources of construction demand, face their own challenges. Universities are dealing with reduced grants and contracts, along with visa restrictions affecting international students and researchers. This has translated to decreased demand for new dormitories, classrooms, and laboratory facilities.

“They have a lot less money available to build new dorms and classrooms and labs, and less need for it if they’re not going to have the personnel,” Simonson explains.

Construction Lending Remains Tight

While contractors don’t typically arrange project financing directly, the broader lending environment continues to impact the industry. Construction loans remain expensive compared to pre-pandemic levels, creating an additional deterrent for developers considering new projects.

Combined with rising material and labor costs, developers face a challenging equation when evaluating project feasibility and financing needs.

Looking Ahead: Caution on Leading Indicators

Industry observers often look to indicators like the Architecture Billings Index (ABI) and Dodge Momentum Index for insights. However, Simonson urges caution in interpreting these metrics in the current environment.

The ABI has remained below 50 for most of the past three years, indicating declining billings. The Dodge Momentum Index, which identifies projects in planning stages, may be less reliable given current economic uncertainty.

“In this period of so much uncertainty, such as rapid change in tariffs and in government contracts, grants and appropriations, that linkage is probably not as strong as it used to be,” Simonson notes.

Despite these challenges, the construction industry’s resilience is evident in contractors’ reluctance to lay off workers, suggesting underlying confidence in future demand. As economic conditions evolve and policy uncertainties resolve, the industry’s ability to adapt and respond to changing market conditions will likely determine the pace and scope of recovery in the months ahead.

For developers and real estate investors, the current environment demands careful attention to regional variations, material cost trends, and financing conditions while maintaining flexibility to respond to rapidly changing economic and policy landscapes.