Construction spending increased at end of 2024

February 3, 2025

Construction spending rose 0.5% in December, moved entirely by private sector activity. Overall spending ended the year 4.3% stronger. Inputs to construction industries rose only 0.4% compared to a year ago in December. However, the implementation of 25% tariffs on Canada and Mexico and retaliatory tariffs will mean higher construction costs; they are already 36% higher than pre-pandemic.

The US imports essential construction materials from Canada and Mexico; specifically, softwood lumber and gypsum (used for drywall). Softwood lumber is already subject to a 14.5% tariff, bringing the new effective rate to nearly 40%. Canada has already prepared retaliatory tariffs while Mexico has announced it will act as well.

According to Associated General Contractors (AGC), producers have already started to raise prices for a variety of materials. Steel, gypsum and lumber prices have already risen, prior to any new tariffs.

Input costs are only one part of the construction equation: Labor matters significantly as well. According to an AGC survey of builders, the top concerns for 2025 are regarding labor: rising direct labor costs, insufficient supply of workers or subcontractors and worker quality. It is hard to ramp up activity in the labor-intensive construction industry under these conditions.

Private residential construction spending rose 1.5% due to stronger single-family construction, while multifamily lost ground. Builders have pivoted away from starting new apartments as they complete record backlogs. Single-family construction could be stronger due to demographic tailwinds and expectations of lower mortgage rates. Keep in mind, approximately 7% of all inputs used in residential construction are imported.

Private nonresidential construction spending eked out a 0.1% gain in December on office, communication and power construction. Office construction includes data centers, which have hit another new record in spending. The latest KPMG Asset Management Outlook survey revealed that investors are bullish on data centers, with 40% of respondents believing that data centers will be the real estate asset class that will offer the most meaningful returns in the next 24 months.

Public construction spending slumped 0.5% as federal, state and local government spending all fell. The bulk of construction spending occurs at the state and local levels. Lower revenues and cost cutting will impact governments’ abilities to ramp up construction spending this year.