Construction falls on tariff fears and unseasonable weather

March 5, 2025

Construction spending fell 0.2% in January on lower private residential activity. Colder-than-average temperatures and record snow in the South held back activity. The South is the single largest market where builders operate. Construction costs, which were collected before any tariff announcements, jumped 1.1% compared to a month ago. Steel, aluminum and lumber prices have already risen ahead of tariffs. Any tariffs that are put in place will be additive, meaning that a 25% tariff on steel and aluminum or lumber will be added to any country-specific tariffs. The US imports 13% of its steel, 50% of its aluminum and 74% of its lumber from Canada.

Private residential construction fell 0.4% on lower multifamily starts; single-family starts rose 0.6%. New multifamily construction continues to decline as builders complete backlogs and pivot away from apartments. Rents have fallen in regions that saw the largest supply of new apartments coming on line. The expectation is that rents will begin to reverse course once the current new supply is absorbed, which is happening faster than anticipated due to the slowdown in the single-family market; those who cannot buy end up renting, pushing up demand for apartments. Multifamily permits are down 1% from a year ago.

Builders are concerned about shortages ahead of new tariffs and immigration restrictions. Labor hoarding is already occurring; layoffs in the sector were down 15% in December compared to a year ago while job openings were down 50%. Projects are being put on hold.

The construction sector is heavily reliant on immigrant workers, while the rising cost of inputs adds insult to injury; costs are already 40% higher than pre-pandemic. Lending has tightened, making it harder to ramp up projects that require debt financing. Strong demographics should provide a floor under demand if supply picks up.

Private nonresidential construction was flat in January with manufacturing, commercial, transportation and education infrastructure spending down. Construction of chip and battery plants had been on a tear since late 2021 following the implementation of the bipartisan infrastructure act but has lost momentum. Spending is now less than 1% higher than it was a year ago.

Data center construction, which is included in the office category, jumped 1.9% in the month to hit another new record. Data centers and power infrastructure will be the bright spots in the sector as firms ramp up their GenAI capabilities.

Public construction spending, most of which is done by state and local governments, rose 0.1% on higher federal construction spending. As a share of the total, spending by the federal government only amounts to about 7% of all construction spending by the public sector.