By Ken Simonson, Chief Economist, Associated General Contractors of America (AGC)
This year opened with a mixed bag of economic indicators and an unusually high level of uncertainty about how policy changes would affect the United States’ construction industry and its economy more broadly. Areas to watch include tariffs, immigration, taxes, funding and regulation.
The economy remained robust in late 2024. Nonfarm payroll employment increased by 256,000, seasonally adjusted, from November to December, well above the monthly average of 186,000 for 2024 as a whole. Inflation-adjusted gross domestic product (real GDP) climbed 3.1 percent at a seasonally adjusted annual rate in the third quarter, up a tad from 3.0 percent in the second quarter. (Seasonal adjustment is a statistical procedure that removes the normal variation due to regularly recurring patterns to show the underlying economic changes. Expressing changes at an annual rate allows ready comparison to full-year results.)
However, there are also signs of a slowdown. Construction spending on projects underway in November was unchanged from October’s seasonally adjusted level, the U.S. Census Bureau reported on January 2. While spending was 3 percent higher than in November 2023 before adjusting for inflation, that was the smallest year-over-year increase since 2019.
Progress appears to have stalled as well on curbing inflation. The consumer price index rose 0.4 percent, seasonally adjusted, in December, following an increase of 0.3 percent in November. That brought the year-over-year increase to 2.9 percent, the largest gain since July.
The Federal Reserve System’s Federal Open Market Committee (FOMC) did lower its target for the overnight bank lending rate, known as the federal funds rate, by another 25 basis points, or 0.25 percentage points, in December. However, the FOMC signaled that it was likely to make fewer rate cuts in 2025 than had previously been expected. Meanwhile, the interest rate for new 30-year fixed mortgages, a key determinant of home sales, ended the year at 6.91 percent, near its post-pandemic high.
A higher fed funds rate means bank lending rates will be higher. That will be expensive for homebuilders and other contractors who use bank loans for working capital, such as inventory.
Higher short-term rates will also dampen demand for construction in a couple of ways. Developers who rely on bank financing for construction may find that some projects are not profitable. Homeowners who use credit cards or home-equity lines of credit (LOCs) to pay for remodeling and additions will be pinched as well.
Homebuilders are hit by increases in both short- and long-term rates. Their own borrowing costs go up, while higher mortgage rates mean fewer would-be home buyers have enough income to qualify for loans.
Despite these headwinds, contractors remain generally optimistic about the prospects for construction. One useful perspective comes from the annual construction outlook survey that the Associated General Contractors of America (AGC) released on January 8. The survey, which drew more than 1,100 responses, was conducted from shortly after Election Day in November until just before the FOMC’s mid-December meeting.
Respondents were asked to say whether they expected the dollar value available to bid on for 17 different project categories would be higher, lower or about the same as in the year before. The AGC presented the findings in the form of a net reading—the difference between the percentages of respondents who reported “higher” versus “lower” prospects.
The highest net reading, 42 percent, was for data centers. Contractors were also very bullish about the prospects for water and sewer projects, with a net reading of 35 percent, and for power projects, with a net reading of 32 percent. The readings for three additional, largely public categories were also strongly positive. The net reading for transportation structures, such as airport and rail projects, was 29 percent. Expectations for bridge and highway work were 24 percent net positive. The reading for federal government work was 22 percent. One other public category—public buildings—drew a moderately positive net reading: 14 percent.
Among predominantly private-sector categories, in addition to data centers and power projects, contractors were bullish about non-hospital healthcare facilities, such as clinics, testing facilities and medical labs, with a net of 27 percent. That net was slightly higher than the 24 percent net reading for hospital construction. In addition, survey respondents were largely positive as well about manufacturing-plant construction, with a net reading of 25 percent.
On balance, contractors were also optimistic about the education sector. The net reading was 13 percent for kindergarten-to-12th-grade schools and 12 percent for higher-education construction.
In general, interest-rate-sensitive, developer-financed segments had the least optimistic readings. For instance, the reading was 14 percent for warehouse construction, 12 percent for multifamily residential and 7 percent for lodging. The net reading was mildly pessimistic for private-office construction, at -3 percent, and for retail projects, at -5 percent.
However, all of these forecasts are clouded by a high degree of uncertainty regarding several categories of federal policy initiatives.
Regulations. There appears little doubt that contractors and other businesses will face fewer new federal regulations with which to cope under a second administration led by President Donald Trump than if Democrats had retained the White House. In his first term, Trump directed agencies to rescind two regulations for every new one they proposed. His rhetoric and nominees this time suggest he will again halt many initiatives proposed but not finalized by President Joe Biden’s administration before he leaves office.
However, rolling back existing final regulations requires going through many, if not all, of the steps needed to adopt rules in the first place. Trump’s previous appointees often lacked the experience, or did not last in office long enough, to complete those steps. It remains to be seen how determined and successful officials will be this time.
Moreover, many of the rules that drive up costs and slow down approvals to build or expand come from state and local governments. Federal agencies will have little opportunity to affect those regulations.
The Supreme Court of the United States (SCOTUS) has added further uncertainty to the regulatory environment. In a ruling last June, the court overturned a doctrine it adopted nearly 40 years previously that gave the U.S. Environmental Protection Agency (EPA) and other federal entities broad leeway to implement their interpretations of Congressional intent. Now, more challenges to federal rules, some of them decades old, are sure to be brought.
Taxes and tariffs. Federal tax laws, like regulations, seem certain to be more business-friendly under Republican control of the White House, Senate and House of Representatives than if the Democrats had won the so-called trifecta. Republicans appear eager to extend, and perhaps expand, many of the tax cuts enacted in 2017 that are due to expire at the end of 2025.
However, there is no consensus on how to continue those tax provisions without adding to the federal budget deficit. Although Trump has asserted that tariffs are the answer, nearly all independent analyses suggest tariffs will generate relatively little revenue. Indeed, tariffs will drive up the costs of producing many items, making US firms less competitive or reducing their profits if they choose to absorb those costs. At the same time, US trading partners are likely to retaliate by imposing their own tariffs or other restrictions on US exports. These measures will further cut into sales, employment and wages—and federal tax revenue.
Instead of extending tax reductions across the board, the U.S. Congress is likely to repeal some and allow others to expire. Among the provisions that have been suggested for termination are several that encourage investments in renewable-energy production, factories for advanced manufacturing and tax credits for the purchase of electric vehicles or making homes and buildings more energy efficient.
Spending. Some federal spending programs that may be on the chopping block include grants and loans for construction and production of semiconductors, electric vehicles and their batteries, and solar and other renewable energy. As with the list of vulnerable tax provisions, construction firms are likely to be hit harder than many other sectors if these programs are eliminated or scaled back.
There is also a possibility that some of the unspent funds under the $1.2-trillion Infrastructure Investment and Jobs Act (IIJA) will be frozen or repealed. Although the law has been in place since November 2021, many projects still have not been awarded. In its last few months in office, the Biden Administration announced many more final funding agreements for transportation, energy and environmental projects. Most of these projects will likely proceed, but these construction markets are at risk.
Immigration. The population of the United States increased from July 1, 2023, to July 1, 2024, by just under 1 percent, the fastest rate since 2001, the U.S. Census Bureau reported on December 19. “Net international migration,” the agency noted, “was the critical demographic component of change driving growth in the resident population. With a net increase of 2.8 million people, it accounted for 84% of the nation’s 3.3 million increase in population between 2023 and 2024. This reflects a continued trend of rising international migration, with a net increase of 1.7 million in 2022 and 2.3 million in 2023.”
Trump has vowed to clamp down on immigration and also undertake “mass deportations”. A cutoff in immigration and an increase in emigration—voluntary or forced—would dig deeply into the demand for construction goods and services in many states.
Net international migration last year was positive for all 50 states, with Washington, D.C., Florida, California and Texas experiencing the largest net immigration. Florida had the highest population-growth rate of any state at 2.0 percent. However, that growth was highly dependent on immigration. Florida was among 17 states that experienced more deaths than births, meaning their populations would have declined if not for immigration.
Restricting immigration, let alone deporting large numbers of foreign-born workers, would be particularly hard on construction. An analysis of Census Bureau data by Riordan Frost of the Joint Center for Housing Studies of Harvard University found that 34 percent of construction craft workers in 2023 were immigrants—nearly double the 18-percent immigrant share of the nation’s overall labor force. Any exodus of such workers would be disruptive to projects everywhere, but the initial impacts would vary greatly by state. Roughly half of construction craft workers in D.C., California, Florida, Maryland, Nevada, New Jersey and Texas were immigrants.
Nevertheless, even states with low shares of foreign-born workers would be affected as individuals relocate to states that have raised wages in order to make up for their lost workers. States where workplaces were raided—in an effort to find undocumented workers—also lost workers who may have been in the US legally but still feared that they or members of their households would be detained.
In short, construction contractors can expect favorable opportunities related to data centers, infrastructure, manufacturing, federal projects, healthcare and education construction. Prospects are generally less positive or slightly negative for interest-rate-sensitive categories, including homebuilding, home improvements and income-producing properties. However, changes in a wide range of federal policies may upend the outlook for any sector or state.