The U.S. economy, and consequently the construction sector, is currently operating under a pervasive cloud of uncertainty. This environment, distinct from quantifiable risk, is characterized by a broader swath of outcomes than at possibly any other time in living memory, making strategic planning particularly challenging. This unpredictability introduces significant challenges into economic models and forecasts, requiring flexibility and adaptability.
This prevalent economic uncertainty is dampening overall economic activity, leading to delayed business investment and subdued consumer spending. Key macroeconomic indicators reflect this caution, with modest GDP growth forecasts and persistent inflationary pressures. For construction, this translates into a complex landscape already marked by fluctuating project pipelines, persistent labor shortages, escalating material costs exacerbated by tariffs, and tighter financing conditions. While some sub-sectors like manufacturing and data centers show resilience, others, such as office and retail, face significant headwinds1.
When uncertainty is high, consumers tend to delay or cancel spending and investment plans2. This wait-and-see approach is driven by a lack of confidence rather than a calculable assessment of risk. This slows economic activity and reduces demand for new construction projects, as companies postpone expansions or new builds amid softened aggregate demand. When the rules of the game—be they policy shifts or market conditions—are unclear, the optimal strategy for many businesses is to conserve capital and defer non-essential spending – from new construction to capital investments and hiring – slowing the construction pipeline, as fewer projects begin.
While it is difficult to measure directly, the impact of uncertainty is tracked through various proxies. Key measures include:
This news-based index tracks the frequency of specific words related to economic policy uncertainty in newspaper articles. Policy uncertainty, also known as regime uncertainty, specifically refers to the uncertain future path of government policy (monetary, fiscal, tax, regulatory), which increases risks (and consequently, the costs of offsetting those risks), causing businesses and individuals to delay spending and investment 3.
Unusual fluctuations in financial markets, such as the temporary disconnect between elevated risk and treasury investment, serve as a reflection of uncertainty4.
The dispersion in predictions among professional forecasters for key economic indicators (e.g., GDP, inflation) highlights the larger-than-usual areas of probability or paths for key metrics5.
Surveys of business managers and consumers, such as the University of Michigan’s consumer sentiment survey, reflect their difficulty in making predictions about their business situation and household finances6.
These measures provide a pulse on the collective sentiment and predictability of the economic environment. For instance, a consistently high EPU index signals that businesses face significant unknowns regarding future regulations or fiscal policies, directly impacting long-term investment decisions. The NFIB Small Business Optimism Index, for example, reported its Uncertainty Index at 94 in May of this year, significantly above its historical average of 68, indicating that businesses remain highly sensitive to unpredictable domestic trade policy7. This suggests that even if broader economic conditions show signs of improvement, policy-related uncertainty can act as a persistent drag. For construction, this means that even if underlying demand exists, the unpredictable nature of tariffs, interest rate policies, or other regulations can paralyze investment decisions, leading to project delays or cancellations, regardless of underlying market need.
Economic uncertainty directly dampens economic activity across the board. Deloitte forecasts modest real GDP growth of 1.4% in 2025 and 1.5% in 20268, while ConstructConnect’s May 2025 data anticipates just 1.2% growth this year.9 Slowed GDP growth indicates a weaker economic climate, typically curbing demand for commercial space as businesses adopt a more cautious expansion strategy.
Economic uncertainty is weighing heavily on both consumer spending and business investment. Real consumer spending slowed considerably to 1.2% annual growth in Q1 2025, down sharply from 4% in Q4 2024.8 Durable goods spending fell by 3.8% in Q1 2025, reflecting falling consumer sentiment –which dropped 18.2% between December 2024 and June 2025.8 Consumers are shifting their spending patterns, prioritizing value over brand loyalty, which translates to reduced demand for retail, hospitality, and other consumer-facing commercial spaces.
On the business investment front, higher tariff costs coupled with elevated interest rates are prompting businesses to scale back investment and hiring through 2025 and into 2026.10 This directly slows the pipeline for new factories, offices, and other commercial facilities.
The significant drop in consumer sentiment and the shift in consumer spending patterns suggest a deeper, more cautious consumer psychology. This is not just about direct retail construction; it indicates a broader dampening of confidence economy-wide. Since consumer spending drives 70% of macroeconomic demand, this restraint has ripple effects across industries — from entertainment and food service to healthcare. Prolonged caution could stall demand for new spaces across multiple sectors, complicating real estate forecasting and making new project starts riskier.
Inflation remains a persistent concern, complicating the economic outlook. The New York Fed’s May 2025 survey of consumer expectations shows a median one-year ahead inflation expectations rising to 4.3%, up from 3% in November 2024 – driven in part by tariffs.11 In response, the Federal Reserve raised the federal funds rate 5.25% in December 2024, to curb inflation, making future rate cuts less likely even amid slowing growth. Elevated interest rates are already increasing borrowing costs, impacting project viability, and potentially leading to delays or cancellations. Deloitte projects the 10-year Treasury yield will stay above 4.5% through 2026.8 High inflation erodes purchasing power and raises operational costs across all sectors. In construction, elevated interest rates directly increase the cost of capital, making financing harder to secure and projects tougher to pencil out.
The combination of sluggish GDP growth (1.2-1.5%) and stubbornly high inflation (4.3%) creates a risk of a stagflation scenario—low growth paired with high inflation. This environment limits the Fed’s ability to stimulate the economy through rate cuts without exacerbating inflation. For commercial construction, stagflation creates a dual threat: weakened demand (from slow growth) and rising costs (from inflation and elevated interest rates), putting a severe squeeze on profitability and project feasibility, and potentially leading to a broader crisis of confidence.
Total construction spending in May 2025 fell to a seasonally adjusted annual rate of $2.1 trillion, down 0.3% from April and 3.5% year-over-year.12 Cumulative spending for the first five months of 2025 was 2.1% below the same period in 2024.12 Private construction spending declined 0.5% in May 2025, with nonresidential private construction down 0.4%.12 In contrast, public construction spending rose slightly in May 2025, reaching $511.6 billion, up 0.1% from April — a relatively bright spot amid broader softness.12
Total construction starts were up 13% in May 2025 from a sluggish April, reaching a seasonally adjusted annual rate of $1.16 trillion.13 Despite this monthly rebound, year-to-date starts through May, remain 4% below 2024 levels.13 Nonresidential starts are down 6% year-to-date, though commercial starts within this category were up 6%.13 Manufacturing starts, after surging 78% in April, declined 13% in May, reflecting volatility and selective growth across sectors.13
While private nonresidential spending remains subdued overall, sectors like manufacturing, data centers, and public infrastructure are emerging as growth drivers. Conversely, office, retail, and lodging face weak demand. This suggests that economic uncertainty is not impacting all commercial construction segments equally. Capital is being reallocated towards sectors perceived as more resilient or driven by long-term structural trends (e.g., digitalization, energy transition, government spending). For construction firms, this means that relying on historical market strengths, like office, without adapting to these shifts will be detrimental. Strategic diversification into high-growth areas like manufacturing facilities and data centers – even with challenges like labor demands for megaprojects –, is critical for sustaining backlog and profitability.
Although many contractors entered 2025 with ample backlog, persistent economic uncertainty and a 4% year-to-date decline in starts threaten future stability.13,14 In a June 2025 survey from the National Multifamily Housing Council, 71% of respondents cited economic uncertainty as the primary cause of project delays.15 A strong backlog offers temporary stability but does not address the underlying issue of reduced new project initiation. As existing projects wrap up, a shrinking pipeline of new starts will eventually lead to revenue declines and potential workforce impacts. This necessitates a proactive approach to business development, targeted risk management, and a forward-looking strategy focused on securing future opportunities – not just managing existing ones.
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