The construction industry, much like the broader economy, entered 2025 with ample—and somewhat surprising—momentum. Construction activity remained elevated despite a prolonged period of high interest rates, inflation had slowed considerably from the 40-year high seen in 2022, and most forecasters expected multiple rate cuts throughout the new year.
More importantly, construction industry labor shortages had eased, and materials prices had ceased rising, remaining more or less unchanged throughout 2024. This, along with surging data center and manufacturing construction activity, kept contractors busy despite the effects of high borrowing costs and tight lending standards.
The outlook appears significantly less upbeat just four months into 2025. This deterioration began with initial trade war skirmishes with our closest North American trade partners, which put upward pressure on materials costs and raised economic uncertainty to levels not seen since the early months of the pandemic. This was just the beginning. Because of the massive tariffs announced on April 2nd—and subsequently changed, raised, lowered, and altered several times in the following two weeks—forecasters have significantly raised the odds of a recession over the next twelve months, with some suggesting that a recession may have already begun.
The effective U.S. tariff rate is, for now, at the highest level in almost 100 years. This has diminished the construction outlook in several ways. Directly, higher import taxes will raise the cost of materials, cutting into contractor profit margins and causing many owners to delay or cancel projects. Recent data indicate that steel, copper, and lumber prices have already begun to rise.
The size of the tariffs and the way they were implemented has caused many investors to, at least temporarily, lose faith in the U.S. business environment. In addition to reducing domestic investment levels, this has curbed the appetite for U.S. government debt, pushing bond prices down and yields higher. As a result, borrowing costs have risen while the prospect of rate cuts have, at least for the moment, faded.
Higher import taxes will raise the cost of materials, cutting into contractor profit margins and causing many owners to delay or cancel project.
There was a notion that the tariffs would bolster U.S. manufacturing construction, but that does not appear to be the case. First, the rapidly changing nature of the policy renders it nearly impossible for businesses to commit to reshoring. Because large producers use a decades long horizon for investment decisions, short-term tariffs are unlikely to influence their decision making.
Second, the recent decision to exempt imports Chinese cell phones, laptops, and semiconductors means that many finished Chinese goods face a lower tax rate than the components a domestic manufacturer would need to import to produce those goods themselves.
And then there’s the higher odds of recession. Given the cyclical nature of construction, an economic downturn is never a good thing for the industry. Of course, the rapidly changing nature of the policy, while a cause of the darkened outlooks, also means that it could resolve relatively quickly.
Contractors in Western Michigan may remain busy due to the region’s megaprojects and the secondary construction activity that has and will continue to occur as a result. Construction employment in the area has risen by 2.8% over the past year, significantly faster than the nationwide industry employment (+2.0% year over year in February). Those job gains were concentrated in the Grand Rapids-Wyoming and Kalamazoo-Portage areas. Over the past year, construction employment is flat in Muskegon and down 5.0% in Niles-Benton Harbor.
The upshot is that it’s a precarious moment for the construction industry. As seen in ABC’s most recent Construction Confidence Index, contractors are increasingly concerned about the next six months, especially regarding their profit margins. Despite these concerns, however, an imminent resolution to the trade war would significantly improve the outlook.
Anirban Basu, ABC’s Chief Economist
Anirban Basu is the Chairman & CEO of Sage Policy Group, Inc., an economic and policy consulting firm based in Baltimore, MD, with an office in Orlando, FL. The firm provides strategic analytical services to various sectors, including energy suppliers, law firms, medical systems, government agencies, and real estate developers.
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