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May 1, 2025

Construction spending fell 0.5% in March on lower spending in both the public and private sectors. Compared to a year ago, spending is up 2.8%, which is not adjusted for inflation. The producer price index for inputs to construction industries rose 1% over the same period; lower energy prices have helped keep the overall index lower, even as other commodity prices have risen.

Private residential investment fell 0.4% in the month on weaker home improvements. Single-family construction was up 0.1%, while multifamily was flat. Mortgage rates fell slightly in March which helped boost new home buying activity. Builders were not swayed by the drop in rates; their sentiment about future activity remained pessimistic.

Larger builders are offering mortgage rate buydowns and price cuts to lure buyers, while smaller builders are sitting on significant unsold inventories. Around 60% of builders reported price increases or announcements of increases in April from their suppliers. More are expected as copper and lumber are under investigation for tariffs. Those are expected to be announced later in the year. Lower demand and increased costs will continue to pressure profit margins. Consolidations, notably in the single-family market, are expected.

Private nonresidential construction dropped 0.8% across almost all categories. Manufacturing, the largest category of spending, fell 0.4% on lower transportation equipment, plastic and rubber and computer and electronics facilities construction. Computer, electronic and electrical manufacturing facilities had been on a tear since the middle of 2021, supported by the infrastructure bills and the CHIPS act, but have declined for eight of the last ten months. Investigations into semiconductors and their derivatives are expected to be announced later this year. Tariffs on other inputs needed in the construction and production of these facilities could further hinder those plans. Commercial construction declined 1% on lower retail, restaurant and warehouse construction.

Data centers, which are recorded under office construction, were flat in March but still at record highs. Lack of power sources is a major obstacle to ramping up data center construction. Add in rising construction costs and labor shortages, and some large tech firms have already announced project cancellations.

Spending at all levels of government fell 0.2%. Federal spending makes up only about 7% of the total spending. State and local governments are pulling back due to a shortfall in fiscal 2024 revenues and concerns over federal funding. Losses were broad-based and showed up as lower highway and street, sewage and waste disposal, power and educational infrastructure spending.