4 mins
GROWTH EXPECTED BUT EARLY DAYS
With the Trump Presidency still in its infancy, Scott Hazelton offers his informed estimate about how construction will fare
US real Gross Domestic Product (GDP) slowed to 2.8% in 2024 (from 2.9% in 2023) and is expected to slow further to 2.0% in 2025 and 1.7% in 2026. The factors responsible include restrictive monetary policy, ceased tailwinds that boosted growth through 2023, a strong US dollar, and conditions which portend weakening equity values.
The growth estimated for 2025 and 2026 is below potential GDP growth. The expected policies of the Trump administration and Republican-controlled Congress are likely to include tax cuts, tariffs, and deportations. We believe that, in 2025, these policies will give rise to higher inflation, a slower pace of monetary policy easing, higher interest rates, a stronger dollar, and tighter financial conditions.
Similar sentiment was reflected in the Summary of Economic Projections that accompanied the December 18 meeting of the Federal Open Market Committee, in which 2025 projections for inflation and the federal funds rate were revised materially higher. Financial market indicators are comporting with our view. At the time of this writing, futures markets were pricing in a 78% probability of no more than 50 basis points of Federal Reserve rate cuts by the December 2025 meeting. Term Treasury yields and private borrowing costs have risen sharply, and the dollar has strengthened.
Core construction spending has become a drag on growth because nominal infrastructure spending, which soared in 2022 and 2023, has flattened, and private nonresidential spending on the computer/electronic/electrical category, which skyrocketed in 2022 and 2023, is sliding. Residential construction spending will contract in real terms in 2025. While home improvement spending will eke out 1.8% growth, both new single family (-1.6%) and multi-family (-14.7%) construction will be negative. Elevated interest rates, along with continued shortages of labour and low existing home inventories, have resulted in affordability concerns for consumers that have put downward pressure on the market. In addition to high interest rates, home sales prices increased 3.6% from the year earlier.
New home sales have stabilised, however, and unsold inventory is at a 17-year high, suggesting that a correction in the form of price cuts and fewer homes started are likely – either will reduce residential construction investment.
Existing home sales increased for the third consecutive month, suggesting that one of the worst downturns in history may have ended in October. Single family existing home sales were up 5.8% in the fourth quarter. Given elevated and rising mortgages rates, the sales pickup is surprising. The 30-year fixed mortgage rate began the quarter at 6.49% and ended at 6.93%. The median selling price of a singlefamily home at year end 2024 was 6.1% higher than a year earlier. The turnaround in existing home sales is one driver for continued growth in home improvement spending.
Nonresidential construction
Real construction of nonresidential structures grew 5.4% in 2024, but is poised for declines in 2025 (-3.5%) and 2026 (-5.2%). While the manufacturing segment had the best performance, it was overwhelmingly driven by the computer/electronic/electrical category – spending on plants producing electric vehicle batteries and microprocessors. This category peaked in May and was already down 1% by the end of the year. With the expiration of incentives, such as the CHIPS Act, spending will decline 18.7% in 2025 and 27.6% in 2026. Total manufacturing construction will decline 12% and 16.9% respectively.
Commercial construction spending declined by 8.0% in 2024, the fourth consecutive yearover-year decline. Only the lodging segment is expected to offer growth in 2025 and 2026.
Datacenters, subsumed under the office segment, jumped 2.7% in November on the heels of a 4.4% surge in October, increasing for the 17th time in the last 18 months to a recordhigh $31.5 billion annual rate. Indeed, data center construction could be even higher were it not for supply chain limits. On an annual basis, data center construction is seeing growth at better than 30% rates, but pure office plays continue to decline.
The worst declines are over for retail, and it will nearly hold its own over the forecast. Still, this will be largely renovation spend as existing stores are re-purposed. After three strong years over 2020-22, warehouse construction declined 18.7% in 2024 and is set to decline in 2025 and 2026.
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The best opportunities for nonresidential structures growth will come from the institutional segment with health care, education and government office structures all offering single-digit growth. Government office construction is expected to shrink by 2026.Public health care will outpace private facility construction, although the strongest growth in this segment will be specialty care facilities.
Impact of infrastructure
Total construction spending growth has been carried by the infrastructure segment. However, spending under the Investment in Infrastructure and Jobs (IIJA) is peaking. While the level of spending will remain high, infrastructure will cease to be a significant growth driver.
There is something of a wild card with construction of power infrastructure. Wind turbine construction has collapsed with solar becoming the dominant investment for renewables. While not a large target for IIJA, power infrastructure construction grew 8.5% in 2023 and 11.6% in 2024. We project 4.4% growth in 2025 based on existing plans.
However, the rapid growth in data centers will require a massive increase in power generation.
It remains to be seen what will become the dominant fuel type and whether these facilities opt for developing their own power rather than wait for public utility investment. While the Trump administration has promised to ease regulations, most power companies are regulated by states, not the federal government. There is upside potential for infrastructure to become a construction growth engine later in the forecast, but this will arise from the power sector, not the more conventional transportation components.
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