WHAT WE LEARNED IN JANUARY: CONTRACTORS OPTIMISTIC DESPITE COOLING MOMENTUM
The construction industry’s momentum faded somewhat over the past few months. Nonresidential spending growth has stalled, employment growth has slowed to a crawl and materials prices jumped higher in January. Interest rates, which appear set to remain higher for longer, continue to weigh on the construction industry. Despite all this, however, contractors remain optimistic about the next two quarters.
MATERIALS PRICES SURGE IN JANUARY
Construction input prices rose 1.4% in January, the largest month-over-month rise in two years. Higher energy prices and start-of-year price increases explain some of the sharp rise, and purchasers rushing to buy inputs before tariffs go into effect also put upward pressure on prices. With demand expected to increase and ongoing uncertainty regarding trade policy, input prices will likely trend upward over the next several months.
NONRESIDENTIAL CONSTRUCTION SPENDING SLIPS IN DECEMBER
Nonresidential construction spending fell slightly in December and was up just 3.0% year over year. To the extent the segment has retained momentum, it’s due to the meteoric demand for manufacturing facilities and data centers. Those two categories accounted for 94% of the increase in nonresidential spending observed in 2024.
HIRING HISTORICALLY SLOW, EMPLOYMENT GROWTH SLOWS TO A CRAWL
Construction industry employment increased by a modest 4,400 jobs in January, and the industry has averaged just 6,000 net new jobs per month since October. This is largely due to weakness in the residential segment, which actually lost 200 jobs in January.
The rate at which contractors are hiring new workers has slowed dramatically, falling to the lowest level on record aside from the pandemic-affected month of April 2020. With the rate of quits and layoffs also historically low, many contractors appear to be in a holding pattern.
BACKLOG INCHES HIGHER, CONTRACTOR CONFIDENCE STRONG
ABC’s Construction Backlog Indicator inched back up to 8.4 months in January 2025 and is unchanged on a year-over-year basis. Despite high interest rates and underwhelming data over the past few months, contractors remain optimistic. More than 63% of contractors expect their sales to increase during the first half of 2025, while just 13% expect their sales to decline.
LOOKING AHEAD
Economywide inflation accelerated in January, and most forecasters now expect one interest rate cut at most in 2025. Higher for longer rates will continue to weigh on construction activity in certain segments, and the prospect of higher material prices may cut into contractor profit margins. That said, labor availability has improved, contractors are optimistic about demand, and it would only take a few months of better-than-expected inflation data to increase the odds of rate cuts.
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