The Construction Economy: 2025 Lessons and 2026 Outlook

Written by CS Market Research Manager, Curt Fessler

If I had to pick a phrase to describe the state of the construction economic outlook for 2026 today, it would be “Building Through Uncertainty.” Here is why:

AI’s Impact on the Economy

When considering the impact of the artificial intelligence boom on the broader economy, there is much to be optimistic about. It appears near certain that AI will eventually significantly boost productivity, the economy’s potential growth rate, and perhaps even lift living standards. Having said this, there is much to watch between now and then. While massive investments are being made in data centers and other AI infrastructure, there is also an arguably circular financial relationship with the big AI companies investing in each other, essentially recycling capital. This is not necessarily a bad thing, but it does present some risks, including inflated valuations if earnings from AI ventures don’t catch up.   

The “Magnificent Seven” (Apple, Microsoft, Nvidia, Alphabet, Amazon, Meta Platforms, and Tesla) currently account for nearly 37% of the S&P 500, underscoring both the strength and concentration of tech-driven growth.

The breakout nature of the AI industry can make the stock market appear overvalued by tried-and-true measures. Stock prices have increased by a searing average of 8% or more annually since the early 2000s, the last time the 10-year Treasury yield was in the +4% range. This S&P growth is double the pace of nominal GDP growth. The stock market is seemingly becoming disconnected from much of the economy. There’s essentially everything tied to the AI boom and everything else. Of course, this can go on for much longer; that’s the way emergent, capital-intensive asset markets work, but the data does harken back to previous market adjustments. 

Stressed Working-age Population

Demographic trends, such as the aging Baby Boomer generation retiring, fewer births and more stringent immigration practices, are resulting in a stagnant working-age population. This could be the U.S.’s most significant structural headwind to economic growth.

We hope that the AI hype is real, as it is almost impossible to find an example of an economy that has created strong growth without a concurrent increase in the labor force.

 National Center for Health Statistics, Census Bureau via Haver, and other's calculations. 

Affordability Challenges (For Some)

The nation is facing an intensifying affordability challenge for lower and middle-class households. Prices for many necessities, from groceries to housing, insurance and cars (including repairs), have increased significantly since the pandemic and most prices continue to rise at an uncomfortable pace. Consumer price inflation is near 3%, well above the Fed’s inflation target. Inflation had slowed moving into this year and was on track to return to the Fed’s inflation target by year’s end. However, higher tariffs, highly restrictive immigration policy and broad de-globalization have shifted that outlook, and inflation appears likely to remain stubbornly high for the foreseeable future. A job market struggling to create jobs, rising unemployment, skyrocketing layoff announcements, higher interest rates, high housing costs and slow wage growth mean that the tough financial times low- and middle-income Americans are grappling with will likely persist.

Material, Labor, and Financing Costs

The construction industry also continues to experience higher-than-average material cost levels. As of September, material costs were on average 3.5% higher year-over-year. Material cost escalations are largely due to the impacts of import tariffs, which continue to work their way through the system. We anticipate this trend will persist for several more months. The most significant increases have been from lumber, metals, electrical components and natural gas.

The already stressed construction labor market is also facing increased pressure as immigration enforcement efforts disrupt the workforce. The construction industry employs more foreign-born workers (one in every three) than any other U.S. industry.

The Federal Reserve continues to walk a tightrope when it comes to interest rate cuts due to a softening job market. Several quarter-point rate cuts have made lending slightly more favorable; however, considering other market factors, they are doing little to stimulate construction for many segments.

Flying Blind

With government data, we always expect a lag; however, the recent government shutdown has exacerbated that reality. Some private models and datasets help fill the gaps, but many of them are also dependent on government data or provide only a partial view of the landscape.

Construction Starts and Megaprojects

Just as it has over the past two years, Non-residential activity continues to drive the growth in US construction starts.

We are seeing clear winners and losers in the market. Look no further than where the mega projects are to spot the winners. Megaprojects valued at $1B or more have been pivotal in fueling the market. These have been concentrated in civil infrastructure, power generation, manufacturing, transportation terminals, and, surprise, surprise, data centers. 

Hotels, offices and warehouses on the commercial side, as well as education and healthcare on the institutional side, all fall on the weaker side of the starts equation, signaling potential softness in the overall pipeline. While neither market is cratering, the warehouse market is stabilizing after years of aggressive buildout and hotels are softening as the US consumer pulls back on travel expenditures.

On the institutional side, while an aging population is creating high demand for healthcare and senior living, the uncertainty over government funding is creating hesitation in capital expenditures, especially in the hospital segment. The downtick in education starts can be traced back to lower enrollment due to declining birth rates as well as tightened visa regulations, high costs, and, again, uncertainty regarding government funding.

There’s Still Opportunity

Construction starts data shows that even with some segments pulling back slightly, there is still plenty of opportunity in the market. Regionality is important to consider. While some segments show a decline, there are regions experiencing high growth in the very same segments. It’s also important to understand that starts data captures the entire project value in the year the project breaks ground. Actual spending occurs over time, often over several years, in a bell-curve distribution.

Overall, we are still expecting 7%+ growth in non-residential starts, driven by the strength in the fastest-growing markets, such as data centers. 

Courtesy of ConstructConnect

Spending

2025 construction spending initially showed some early momentum, but tricky market dynamics quickly challenged this momentum as the year progressed.

Real value added climbed to $890 billion in the second quarter, a 1% increase year over year, while real gross output reflected a 0.6% fall. By July, total construction spending declined almost 3% year over year, primarily driven by downturns in commercial (–8.2%) and manufacturing (–7%) construction. At the same time, firms struggled with persistent inflation, elevated interest rates, tariff uncertainty, acute labor shortages, supply chain disruptions and material price spikes, which contributed to tightened margins and stretched schedules.

Despite challenges, there were notable areas of positivity, including the surging artificial intelligence–driven data center construction and the associated focus on energy infrastructure. Advanced manufacturing, health care and defense activities presented selective growth opportunities. Investment in structures is projected to shift from a decline in 2025 to modest growth (nearly +2%) in 2026, with AI-related data center outlays continuing to support engineering and construction (E&C) work.

Outlook

What will drive the market direction in 2026?

1. Continued impact of tariffs on materials and the general economy. Tariffs continue to increase material costs substantially. When considering margin expectations and owner price sensitivity, the jury is still out on what projects in planning will proceed, be delayed or abandoned. Contractors are engaging in stockpiling, material substitution, digital adoption and supplier diversification in an attempt to control costs, but the struggle to keep projects “penciling out” is a daily battle.
2. Continued strength in data centers and energy infrastructure is key to achieving overall growth in 2026. Many contractors are realigning skills and portfolios to be more competitive in the mega-project-driven data center and associated energy markets.
3. Skilled labor availability continues to trouble the construction industry. COVID-era attrition, combined with immigration enforcement and the intense labor demands of mega-projects, has created a pressing need to attract, upskill and retain skilled labor. Expect technology adoption (productivity) and workforce development to play key roles.
4. Resolving the current government funding uncertainties affecting the institutional education and healthcare segments is critical to relieving capital investment hesitancy and returning those markets to a growth mode.

The Bottom Line: A Year of Possibility

2026 isn’t just another year; it’s a turning point. With AI accelerating innovation, mega projects reshaping infrastructure and technology driving productivity, the opportunities ahead are extraordinary. Yes, challenges remain, but they are catalysts for smarter strategies and stronger partnerships. For those ready to adapt and lead, the next chapter promises growth, resilience and transformation on a scale we’ve never seen before. The future isn’t waiting—let’s build it.

Curt Fessler is the Market Research Manager at Construction Specialties, in charge of economic and construction industry analysis and forecasting. He gathers market insights, analyses material and product pricing, studies trends and conducts competitive analysis. Curt has been with CS for more than 15 years in several product delivery and marketing leadership roles.