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1. Is the Construction Boom Really in Just Three Sectors?
Depending on whom you speak to, the construction sector is either “the best in my lifetime” or “fair to partly cloudy”. In reality, both are true statements. Large general contractors have filled their pipelines with mega data center and power generation projects, many of which are reporting that they are full well into 2027. And that has also pushed some projects that they would have historically looked at down into mid-tier contractors who are also now filling up their pipelines. But that doesn’t tell the whole story.
Between data center construction and power generation, they account for 17-19% of total nonresidential construction on a spending basis. Data center construction is now estimated to be $65B-$70B (growing to $80B perhaps this year) while power generation is roughly $158B. Between the two, they account for nearly 90% of the growth in nonresidential, but they don’t account for all of the spending. Among the $1.2 trillion in total nonresidential spending, manufacturing makes up another 25% on its own. Combined, those three sectors now account for more than 50% of total nonresidential spending.
Other sectors including traditional office, commercial, health care, education, and traditional civil construction are still “holding their own”, but they aren’t growing at a rapid clip. Therefore, client activity is going to be mixed. It is true that some clients have more business than they can handle while others are struggling against flat volumes and little project work. If they don’t have some connections or expertise in data centers, power generation, or manufacturing construction, they are fighting over sectors that are flat at best.
Additional Reading: https://www.jll.com/en-us/insights/market-outlook/data-center-outlook
2. Construction Labor Availability, Wages, and Tariff Changes Growing Pain Point for Firms.
A quick interview with a construction executive about pain points in their operations will reveal that finding and retaining quality talent is still one of their greatest challenges. The latest Employment Cost Index through Q4 showed annual wages growing at 4.3% Y/Y, one of the fastest growth rates among all sectors. This is largely due to a worker shortage that existed prior to deportations and one that was exacerbated because of heavier deportation activity.
Data on job openings in the construction sector through December (latest available) show them up 42.4% to 292,000 (up 2.8% M/M). This is the largest annual pace of growth since coming out of the pandemic lockdown in 2021. Reports in some regions indicate that projects are on hold and general contractors could be taking on more projects (more demand than capacity to do those projects) if there was available talent. And as mentioned earlier, the result is an annual wage growth percent that is robust.
Lastly, the big changes in the tariff landscape have many firms scratching their heads. The Supreme Court’s ruling that IEEPA tariffs are illegal was quickly replaced by Section 122 tariffs (rarely used) which allow the President to impost up to 15% tariffs for 150 days. The President initially said he would impose 10% tariffs to replace reciprocal tariffs but verbally moved that to 15% shortly after. At the time of writing, the 10% threshold was legal, 15% was still pending. With July 24th being the deadline for these tariffs, the administration will have to replace them with new Section 232 or 301 tariffs, or it will have to get a formalized trade agreement in place with that country to lock the broader 10 or 15% Section 122 tariffs in place. For now, firms can count on the fact that Section 232 and 301 (such as steel, aluminum, copper) tariffs remain in place and in other applications, a temporary 10-15% tariff will be in place for countries that don’t have a legal trade deal finalized. Supply chain strategies will play a big role in inventory availability and product costs in the coming quarters, and many tariff exemptions will be offered. It will be challenging to track it, but firms may have some advantages in fully understanding tariff policy and how it plays out in construction material costs.
Source: https://fred.stlouisfed.org/series/ECICONWAG ; https://fred.stlouisfed.org/series/JTS2300JOL
