Construction Executive’s 2026 Q1 Construction Economic Update and Forecast

Recession Amid Policy Shocks

The construction industry has slipped into recession, marked by declining activity in many nonresidential segments through late 2025 and into early 2026. Forecasts from groups like the American Institute of Architects project only 1% nominal growth in building spending for 2026, a figure unlikely to outpace rising costs and effectively flat in real terms. This slowdown follows stronger periods earlier in the decade but has been exacerbated by demand shifts away from traditional commercial and manufacturing builds.

Tariffs introduced or expanded in 2025, particularly on steel, aluminum, and other imports, have driven material costs upward, with effective rates reaching 25-30% in some cases and projections of 5-25% further increases depending on the material. These costs, combined with lingering effects of elevated interest rates from prior years, have already led to project delays, cancellations, or scale-backs as budgets fail to accommodate updated bids. The Supreme Court is currently weighing challenges to the executive's tariff imposition powers, creating additional uncertainty that could either curb or entrench these price pressures.

Sectoral imbalances stand out sharply: data centers and power facilities continue surging due to AI and energy demands, potentially growing 20% or more, while manufacturing and commercial construction face declines or minimal gains. This polarization means firms heavily exposed to cyclical or tariff-sensitive areas suffer most, while those positioned in high-growth niches may thrive. Labor needs persist, with estimates requiring hundreds of thousands of new workers annually despite softer overall demand, as retirements outpace growth in many segments.

Broader economic context adds layers: moderate GDP growth around 2% is anticipated for 2026, with possible Federal Reserve rate trims providing some financing relief, yet policy volatility—including potential fiscal shifts and immigration changes—affects labor availability and supply chains. The interplay between these forces risks prolonged stagnation in parts of the industry unless uncertainties resolve favorably.