3 Charts Contractors Should Be Watching This Year

Contractors are juggling optimism and malaise heading into 2025.

From interest rate cuts to a new presidential administration, construction professionals are keeping a close eye on key issues and trends that could drive up costs or unlock new opportunities.

While the outlook for the year is uncertain, below are some of the indicators that will have the biggest impact on construction activity, according to economists and other industry experts.

The possibility of razing the rates under the next Trump administration remains important above the producer price index as contractors prepare for potential impacts on materials including steel, wood and MEP components.

Ultimately, the full impact will depend on policy implementation and trade relations, said Luke Lillehaugen, senior economist at S&P Global Market Intelligence.

“Should the proposed 25% tariff on all Canadian goods be implemented, US lumber supplies would be disrupted as prices would rise significantly and US shortages would materialize before domestic production be increased to meet demand,” said Lillehaugen. . “Meanwhile, prices would fall in Canada due to oversupply.”

Steel could also be exposed, said Christos Rigoutsos, Lillehaugen’s colleague and senior economist at S&P. Steel prices have fallen significantly in the past year, but tariffs could offset these recent cost reductions.

“Rebar and wire prices are likely to be affected, as Mexico and Canada are some of the largest exporters of these products to the US, leading to the possibility of even higher floor prices,” he said. say Rigoutsos

Material costs skyrocketed during the COVID-19 pandemic, and while prices have since stabilized, they are still much higher than before 2020. In fact, inputs for non-residential construction have increased by 39.2% as of February 2020, according to the US Bureau of Labor Statistics.

But there can be a silver lining, said Bryan Ehrlich, president of NCE General Contractors in San Antonio, Texas. He said the tariffs could force global suppliers to lower prices to stay competitive in the United States.

“We are getting much closer to the free market again determining prices,” Ehrlich said. “The tariffs will force suppliers outside the country to find ways to lower their prices to remain competitive in the market.”

However, those blanket fees could have a different effect for the construction industry, said Michael Guckes, chief economist at Cincinnati-based ConstructConnect. This is because even if demand for domestic materials increases, manufacturers may struggle to ramp up production.

“Without a significant increase in domestic labor, manufacturers’ output will be subject to the limits of what little available labor they can find,” Guckes said. “As we experienced during COVID, this could create a further increase in wages that would only increase product costs and make consumers even worse off.”

In other words, the tariffs could leave contractors in a worse place: higher costs for imports and limited domestic supply, Guckes said. This puts pressure on material prices to rise again.

Inflation continues to pose challenges for contractors and developers, said Chad Prinkey, CEO of Well Built Construction Consulting, a Baltimore-based firm that provides strategic consulting, facilitation services and roundtables for construction executives.

“The big number that I think we all need to keep watching is inflation,” Prinkey said. “I may be a bit shy on hyperinflation in 2021 and 2022, but the efforts required to control inflation once it gets out of control has a particularly painful impact on developer-driven construction.”

That impact is already visible across the industry as rising material costs, labor shortages and margin pressures strain the industry’s ability to adapt, Ehrlich said.

“You can see projects that were done five or six years ago, say $1 million, are now $1.8 to $2 million,” Ehrlich said. “We can’t do anything about it, especially in the specialized trades. The costs are only going up.”

To overcome these pressures, some contractors are turning to value engineering, Ehrlich said.

“With our clients, we were talking about a building and what’s cheaper with material A or material B,” Ehrlich said. “The more cost exercises we could offer and the more creative we could be in those value engineering options, it mitigates some of that inflation.”

However, inflation could continue to rise in 2025, said Anirban Basu, chief economist at Associated Builders and Contractors. That could keep those financial pressures high, he said.

“Inflation is still significantly above the Federal Reserve’s target of 2 percent,” Basu said. “This suggests to me that the Federal Reserve will have a hard time justifying further rate cuts going forward.”

This cautious outlook aligns with the Fed’s actions to close last year. When it cut rates on December 18 for the third time in 2024, the central bank signaled that it could favor less monetary policy easing in 2025.

Indicator 3: Interest rate

Effective monthly federal funds rate from December 2019 through November 2024.

Despite the Fed’s new outlook, the cuts that have already taken place could open up new opportunities for project starts and will therefore remain a focal point for construction professionals.

Even modest rate cuts can significantly improve commercial construction financing conditions, said Chris Fisher, managing director of Troy, Michigan-based consulting group Ducker Carlisle. He pointed to growing optimism among developers and investors as rates eased in 2024.

“A small move in interest rates at a significant spending level in the millions will make a big difference,” Fisher said.

But this optimism could be short-lived.

It seems unlikely that the Federal Reserve will continue aggressive rate cuts in 2025as inflation remains stubbornly above the 2% target, Basu said. This means that borrowing costs could remain high.

“I think next year there will be a slowdown in the economy,” Basu said. “Expect a slowdown because of these higher interest rates.”

Still, contractors continue to work relatively healthy levels of lag. In other words, despite high interest rates and indications that the Fed will slow its rate-cutting campaign, contractors are still pushing ahead, Ehrlich said.

“If you own a business, you’re not betting on interest rates going down,” Ehrlich said. “It makes it harder to do business, but that’s just the current state of the environment.”