Construction Industry Faces Uncertain Future Amid Tariffs and Labor Shortages

The construction industry is at a crossroads, grappling with a perfect storm of challenges that are forcing project owners to cancel, defer, or shrink their plans. The latest data from the Associated General Contractors of America (AGC) paints a stark picture: spending on projects underway in July inched down 0.1 percent from June, with declines in private nonresidential and multifamily construction offsetting pickups in public outlays and single-family homebuilding. This trend is consistent with an AGC survey that revealed many owners have scaled back projects due to tariffs and labor shortages.

The survey findings are alarming. Sixteen percent of contractors reported that projects had been canceled, postponed, or scaled back due to tariffs, while 45 percent cited labor shortages as the cause of project delays. Additionally, 26 percent of firms reported that projects had been affected by changes in owners’ demand or need due to other policy changes, such as federal funding, taxes, and regulations. These figures underscore the urgent need for policy certainty and workforce support in the construction sector.

The economic implications of these trends are far-reaching. The regulatory environment, shaped by the Trump administration's rollbacks and policy shifts, has introduced uncertainty, particularly for projects dependent on pending environmental and labor guidelines. While the regulatory freeze could streamline certain construction processes, it also creates an uncertain landscape for long-term investment. Large infrastructure projects may see faster approval times, but the uncertainty around labor and environmental policies could deter long-term investment, leading to a cautious approach by investors and potentially slowing down the recovery of the construction sector.

Labor shortages, exacerbated by stricter immigration policies, are another significant challenge. Nationally, foreign-born workers fill an estimated 30% of trade jobs, and increased worksite immigration audits and raids could deter undocumented labor, which has traditionally filled many construction roles. States with a high reliance on immigrant labor, such as California, Texas, Florida, and New York, could be hit hardest. Companies may need to invest more in training programs and explore innovative solutions, like apprenticeship and vocational training, to address workforce challenges. Industry associations may lobby for construction-specific visa programs or guest worker exemptions to mitigate these labor shortages.

Material costs and supply chain considerations are also critical factors. The Trump administration's trade and tariff policy changes could affect key construction materials like steel, aluminum, and lumber. If tariffs increase, material costs could rise, offsetting any savings from reduced regulations. For example, the U.S. imported $8.2 billion worth of sawmill and wood products in 2024, nearly 72% of which came from Canada. The Department of Commerce has signaled that it plans to roughly double the 14.5% lumber tariff rate later this year, which could mean that the overall tariff rate on Canadian softwood lumber will rise above 50% in the fall and could approach 60%. Additionally, numerous raw materials and components, ranging from steel and aluminum to home appliances, are sourced from China and are already subject to existing 301 and 232 tariffs. Proposed new tariffs on China, Canada, and Mexico are projected to raise the cost of imported construction materials by more than $3 billion, depending on the specific rates. For some materials, where imports are critical to supply, prices could see dramatic increases, adding layered costs that could substantially impact builders' ability to deliver new projects.

The cost of building materials has already risen by 34% since December 2020, which is far higher than the rate of inflation. Already, NAHB has received anecdotal reports from members that the cost impacts of the building material tariffs on the average price of a new home could range between $7,500 to $10,000. These increased material costs and supply chain disruptions can slow down construction projects, extend timelines, and increase labor costs as workers wait for materials to arrive. This ripple effect is felt acutely in project timelines and budgets, making new construction projects less attractive and potentially reducing the demand for new buildings and infrastructure.

In summary, the long-term economic implications of the current trends in construction spending are multifaceted. Regulatory uncertainty, labor shortages, and increased material costs are all factors that could influence future investment decisions in the construction sector. Investors may adopt a more cautious approach, leading to a slower recovery in the sector. Construction companies will need to adapt to these challenges by exploring alternative funding sources, investing in training programs, and lobbying for policy changes that support the industry's growth.

The construction industry is at a critical juncture, and the path forward is fraught with uncertainty. However, with strategic planning and policy support, the sector can navigate these challenges and emerge stronger. The need for greater policy certainty and workforce development measures is more pressing than ever. The Trump administration must quickly resolve trade disputes to end the threat of retaliatory tariffs and implement short and long-term workforce development measures, including new pathways for people to enter the country and work in construction and more investments in construction training and education programs. Only then can the construction industry regain its footing and continue to drive economic growth.