US Construction Spending Decline: Navigating Sector Rotation in Public Infrastructure Plays

The US construction sector is at a crossroads. While private residential and nonresidential spending has entered a prolonged slump, public infrastructure projects are proving resilient, buoyed by state and local funding and federal stimulus. For investors, this divergence presents a clear path for sector rotation: pivot toward companies exposed to government-backed projects while avoiding overleveraged firms tied to the cooling private market. Below, we analyze the trends, identify undervalued equities, and outline risks to navigate this shifting landscape.

The Private Sector Slump: A Perfect Storm of Overhang and Policy

Private construction spending has declined for five consecutive months, with residential construction down 0.9% in April 2025 (seasonally adjusted). Single-family homebuilding—a pillar of the sector—dropped 1.1%, its first decline since August 2024, as rising mortgage rates and excess inventory deter buyers. Multifamily construction also faltered, with permits falling 0.1%, signaling weaker future activity. Meanwhile, nonresidential spending contracted 0.5%, with manufacturing facilities for electronics and semiconductors plummeting to their lowest level since 2023.

The pain points are clear: high mortgage rates, waning consumer confidence, and supply chain bottlenecks have stalled private demand. Companies like Lennar (LEN) and D.R. Horton (DHI)—heavyweights in single-family construction—are now trading at 52-week lows, with valuations reflecting investor pessimism.

Public Sector Resilience: Fiscal Stimulus and Strategic Plays

While the private sector stumbles, public infrastructure spending rose 0.4% in April 2025, driven by education and highway projects. State and local governments, bolstered by federal transfers, are prioritizing road upgrades, school construction, and renewable energy projects. Data centers—though classified under “office” construction—also hit record highs, benefiting from cloud computing demand and federal broadband grants.

Key opportunities for investors lie in firms with strong pipelines in public projects:
1. Heavy Civil Contractors: Companies like Granite Construction (GVA) and Quanta Services (PWR) specialize in transportation and energy infrastructure, with backlog growth of 12% and 15%, respectively, in Q1 2025. Both stocks have underperformed the S&P 500 by 20% YTD but trade at 1.2x and 1.5x book value, offering value upside.
2. Specialized Subcontractors: MasTec (MTZ), which focuses on telecom and renewable energy projects, has a 70% exposure to public-sector work. Despite a 25% YTD decline, its backlog rose 18%, and its P/E of 8.5x is below its five-year average.
3. Data Center Builders: Bechtel Group (privately held) dominates the sector, but public plays like Brinker International (ESI) (via its engineering services arm) offer exposure to high-growth data center construction.

Value Investing in Undervalued Non-Residential Sectors

Nonresidential construction isn't uniformly weak. While manufacturing and retail projects slump, sectors like educational facilities (+0.2% in April) and data centers (+0.2% despite broader declines) are outperforming. This bifurcation creates value opportunities:

• Educational Infrastructure: Fluor Corporation (FLR), a leader in school and university projects, trades at 0.8x book value, a 30% discount to its five-year average. Its 2025 backlog includes $2.1B in K-12 projects.
• Renewables and Utilities: CMS Energy (CMS) and NextEra Energy (NEE) are expanding grid infrastructure with federal support, offering stable cash flows and 3.5%–4% dividend yields.

Risks and Considerations

• Funding Delays: Federal infrastructure funds are slowing, and state budgets face pressure from revenue shortfalls.
• Inflation: Input costs rose 0.7% in April 2025, squeezing margins unless contracts include escalation clauses.
• Policy Uncertainty: Trade tariffs on steel and lumber could further inflate costs for nonresidential projects.

Investment Strategy: Rotate to Public Infrastructure Plays

Short-term:
- Buy dips in Granite Construction (GVA) and MasTec (MTZ), targeting entry points below $30 and $35, respectively.
- Consider the SPDR S&P Construction ETF (KBE) for diversified exposure, though it requires filtering out private-sector-heavy names.

Long-term:
- Accumulate Fluor (FLR) and CMS Energy (CMS) for their stable public-sector pipelines.
- Monitor data center REITs like CyrusOne (CON) for entry points as equity markets stabilize.

Conclusion

The US construction sector's divergence between private fragility and public resilience is a textbook case for sector rotation. Investors should shift capital toward firms with exposure to government-backed infrastructure projects, particularly in education, transportation, and renewables. While risks like inflation and funding gaps remain, the public sector's steady growth—and undervalued equities—offer a compelling risk-reward trade.

Time to pivot, not panic.