U.S. Construction Spending: Navigating Sector Rotation and Defensive Positioning in a Deteriorating Landscape

The U.S. construction industry is at a crossroads. After a period of robust growth in 2024—driven by infrastructure spending and a post-pandemic housing boom—the sector is now grappling with a cocktail of headwinds: elevated interest rates, rising material costs, and policy-driven uncertainties. June 2025 data reveals a 0.4% monthly decline in total construction spending, marking the fourth consecutive drop and a 2.9% year-over-year contraction. This shift demands a careful reevaluation of sector rotation and defensive positioning for investors navigating a slowing construction environment.

The Fractured Landscape: Residential vs. Nonresidential Sectors

The residential construction segment has been the hardest hit. Single-family housing permits and commencements have fallen by 3.5% and 1.6% year-over-year, respectively, as mortgage rates hover near 7% and affordability constraints persist. The NAHB/Wells Fargo Housing Market Index hit its third-lowest level since 2012 in June, signaling a structural shift in demand. Multifamily construction, once a bright spot, has also faltered, down 9.5% compared to June 2024, as oversupply and declining rents erode profitability.

In contrast, nonresidential construction spending has shown uneven resilience. Public infrastructure projects—particularly highways and educational facilities—have bucked the trend, with June data showing a 0.4% monthly increase in public construction spending. The Federal Highway Administration's $4.9 billion allocation for bridge projects under the Bridge Investment Program underscores the government's commitment to long-term infrastructure, a defensive bet against economic volatility.

Meanwhile, data centers have emerged as a surprising growth engine. Categorized under the office sector, data center spending rose 0.2% in May 2025 and hit a record high. This reflects the surge in demand for cloud computing and AI infrastructure, a trend that is likely to persist regardless of macroeconomic conditions.

The Cost of Tariffs and Labor: A Double-Edged Sword

The construction industry's woes are compounded by external shocks. Retaliatory tariffs on steel, aluminum, and lumber have driven input costs higher, squeezing margins for developers and contractors. The U.S. Census Bureau reports a 4.2% year-on-year rise in the price index for new single-family homes under construction in early 2025, exacerbating affordability challenges and reducing project viability.

Labor shortages, worsened by immigration enforcement actions at construction sites, further strain capacity. These factors have forced firms to adopt defensive strategies, prioritizing projects with stable funding—such as public infrastructure—and deferring speculative ventures in residential and manufacturing sectors.

Sector Rotation: Where to Allocate in a Deteriorating Environment

Given the current climate, investors should consider rotating out of overexposed residential and industrial construction segments and into sectors with structural tailwinds.

1. Public Infrastructure: With the Infrastructure Investment and Jobs Act (IIJA) funding still in play, highway, bridge, and educational construction projects offer defensive appeal. The FHWA's $500 million Competitive Highway Bridge Program, aimed at modernizing aging infrastructure, is a case in point. Companies like may benefit from increased demand for heavy machinery and project management services.

2. Data Centers: The AI and cloud computing boom is creating a secular demand for data center construction. Firms with expertise in this niche, such as , could outperform as tech giants continue to invest in digital infrastructure.

3. Resilient Subsectors: Transportation and educational construction are showing resilience. The 0.6% monthly increase in highway spending and 0.4% growth in educational construction highlight these categories as safer havens compared to volatile residential markets.

Defensive Positioning: Mitigating Risk in a Volatile Sector

Defensive positioning in construction requires a focus on projects with guaranteed funding and low sensitivity to interest rate fluctuations. Public infrastructure fits this bill, as does work tied to federal mandates (e.g., cybersecurity upgrades for government buildings). Conversely, speculative residential developments and industrial manufacturing projects—particularly those reliant on foreign materials—remain high-risk.

Investors should also monitor policy shifts under the Trump administration. While the IIJA appears secure, potential tariff hikes on imports or immigration crackdowns could further disrupt supply chains and labor availability. Diversifying exposure across sectors and geographies can help mitigate these risks.

The Road Ahead: A Cautious Outlook

Construction spending is projected to grow just 1% in real terms in 2025, a stark slowdown from 6.5% in 2024. While residential activity is forecast to decline 4.4% this year, infrastructure and data center construction are expected to offset some of the drag, with the latter growing 4.6% in 2026.

For investors, the key takeaway is clear: in a slowing construction environment, strategic sector rotation and defensive positioning are not just prudent—they are imperative. By prioritizing resilient subsectors and hedging against policy-driven risks, investors can navigate the turbulence while positioning for long-term growth.

In the end, the construction sector's challenges are also its opportunities. For those who can discern the signal from the noise, the path forward lies in adaptability, patience, and a willingness to rethink traditional investment paradigms.