Divergent Paths: Positioning for a Downturn in Construction and a Tarnished Renaissance in Automobiles

The U.S. Leading Economic Index (LEI) has become a harbinger of economic fragility. In June 2025, it fell by 0.3% to 98.8, marking a 2.8% decline in the first half of the year—a sharper contraction than the 1.3% drop in late 2024. While the index's six-month diffusion index remains below 50 for a third consecutive month, triggering a recession signal, the broader implications are not uniform. For investors, the LEI's divergence between construction and automobiles reveals starkly different trajectories shaped by policy, pricing, and productivity.

Construction: A Sector in Retreat, But Not Without Opportunity

The construction industry is grappling with a perfect storm of policy uncertainty and capital flight. The Trump administration's freeze on the Inflation Reduction Act (IRA) and Infrastructure Investment and Jobs Act (IIJA) subsidies has left energy and infrastructure projects in limbo. These programs, which had injected $1.2 trillion into the sector since 2022, are now under threat as the administration pivots to fossil fuels. The result? A projected slowdown in real growth from 6.6% in 2024 to 1.4% in 2025.

Yet, this retrenchment masks structural resilience. The “America First Investment Policy,” launched in February 2025, has attracted $2.8 trillion in private commitments, including a $10 billion LNG terminal in Louisiana. While residential construction faces headwinds—driven by high mortgage rates and affordability constraints—public infrastructure spending remains a linchpin. June's 0.5% rise in public construction spending, despite a 0.8% private sector slump, underscores this duality.

For investors, the construction sector demands a nuanced approach. Short-term volatility—exacerbated by legal battles over the IRA freeze—makes direct equity exposure risky. However, long-dated infrastructure bonds and REITs with exposure to toll roads or utilities could offer downside protection. The key is to balance near-term policy uncertainty with the sector's long-term tailwinds: aging infrastructure and the eventual resumption of green energy projects.

Automobiles: Tariffs, Turbulence, and the Tarnished EV Transition

The automobile sector, meanwhile, is caught in a crossfire of tariffs and shifting consumer behavior. The 25% import duties on vehicles and components have pushed new car prices up by 10–15%, dampening demand and forcing automakers to rethink supply chains. Cox Automotive's revised 2025 sales forecast of 15.6 million units—a 700,000 drop from 2024—reflects this strain.

The sector's woes are compounded by the broader economic slowdown. With the LEI signaling a 1.6% GDP growth in 2025, consumer spending on durable goods is expected to contract. High interest rates and a $10.5 trillion decline in household wealth have further eroded purchasing power. Meanwhile, the Trump administration's ambivalence toward electric vehicles (EVs)—coupled with the potential for universal tariffs—threatens to derail the EV transition.

Investors must navigate this turbulence with caution. While EVs still represent a long-term growth vector, short-term volatility is inevitable. Shorting construction-linked stocks and underweighting traditional automakers may seem prudent, but opportunities lie in the periphery. For instance, battery manufacturers with diversified supply chains or companies specializing in retrofitting older vehicles for efficiency could benefit from the sector's recalibration.

Macro Policy: The Unseen Hand

The divergent impacts on construction and automobiles are not accidental but policy-driven. The administration's “America First” agenda prioritizes energy independence and domestic manufacturing, yet its execution has created winners and losers. For construction, the shift toward LNG and oil pipelines offers a lifeline, while the automobile sector bears the brunt of protectionist measures.

Interest rates, meanwhile, remain a double-edged sword. The Federal Reserve's reluctance to cut rates until 2026 exacerbates affordability issues for both homebuyers and car buyers. However, a delayed rate cut could also stabilize the housing market, indirectly supporting construction demand. Investors must monitor the interplay between inflation, employment, and fiscal policy to anticipate sector rotations.

Positioning for the Downturn

In this asymmetric environment, the optimal strategy is to hedge between sectors. For construction, consider long-dated infrastructure bonds and short-term Treasuries to mitigate interest rate risk. In automobiles, a basket of EV supply chain stocks and short-term fixed income can balance growth potential with downside protection.

The LEI's warning of a 1.6% GDP slowdown and a potential 60% recession probability in 2025 necessitates a defensive posture. Yet, history shows that downturns often precede innovation-driven recoveries. The key is to identify sectors where policy and capital can align—whether in next-generation infrastructure or reimagined mobility solutions.

As the LEI continues its downward spiral, the path to recovery will demand not just fiscal stimulus but structural reinvention. For investors, the challenge is to discern which sectors are merely weathering the storm and which are poised to ride the next wave of economic transformation.