The Implications of Weak July Construction Spending on U.S. Housing and Infrastructure Equity Sectors

The U.S. construction sector’s July 2025 data paints a stark picture of a market in transition. Total construction spending fell 0.1% month-over-month to $2.139 trillion, with residential investment contracting at the fastest pace since late 2007 [1]. This decline, driven by high mortgage rates (6.7%), labor shortages, and tariff-induced inflation, has forced investors to recalibrate their strategies. While the housing sector grapples with affordability crises and inventory gluts, infrastructure and data center construction are emerging as defensive plays in a stalling economy.

A Housing Sector at a Crossroads

The housing market’s fragility is evident in July’s data. New home sales dropped 0.6% monthly to 652,000 units, with a 21-month inventory growth streak pushing supply to 9.2 months—a buyer’s market in the making [2]. Despite a 5.2% rise in housing starts to 1.428 million units, this rebound was concentrated in the South and Midwest, where affordability gaps are narrowing [3]. Meanwhile, the Northeast and Midwest remain relatively stable, but regional disparities complicate ETF performance. The SPDR S&P Homebuilders ETF (XHB) gained 10.45% year-to-date, buoyed by dovish Fed rhetoric and strong earnings from D.R. Horton and PulteGroup [4]. However, the iShares U.S. Home Construction ETF (ITB) fell 24% over six months as investors shifted to construction tech and AI-driven infrastructure [5].

The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) rose to 33 in July but remained negative for 15 consecutive months [6]. Builders are cutting prices—38% reduced prices in July, with an average 5% discount—reflecting a market where demand is outpacing supply [7]. Yet, the Federal Reserve’s reluctance to cut rates before 2026 and the Trump administration’s tariffs on steel and lumber have created a toxic mix of rising costs and stagnant demand [8].

Infrastructure as a Safe Haven

While housing struggles, infrastructure and data center construction are gaining traction. Public spending rose 0.1% in July, driven by federal projects like the Federal Highway Administration’s $4.9 billion bridge improvement grants [9]. The AIA Consensus Construction Forecast projects 1.7% growth in nonresidential construction in 2025, with institutional facilities (e.g., schools, hospitals) leading the charge [10]. Data centers, fueled by AI and cloud computing, are a standout: spending surged 33% in 2025, with another 20% expected in 2026 [11].

Investors are capitalizing on this divergence. Infrastructure-focused ETFs, such as the Invesco Dynamic Building & Construction ETF (PKB), have outperformed, while construction-tech funds are attracting capital for their role in mitigating labor shortages and material cost volatility [12]. The sector’s resilience is further bolstered by long-term public-private partnerships, with firms like Bechtel and Fluor benefiting from stable federal contracts [13].

Investor Preparedness in a Shifting Landscape

The July data underscores the need for strategic hedging. Housing ETFs like XHB and HOMZ (which tracks homebuilding, construction, and housing services) are positioned to benefit from a potential Fed pivot, but their exposure to single-family construction remains a risk [14]. Conversely, infrastructure and data center ETFs offer insulation from housing market volatility, though they face challenges from trade policy uncertainty and material cost inflation [15].

For investors, the key lies in balancing exposure to growth sectors (e.g., AI-driven infrastructure) with defensive plays (e.g., Treasury Inflation-Protected Securities). The construction industry’s shift toward digital tools like BIM and prefabrication also presents opportunities for ETFs focused on innovation [16].

Conclusion

The July 2025 construction spending report signals a sectoral realignment. As housing affordability crises deepen and mortgage rates remain elevated, investors are pivoting to infrastructure and data center construction—sectors insulated from the cyclical downturns of residential markets. While challenges like tariffs and labor shortages persist, the long-term outlook for infrastructure remains robust, offering a counterweight to the housing sector’s fragility. For equity investors, the path forward lies in diversification, hedging against housing sector risks while capitalizing on the resilience of infrastructure and technology-driven construction.

Source:
[1] U.S. Census Bureau, July 2025 construction spending report [https://www.census.gov/construction/nrs/current/index.html]
[2] New Residential Sales Press Release [https://www.census.gov/construction/nrs/current/index.html]
[3] Housing Starts Up 5.2% in July, Higher Than Expected [https://www.advisorperspectives.com/dshort/updates/2025/08/19/housing-starts-up-july-2025]
[4] XHB ETF Stock Price & Overview [https://stockanalysis.com/etf/xhb/]
[5] Strategic Sector Rotation in a Shifting Landscape [https://www.ainvest.com/news/housing-market-recalibration-strategic-sector-rotation-shifting-landscape-2508/]
[6] Home builder confidence rises in July | ABA Banking Journal [https://bankingjournal.aba.com/2025/07/home-builder-confidence-rises-in-july/]
[7] Regional Disparities in the July 2025 Housing Market [https://www.clearcapital.com/july-2025-home-data-index-market-report/]
[8] Construction Dive's July 2025 economic roundup [https://www.constructiondive.com/news/construction-july-2025-economic-roundup/756779/]
[9] US and Key States Construction Industry Report 2025 [https://finance.yahoo.com/news/us-key-states-construction-industry-081100717.html]
[10] July 2025 AIA Consensus Construction Forecast [https://www.aia.org/resource-center/july-2025-consensus-construction-forecast]
[11] Construction Trends: July/August 2025 [https://www.awci.org/media/construction-trends/construction-trends-july-august-2025/]
[12] Unlocking Sector Rotation Opportunities in the U.S. [https://www.ainvest.com/news/unlocking-sector-rotation-opportunities-housing-market-strategic-guide-2025-2507/]
[13] Homebuilder ETF on Track to Hit 5-Month High [https://www.morningstar.com/news/marketwatch/20250722112/homebuilder-etf-on-track-to-hit-5-month-high-despite-bleak-outlook-for-housing-heres-why]
[14] Housing Market Momentum in Q3 2025 [https://www.ainvest.com/news/housing-market-momentum-q3-2025-decoding-home-sales-leading-indicator-real-estate-construction-sector-investments-2508/]
[15] Construction Industry August 2025 [https://www.prairiecap.com/newsletters/prairie-industry-perspective-construction-industry-august-2025]
[16] Homebuilder ETFs: Framing the Opportunity [https://www.etftrends.com/homebuilder-etfs-framing-opportunity/]