U.S. Industrial Surge Signals Strategic Shift: Construction & Engineering Outperform, Defensive Sectors Lag

The latest Federal Reserve Industrial Production report for Q2 2025 reveals a critical divergence in economic performance across sectors. While overall industrial output grew modestly, the Construction & Engineering (C&E) sector defied expectations, outperforming forecasts by leveraging government stimulus and infrastructure spending. Meanwhile, defensive sectors like utilities and consumer staples lagged behind, underscoring a strategic opportunity for investors to pivot portfolios toward growth-oriented industries.

The Data's Significance: A Sectoral Split

Industrial Production rose 0.3% in June, with the Construction Supplies index climbing 0.3% and the Civil Engineering sub-sector growing 3% annually. This outperformance contrasts sharply with weaker sectors like Electrical Equipment (-2.5%) and Motor Vehicles (-2.6%), which dragged down manufacturing. The Fed's data also highlights a critical shift: capacity utilization in mining (a key supplier to construction) rose to 90.6%, while utilities languished at 70.1%—far below their long-run averages.

Why Construction & Engineering Is Leading the Charge

1. Infrastructure Investment Paying Dividends
   The Infrastructure Investment and Jobs Act (IIJA) is fueling a 3% annual rise in civil engineering activity, supporting projects like road repairs and renewable energy grids. Despite labor shortages, firms are adopting prefabrication and BIM (Building Information Modeling) to boost efficiency.

2. Resilience Amid Tariffs and Trade Wars
   While tariffs on steel and rare earth elements have raised costs, U.S. firms are diversifying supply chains and negotiating exemptions. For instance, U.S.-Mexico-Canada Agreement (USMCA) protections shielded gypsum and timber from punitive duties, preserving margins for construction projects.

3. Late-Cycle Dynamics Favoring Specific Sub-Sectors
   While the Nonresidential Construction Index (NRCI) dropped 24% in Q2 due to tariff-driven delays, civil engineering's government-backed projects are insulated. Data center and semiconductor plant construction—critical for tech infrastructure—are booming, driven by $200B in IIJA allocations.

Defensive Sectors Lagging: Utilities and Staples Under Pressure

• Utilities: Despite a 2.8% June surge in electric utilities, the sector's annual output fell 0.8%, reflecting grid modernization bottlenecks and inflation-driven rate cuts.
• Consumer Staples: Rising inflation (2.3% in April) and cautious consumer spending have dampened demand for non-discretionary goods.

Investment Implications: Act Now Before the Window Closes

The data suggests a clear sector rotation opportunity:
- Overweight C&E stocks: Target companies exposed to civil engineering and infrastructure, such as Caterpillar (CAT), Bechtel, or ETFs tracking construction materials.
- Underweight staples: Defensive sectors face structural headwinds as inflation and policy uncertainty linger.
- Monitor labor and tariff risks: Investors should favor firms with diversified supply chains and partnerships with trade schools to mitigate labor gaps.

Final Take: Timing Is Everything

The Fed's data confirms that the C&E sector's growth is forecast-resistant, buoyed by bipartisan infrastructure spending and technological innovation. With the IIJA's $1.2T allocation still unspent and civil engineering projects ramping up, this sector's outperformance is likely to persist. Act swiftly: Rotate into construction and engineering equities while underweighting staples to capitalize on this late-cycle opportunity.

Investors are urged to consult with their financial advisors before making portfolio adjustments.