Reallocating Risk in a Retail Slowdown: Why Construction and Engineering Are the New Defensive Bets

The U.S. retail sales landscape is flashing warning signs. As of June 2025, year-over-year growth stands at 3.51%, a decline from May's 2.83% and a stark drop from 1.97% in the same period last year. This marks a clear underperformance relative to the long-term average of 4.54%. While retail sales remain a bellwether for consumer health, the data signals a shift in risk allocation for investors. Historically, such slowdowns have prompted capital to flow into sectors insulated from discretionary spending—construction and engineering, in particular, are emerging as strategic defensive positions.

The Retail-Construction Nexus: A Tale of Two Sectors

The retail sector's struggles are well-documented. E-commerce's relentless growth has hollowed out traditional retail spaces, leading to overbuilding in warehouse construction and a subsequent oversupply of commercial real estate. The AIA Consensus Construction Forecast underscores this duality: while nonresidential construction spending for retail and commercial sectors is projected to stagnate in 2025, infrastructure-focused projects—such as data centers and energy grids—are thriving.

The disconnect is stark. While retail sales decline, construction spending on critical infrastructure has remained resilient, buoyed by the Infrastructure Investment and Jobs Act (IIJA) and the CHIPS Act. For instance, civil engineering projects tied to renewable energy and digital infrastructure have grown 3% annually, outpacing the broader construction sector. This divergence reflects a broader trend: investors are increasingly favoring sectors with long-term, government-backed demand over those reliant on cyclical consumer behavior.

Engineering as a Defensive Play: The Case for Sector Rotation

Engineering sectors, particularly those tied to essential services and technological infrastructure, are proving to be recession-resistant. Civil engineers working on water supply, power grids, and public transportation systems are less exposed to economic volatility than their counterparts in non-essential construction. Similarly, the semiconductor industry—a cornerstone of modern engineering—has seen robust demand, driven by AI, 5G, and electric vehicles. VLSI (Very Large Scale Integration) design, for example, has become a high-growth niche, with firms like AMD and NVIDIA benefiting from sustained chip demand.

The data is clear: while nonresidential construction spending fell 24% in Q2 2025 due to tariff-driven delays, data center construction is booming. This is not just a function of policy; it's a reflection of structural shifts in how economies allocate resources. As consumers pull back on discretionary purchases, capital is realigning with sectors that underpin economic resilience.

Strategic Adjustments for Investors: Where to Allocate Risk

For investors, the message is straightforward: rebalance portfolios toward construction and engineering sub-sectors insulated from retail volatility. Here's how to approach it:

1. Overweight Infrastructure-Linked Stocks: Companies like Caterpillar (CAT) and Bechtel (BTE) are positioned to benefit from IIJA-driven projects. Their exposure to civil engineering and government contracts provides a buffer against retail-sector underperformance.
2. Tap into Semiconductor Engineering: ETFs like the iShares Semiconductor ETF (XSD) offer access to firms like AMD and Intel, which are riding the VLSI design boom. These stocks are less correlated with retail cycles and more tied to long-term tech trends.
3. Avoid Overleveraged Retail-Adjacent Sectors: Construction machinery manufacturers like Volvo (VOLV) have seen revenue declines, reflecting broader industry headwinds. Similarly, retail-focused construction firms are exposed to oversupply risks.

The Long Game: Policy and Structural Resilience

The Federal Reserve's monetary policy and government stimulus packages will play a pivotal role in shaping the trajectory of these sectors. While short-term interest rate hikes may pressure construction financing, the IIJA's $1.2 trillion allocation ensures a multi-year tailwind for infrastructure engineering. Moreover, the global shift toward renewable energy and AI-driven systems is creating demand for specialized engineering roles that are unlikely to wane, even in a downturn.

In contrast, traditional defensive sectors like utilities and consumer staples are underperforming. Utilities face grid modernization bottlenecks and inflation-driven rate cuts, while consumer staples grapple with dampened demand. This makes engineering-driven infrastructure a more compelling defensive play in 2025.

Conclusion: Reallocating for Resilience

The U.S. retail sales slowdown is not just a data point—it's a signal for investors to rethink risk allocation. Construction and engineering sectors, particularly those tied to infrastructure and semiconductors, are offering a unique combination of defensive positioning and growth potential. By rotating into these areas, investors can hedge against consumer demand shifts while capitalizing on structural trends. The key is to focus on sub-sectors with clear government backing, essential service roles, and technological innovation. In an era of economic uncertainty, these sectors are the new bedrock of portfolio resilience.