Construction spending saw a slight uptick in January, but it remains “far from encouraging,” according to Anirban Basu, ABC's chief economist. Nonresidential construction spending rose 0.1% in January to a seasonally adjusted annual rate of $1.25 trillion, according to an analysis by Associated Builders and Contractors (ABC) using U.S. Census Bureau data. Despite the increase, data center construction played a significant role in the modest gain, accounting for more than 75% of the overall monthly growth.

Although spending increased in 12 out of 16 nonresidential subcategories, the data center boom presents a stark contrast to the overall economic uncertainty. As Basu highlighted, “While that [data center] segment is so hot that it can melt through the effects of high interest rates, many other categories appear to be frozen in place.” He pointed out that even manufacturing, which still accounts for nearly $1 in every $5 of nonresidential construction spending, remains virtually unchanged since May of last year. The broader economy continues to struggle under the weight of high borrowing costs, tariffs, and slow momentum in key sectors like manufacturing.

Economic Challenges Impacting Construction

The lack of growth in most sectors, coupled with high interest rates and tariffs, is causing concern for the construction industry’s future. Ken Simonson, chief economist at the Associated General Contractors of America (AGC), noted that high borrowing costs and tariffs would weigh heavily on future construction activity. “Construction spending growth has been slowing under pressure from high interest rates costs and now the prospect of new waves of tariffs,” Simonson said in a news release. He also mentioned that cancellations and postponements in major manufacturing plant projects are already evident, and the introduction of new tariffs is likely to cause further delays and cancellations.

With tariffs already inflating material costs, developers are increasingly hesitant to proceed with new projects, particularly in the private sector. AGC CEO Jeffrey Shoaf echoed this sentiment, stating, “Higher interest rates are making it harder to get private sector projects approved, and these new tariffs are likely to prompt many developers to hit pause on new projects.” He also pointed out that while there is a desire for more domestic suppliers of construction materials, undermining demand through economic factors like tariffs is not the solution to boosting domestic capacity.

Data Centers Defy Broader Market Challenges

Despite these challenges, the data center construction sector continues to flourish. Basu explained, “Data center construction continues to defy these broader market challenges,” highlighting that the sector is booming due to increasing demand for cloud computing infrastructure, server farms, and data storage. While this segment remains robust, it represents a small portion of the overall construction market, which continues to face a lack of broader growth. “Even manufacturing… remains virtually unchanged since May of last year,” Basu noted, illustrating the stagnation in a significant nonresidential subcategory.

Contractor Confidence Remains Strong Amid Economic Struggles

Even with the overall stagnation in the construction market, contractor confidence remains relatively strong. According to ABC’s survey, nearly 65% of contractors expect their sales to increase during the first half of 2025, despite the current challenges. Basu suggested that contractor optimism could be driven by the strong performance of data center projects, which continue to bring in a substantial amount of revenue to the construction sector. Still, the outlook remains cautious as economic uncertainty looms large over the broader industry.

Looking Ahead: The Future of Construction Spending

The 2025 outlook for the construction industry remains a mixed bag, with certain sectors showing promise while others remain stagnant. The boom in data center construction continues to provide a bright spot, with a strong demand for technology infrastructure supporting its continued growth. However, many sectors, such as manufacturing and private sector projects, continue to struggle, held back by high interest rates and the uncertainty created by tariffs.

The overall construction spending figures remain relatively flat, and the economic pressure from high borrowing costs and tariffs seems likely to continue to impact future growth. The industry is left grappling with how to move forward in this uncertain landscape, balancing the need for growth in sectors like data centers while navigating economic obstacles that threaten to stall the momentum in other areas of nonresidential construction.

As contractors continue to face these challenges, industry experts will likely keep a close eye on upcoming economic policies and the potential for new tariff impacts. With economic uncertainty continuing to cast a shadow over construction activity, the focus will remain on finding solutions to stabilize and foster growth in a time of increasing material costs and slowing project approvals.

In conclusion, while the data center sector provides some relief, overall construction spending trends remain lackluster, highlighting a fragile recovery and an uncertain future. For now, contractors remain cautiously optimistic, awaiting signs of relief from higher costs and a slowdown in new tariffs. The road ahead for construction spending may be rocky, but certain sectors, like data centers, continue to demonstrate resilience in a challenging economy.

Originally reported by Sebastian Obando.