WASHINGTON, May 1 (Reuters) — U.S. construction spending unexpectedly fell in March as both private and public project investments declined across the board, signaling ongoing pressures from high borrowing costs and rising material expenses.

According to the Commerce Department’s Census Bureau, construction spending dipped by 0.5% in March following a slightly downwardly revised 0.6% gain in February. Economists polled by Reuters had expected spending to rise by 0.2%, following the previously reported 0.7% increase in February.

On an annual basis, construction spending was still up 2.8% compared to March 2024, but the month-to-month setback points to wider challenges.

Spending on private construction projects fell 0.6% in March. Notably, investment in residential construction slipped 0.4%, although outlays on new single-family projects edged up slightly by 0.1%.

High mortgage rates and trade policies are putting strain on the homebuilding market. “The National Association of Homebuilders estimated last month that the latest round of tariffs, including boosting duties on Chinese imports to 145% and imposing a 25% levy on foreign steel and aluminum had increased construction costs by $10,900 per home.”

In the multi-family housing segment, outlays were flat in March. Investment in private non-residential structures — such as offices, warehouses, and factories — dropped 0.8%, reflecting weaker demand in the commercial sector as businesses tighten budgets.

Public sector spending also slowed, with federal, state, and local government projects seeing declines in infrastructure investments, schools, and public buildings. Analysts note that public spending, which had provided some support over the past year, is now feeling the impact of project delays and funding constraints.

Industry leaders point to rising costs and an uncertain policy landscape as major headwinds. “Tariffs and high borrowing costs are driving up material prices and making project financing more difficult,” said one construction economist.

Despite the March setback, some economists believe the broader spending trend remains cautiously positive. Infrastructure funds from federal programs like the Bipartisan Infrastructure Law are still flowing into local projects, and residential markets could recover if mortgage rates stabilize later this year.

However, concerns remain. The U.S. labor market continues to be tight, especially for skilled trades, and supply chain issues — though improved compared to 2022 — still affect timelines and costs.

Looking ahead, contractors and developers are watching for signs of relief on both the interest rate and tariff fronts. “The industry needs more predictability in terms of costs and policy,” said one analyst. “Otherwise, we’ll continue to see volatility in spending numbers.”

Originally reported by Reuters.