Economic headwinds persist, but growth remains possible
The U.S. construction industry faces slowing economic momentum, high interest rates and tariff uncertainty. GDP growth for 2026 is projected at just 2.3%, signaling modest expansion amid fiscal challenges like rising deficits and debt.
Labor and cost pressures demand strategic action
Immigration policy shifts and aging workforce trends are tightening labor supply, while material costs continue to rise under aggressive trade policies. Experts urge firms to prioritize cost control, workforce upskilling and automation to maintain competitiveness.
Since our forecast last year, the editors at Window + Door have continued to watch a rapidly changing economic environment, paired with a policy environment that remains very fluid. Long-term interest rates remain stubbornly high, inflation rates have stalled, home building activity levels remain disappointing, tariff rates for construction continue to rise and shift, and construction labor shortages have grown due to restrictive immigration policies. Despite all this, the outlook for 2026 is largely unchanged from what we reported in January 2025—challenging for U.S. construction, with reasons for optimism in the coming year.
Maybe it’s the American ethos of self-reliance—the sentiment that when times get hard, we respond with hard work, initiative and resilience to create opportunities and prosperity—that has the leading construction industry economists responding with “silver lining” forecasts while also hinting that we may be on the brink of a recession.
Economic Outlook
An economic slowdown is emerging
The construction industry entered 2025 with strong momentum driven by major government investments like the Infrastructure Investment and Jobs Act and CHIPS Act. However, the macroeconomic environment has since deteriorated greatly thanks to rapid policy changes that have created uncertainty in the industry. Consumer spending has stalled, housing sales have declined and the job market is weakening.
The One Big Beautiful Bill Act, or OBBBA, will provide limited short-term economic stimulus while creating long-term fiscal challenges through increased deficits and debt, according to Dodge Construction Network. The near-term benefits come primarily from business incentives, including the qualified business income deduction, R&D expense provisions, and qualified opportunity zone renewals, though these last renewals-related construction projects won’t begin until 2027. Then there’s the bill’s fiscal cost: the Congressional Budget Office estimates OBBBA will add $3.4 trillion to deficits over 10 years, pushing the debt-to-GDP ratio from approximately 100% currently to around 130% within a decade, potentially causing severe long-term economic damage.
Examining the economy from a broad perspective, Michael Guckes, chief economist at ConstructConnect, says the “GDP forecast shows modest growth for the foreseeable future, with projections of just over 2% for 2025 and 2.3% for 2026—nothing to get too excited or write home about.”
“As of right now, the construction industry as a whole is sort of on the same knife edge as the rest of the economy. It’s slowing down. It’s not really clear whether it’s in recession or not, but it is awfully close and very uncomfortable,” says Eric Gaus, chief economist, Dodge Construction Network.
Labor market cools off
The construction industry’s most significant direct impact from OBBBA stems from the massive expansion of Immigration and Customs Enforcement and the resulting large-scale deportations. Foreign-born workers constitute approximately 30% of the construction workforce nationally, according to statistics from the U.S. Census Bureau, though this figure reaches 35% to 40% in some states like California and Texas, with a substantial portion being undocumented. This concentration of foreign-born labor has attracted ICE attention, though numerous uncertainties make it difficult to predict the exact impact. Beyond construction specifically, Dodge says increased ICE enforcement has significantly altered projections for household formation, which has been primarily driven by immigrant rather than domestic population growth.
Immigration policy presents the most significant wildcard for 2026, says Ken Simonson, chief economist, Associated General Contractors of America, who emphasizes that construction is “much more dependent than the broader economy, 34% versus 18% of the broader workforce, on foreign-born workers,” with some states like California, Texas, New Jersey, Maryland, and Washington, D.C., showing “50% or more foreign-born” workers in construction trades. While “not many firms have been affected yet by jobsite raids,” Simonson warns that “the Department of Homeland Security has gotten tremendous boost in funding and staffing… and next year could be an active one for affecting jobsites.”
Simonson also notes that “total construction employment has been tapering off pretty steeply over the past three years.” The employment picture reveals a stark divide: residential construction “has been shedding jobs on a year-over-year basis since early this year,” while non-residential construction continues to add jobs “but it’s also slowed down.” The weakness is spreading geographically, with only 28 states showing employment increases compared to 35 to 45 states a year earlier, and the decline now affecting previously strong regions, including the West Coast, Northeast, Rocky Mountains, and for the first time, some Southeast states.
Construction firms continue to compete aggressively for workers through wage increases. “Construction is spending more to entice people to come and work in construction and stay in the field,” says Simonson, with average hourly earnings staying “above a 4% increase for several years now.” However, firms appear hesitant to expand their workforce, as hiring rates remain near historic lows and job openings have “plunged” by 38%. Simonson realizes this “might sound pretty ominous,” and while he says the data on layoffs and worker retention suggest a wait-and-see approach across the industry, he remains optimistic that there will be more work in 2026.
“We’re seeing a long-term slowdown in employment in the construction industry,” says Dodge’s Gaus. “We’re also seeing a slowdown in average hourly earnings. Some of that might be due to businesses not making decisions about going forward with construction projects.”
Challenging material costs
Construction cost pressures are mounting on multiple fronts, according to ConstructConnect’s Guckes, and material costs are currently up about 5% year-over-year, but he warns that “we are in early innings when it comes to construction material prices and where they could go.” He draws comparisons to 2018-2019 when 25% tariffs on aluminum and steel drove construction material prices as high as 8%, noting that current trade policy “is much more aggressive this time around.”
The key to navigating these economic headwinds, says Guckes, is being ruthless in controlling costs. “If you want to protect your profitability, you have to be absolutely ruthless in terms of controlling costs this year and next year,” says Guckes. “Figuring out creative ways to manage the supply chains, to control your profit margins, because we’re already seeing pressures everywhere. Firms have been sacrificing their profit margins to help keep prices stable, but that is only a temporary fix. For 2026, be ruthless, control costs and make sure that you’re bidding.”
Economic Outlook
Economic growth is expected to be below potential, which correlates to a sizable downside risk in the near term for construction activity.
Consumer spending is expected to slow down, from 2.8% growth in 2024 to 2.1% in 2025 and 1.1% in 2026.
The labor market is expected to weaken; unemployment will tick up from 4.0% in 2024 to 4.2% on average in 2025 and 4.7% in 2026.
Residential Outlook
Dodge’s Eric Gaus highlights a significant divergence between single-family and multifamily sectors. Residential construction, particularly multifamily, will be a major driver supporting growth over the coming year. However, Gaus notes that single-family housing “has been coming down quite a bit throughout the year,” while multifamily “has remained relatively strong” with good pipeline indications continuing into 2026.
AGC’s Ken Simonson predicts that residential construction faces continued headwinds, with single-family down 2%, multifamily down 9% and improvements down 8%. While Simonson believes “we may be near the bottom on single-family and multifamily,” he notes that “30-year mortgage rates at 6.25% remain not low enough to bring first time home buyers back to the market,” suggesting “any recovery in residential will be pretty slow and modest.”
Single-family housing
The single-family housing market faced significant headwinds in 2025, with construction remaining underwhelming due to persistent affordability challenges. Mortgage rates hover between 6.5% to 7%; home prices are historically elevated, and growing recession risks combined with a weakening labor market have caused many potential buyers to delay purchases.
In Dodge’s annual economic forecast, Eric Gaus revealed that the outlet has revised down its single-family housing forecasts considerably. “We are actually pulling back our forecasts of single-family housing because we don’t see as many units needed five years from now,” he says. This revision stems from a counterintuitive factor: declining population growth due to changes in immigration policy. “We’re not getting as many people coming to this country from abroad because of our new stance on immigration policy and therefore that’s where we got a lot of our growth in households and if we don’t have more households we don’t need quite as many houses.” He suggests the housing shortage might partially resolve itself through reduced household formation rather than increased construction.
Addressing the housing affordability crisis that has dominated the narrative for four to five years, Gaus estimates the national housing shortage at approximately 1.2 million units that still need to be built to achieve market balance. However, the shortage has evolved since 2022, when it peaked at around two million units.
Gaus emphasizes that the core issue is housing affordability rather than raw supply. “Where they are built and what type they are really, really matter. So, they need to be affordable and they need to be in those states for us to overcome that shortage.” The challenge is that states with the greatest need also have the most difficult zoning restrictions to navigate.
As the housing shortage gradually resolves over the next five years, demand for new construction is expected to normalize, resulting in a relatively flat outlook for single-family starts. Dodge forecasts single-family housing construction will finish 2025 down 5% to 909,000 units, followed by only marginal improvement of 0.9% to 917,000 units in 2026. Looking beyond 2025, slower immigration rates will further constrain household formations and overall housing demand, contributing to the subdued growth trajectory.
AIA’s Kermit Baker emphasizes that “housing recovery is really central to the health of the broader construction industry, but little can be done at the federal level to solve the housing problem.” He notes that different regions are taking creative approaches: California has made it easier for homeowners to put an accessory dwelling unit on a single-family lot. ADUs now represent 15% of new single-family units, up 5% from seven years ago.
Multifamily sector
In contrast, the multifamily sector shows more promise for 2025, driven by buyers priced out of single-family homes who are turning to rentals or townhouses and condominiums. After multifamily completions peaked in Q1 2024, planning activity has steadily increased, correlating with year-to-date growth in multifamily starts. The rental vacancy rate stood at 7.0% in Q2 2025 as the market absorbed new projects. Dodge predicts multifamily starts will expand 6% to 640,000 units in 2025 and another 5% to 670,000 units in 2026, before pulling back through the remainder of the forecast period due to weaker demographic trends and reduced housing demand.
While not as large as the 2022-2023 surge, Dodge’s Eric Gaus sees “another mini wave” of multifamily projects starting, driven by persistent shortages in high-cost markets. Planning data shows multifamily will remain strong through the rest of 2025 and into 2026.
Commercial Building Outlook
Rising uncertainty around tariffs caused many business owners and developers to delay project decisions in the first half of the year, and continued uncertainty will continue to weigh on construction starts, according to economists of Dodge’s 2026 Outlook. As a result, total nonresidential construction is anticipated to expand by a moderate 4% in 2025 and 3% in 2026. Much of that growth will be from continued strength in data center construction and groundbreakings on high-value megaprojects in select sectors. Higher materials price assumptions and more construction activity pivoting to the alteration side of the market will also prop up the dollar value forecast. From a square footage perspective, total nonresidential construction will decline 2% in 2025 before re-expanding by 3% in 2026.
According to AIA, the Consensus Construction Forecast economists predict that overall spending on nonresidential buildings not adjusted for inflation will increase only 1.7% this year and grow very modestly to just 2.0% next year due to high long-term interest rates, falling consumer confidence and labor shortages as factors limiting growth.
ConstructConnect’s Michael Guckes notes that non-residential building faces particular challenges with a projected decline of 6.7% in the U.S. for next year, with manufacturing being a major factor in that weakness due to a projected decline in new manufacturing facility construction.
Commercial building conversions—such as office construction reimagined and renovated to multifamily—have emerged as an important strategy across the country, according to AIA’s Kermit Baker, who reported that “there were over 25,000 multifamily units created last year from other facilities, and that number has been growing quite rapidly.” These conversions now account for “a little over 7% of all multifamily units built nationally.” Interestingly, “Hotel conversions to multifamily have outpaced office conversion for the last two years,” along with conversions of industrial facilities, warehousing, schools and other commercial buildings. New York is “using the oversupply of office space to help offset the lack of affordable housing, with an estimated 10,000 new housing units added in Manhattan alone since 1992 from office conversions,” Baker says.
The reconstruction market has become increasingly significant as Baker explained that “reconstruction activity is a growing share of the overall construction market, not just in housing, but throughout the nonresidential building [sector] as well.” Over the past two decades, as construction activity has slowed and building stock has aged, reconstruction work has increased its share to now represent 40% of architecture firm billings, say Baker. “Virtually all architecture firms worked on at least some reconstruction projects over the past year, with the most common goal being modernizing aging building stock.”
“With the construction market unusually unbalanced, there are more opportunities in the reconstruction realm, particularly adaptive reuse,” adds Baker. “I think the demand is there for conversion of un-utilized facilities. And on top of that, we’re seeing more incentives to undertake these projects. There’s more motivation by state and local governments to support these projects because they’re really supporting the economic health of an area. That combination of strong demand and growing incentives make that a really key market to get into.”
From Uncertainty to Strategy: Brighter Construction Market Ahead
Connor Lokar at the NGA Glazing Executives Forum, GlassBuild America 2025.
Is the worst behind us? As economic uncertainty begins to fade, Connor Lokar of ITR Economics offered a data-driven perspective on what lies ahead. In his annual economic forecast, “Gearing Up for 2026,” Lokar cut through the noise to reveal a clearer economic outlook of the next business cycle through mid-2025 and into 2026—one shaped by rising industrial production, stabilizing construction backlogs, and strategic opportunities amid inflationary pressures. With rates-of-change analysis and global trends pointing toward a cautiously optimistic outlook, the data tells a compelling story: while challenges remain, the foundation for growth is already forming.
“The economy is not collapsing today, and it’s not going to collapse tomorrow. It is not going to collapse next year,” says Lokar. “For the first time in basically two years... we have positive growth. The economy is growing. It’s not going to stop growing. It’s going to accelerate in 2026.”
Beyond the Noise: A Clearer Economic Picture for 2026
Lokar’s message is clear—don’t let headlines and political distractions cloud your strategic vision. His forecast emphasized the importance of focusing on economic fundamentals and leveraging reliable forecasting tools that allow businesses to plan with confidence, even in a volatile environment. Lokar highlighted the use of rates-of-change analysis, which helps define and anticipate shifts in the business cycle, offering early signals for strategic pivots. As of mid-2025, the data suggests that the economy is entering a phase of recovery, with industrial production expected to grow modestly through 2026.
The Data Tells the Story: Construction, Inflation, and Opportunity
The construction sector serves as a microcosm of broader economic trends. Lokar pointed to diverging paths within the industry: single-family housing is poised for a rebound in 2026, while multi-family and nonresidential construction face continued softness. Yet, not all segments are slowing—data center construction is booming, with growth exceeding 40%, making it a bright spot for investment and development.
Backlogs are stabilizing, and the Architecture Billings Index has been signaling a shift since early 2024. These indicators suggest that while the sector is navigating headwinds, the worst may be behind it. Lokar encouraged businesses to be geographically specific in their planning, noting that population growth and regional dynamics will play a critical role in shaping demand.
Inflation remains a central theme. While the easing of price pressures seen in 2023 and 2024 may be over, Lokar warned that costs are rising again, especially in construction inputs like lumber, structural metals and labor. CPI and PPI are both forecasted to climb in 2026, reinforcing the need for robust cost management strategies.
Strategic Imperatives for the Next Cycle
Lokar’s advice is both pragmatic and forward-looking. He urged companies to digitize and embrace AI to stay competitive, develop inflation strategies that go beyond short-term fixes, focus on cost control and margin protection, especially in asset-heavy sectors, and plan for a pivot between 2028 and 2032, when demographic and fiscal pressures may reshape the landscape.
He also cautioned against expecting dramatic interest rate cuts in 2025, noting that government spending and rising debt levels are likely to fuel long-term inflation. With the U.S. requiring 18% of its revenue just to service interest payments, the fiscal outlook remains a concern.
Conclusion: Clarity Through Data
Lokar closed with a call to action for leaders who want to navigate the next phase of the economy with clarity and confidence. By focusing on the data—not the noise—businesses can position themselves for resilience and growth. “Most businesses in this room are going to have a better 2026 than they’re going to have here in 2025, and I want to make sure that you’re ready for that,” Lokar says. “A lot of businesses are going to go under... and a lot of people are going to make more money than they’ve ever made before. This is an opportunity if you see it coming. Be the buyer, not the seller. Leverage that. Grow your business... and be ready to attack 2030 and not fall victim to it.”
