Balancing costs, labor, and ambiguity in the Ninth District’s construction sector

It is common for construction projects in the region to slow down as temperatures drop in winter months. But this season, construction firms experienced slower activity than expected.

From late April through mid-May, we surveyed leaders at 252 construction firms from across the Fed’s Ninth District, who shared their recent experiences and outlook for the sector.

Overall, decision-makers at construction firms entered 2025 with optimism, but for many, expectations shifted as lingering pressures from the rising costs of recent years were compounded by rising uncertainty.

Pauses and uncertainty affecting backlogs

More than half of firms reported decreased activity in the six months ending in April 2025, twice the share of those who reported improvements (Figure 1).

Respondents said that some clients had kept projects on hold because they anticipated lower interest rates and prices to stabilize further in 2025. As a result, companies pulled already-scheduled projects forward—which was good for clients but reduced backlogs at a time of slowing activity.

Many companies hoped that flattening costs and lower interest rates would stimulate new construction activity and replenish backlogs. Instead, growing uncertainty from trade policy has contributed to further project delays and cancellations.

Trade policy has also complicated basic operations for construction firms. For example, the industry’s reliance on imported materials, such as Canadian lumber, has some firms thinking twice before submitting request for proposals. “Bidding is hard when we are unsure of what products will cost in 6 to 12 months because of tariffs,” stated a Minnesota company involved in commercial and residential projects.

Labor and input prices are moderate overall

Respondents reported some modest improvements. Following years of fast-rising prices and wages, pressures were less acute and becoming more manageable.

While input prices paid in recent months have continued to rise, increases were less steep. Forty-four percent of survey-takers experienced price hikes greater than 5 percent, compared with 68 and 54 percent in the spring of 2023 and 2024, respectively.

Still, notable exceptions and recently added pressures pushed up on costs and squeezed margins.

Some firms noted that steel and concrete prices have continued to rise at a faster pace. A Minnesota commercial builder said that recent price increases for most of their inputs ranged between 6 and 13 percent, adding that some vendors had also been including tariff surcharges on some products.

On the labor side, the share of firms that reported wage increases dropped 10 percent relative to last spring. Eighty percent of firms indicated rising wages for trade workers, while 75 percent reported wage increases for all other workers.

Expectations for further compression and ongoing challenges

Nearly half of respondents anticipated conditions will worsen for the industry in the coming months. For the majority, expectations had taken a turn since the start of the year (Figure 2). “The end of the year and into February were quite strong, but has since changed significantly due to tariffs, higher interest rates and fears of more inflation,” shared a respondent from an architectural firm.

The top concern among those surveyed was the impact of government policies and regulations, including tariffs (Figure 3). “Economic uncertainty leads to less investment which leads to less development,” remarked a respondent from an engineering firm.

Respondents also observed reductions in both public and private projects available for bidding and expected competition to intensify as a result.

“Fewer projects means more competition,” shared a South Dakota commercial builder. “More competition puts downward pressure on fees so we’re left with making too little money with costs staying too high.”

While overall labor demand was lower than in the spring of 2024, the majority of firms were hiring—43 percent were looking for full-time workers. The industry has grappled with pervasive talent shortages across occupations, and the challenges to recruit skilled workers are even more acute.

Combined, these challenges and added ambiguity have led to a gloomier outlook than earlier in the year. “Reduced backlogs, less new project enquiries and lower revenues have drastically slashed my projections for 2025,” shared a leader from a south Minnesota firm.

The underlying hope of many was that more clarity would restore confidence and reverse the course of dimming activity. “We need certainty,” an industrial builder in South Dakota said, “We simply need to know what to expect.”