Uncertainty and increased competition impact construction firms

Households and businesses were reluctant to start new construction projects during this year’s busy season in the Federal Reserve’s Ninth District. Increased input costs and wages also put pressure on profits as businesses maintained their own prices to stay competitive.

In early November, representatives from 263 construction companies shared how the economy was impacting their business through the Minneapolis Fed’s fall Construction Survey.

For many firms, the decline in the volume of private and public projects began earlier in the year and lingered throughout the spring and summer months. Expectations for the near future remained somewhat fragile.

Delays and cancellations linger

Overall, construction activity declined slightly in the last six months compared with the same period in 2024 (Figure 1). Nearly half of survey respondents reported lower activity, while one-third reported growth.

Most responses came from residential and commercial builders. The survey showed a small representation from industrial and infrastructure firms, and performance varied across subsectors. Companies with portfolios concentrated in residential and commercial construction reported the most negative impacts. A Minnesota respondent noted that “economic uncertainty and decreased earnings for clients have caused delays and cancellations for many projects that were anticipated to start in 2025.”

Such delays and cancellations were reflected in a net decrease in new projects out for bid, as reported by survey respondents. Forty-one percent of all respondents noted a reduction in new proposals for public projects, and 48 percent reported a decline in new private projects. As fewer plans came online, competition heightened, firms won fewer projects, and their backlogs suffered.

Increases in input prices were less intense than in previous years, but they were still putting pressure on firms. “While costs increased, competitive bidding made us hold our pricing without increases,” shared a respondent. Eighty percent of firms reported higher input costs, but only 63 percent reported increasing the prices they charged to clients.

Many in the industry were hoping lower interest rates would prompt housing market mobility and stimulate investment. However, as the Fed began its rate-cutting cycle in 2024 by lowering the federal funds rate by roughly 1 percentage point, mortgage and other borrowing rates did not necessarily follow (Figure 2).

The prevailing sense was that economic uncertainty was holding back investment, with some exceptions. Among the one-third of respondents who reported growth, builders in infrastructure and industrial projects saw the biggest gains. In a couple of instances, those firms were benefiting from data center investment but noted that “there isn’t a lot of activity outside of that.”

Labor demand remained strong

Despite the general slowdown in construction activity, nearly half of survey takers were actively trying to hire workers.

Several factors drove demand for labor, including growth for some firms, vacant positions from retirements, and shortages in specialized labor.

Most of these companies were trying to recruit full-time workers. But while respondents reported an increase in the number of applicants per job opening, challenges finding qualified candidates persisted.

Electricians, plumbers, and similar tradespeople were in high demand. Some respondents were convinced that data center projects were employing a great number of these workers, aggravating the problem and putting upward pressure on wages.

Only about a quarter of businesses were at least somewhat dependent on foreign-born labor. One in three of these businesses noted a decrease in head count among their foreign-born workforce, and a similar share faced challenges recruiting among this population.

Concerns extended beyond the traditional laborer jobs held by immigrants. For an engineering firm, immigration policy changes were impacting high-skilled individuals with work visas, and the prospect of fewer foreign students could affect their STEM (science, technology, engineering, and math) worker pipeline.

The road ahead

Expectations for the near future showed a varied outlook, with a slight inclination toward further slowing. Looking ahead, three-quarters of respondents named several top challenges: competition for available projects, labor availability, and government policies and regulations (Figure 3).

Some expected the effects of trade policy changes to reverberate through the upcoming months. “Tariffs and constant changes have drastically affected affordability, and clients are much more hesitant [to invest],” shared a respondent. Others pointed to state and local building requirements and labor laws as the sources of increasing costs and narrower margins.

Many respondents anticipated investments in new projects to remain unsteady if uncertainty continues. For most respondents, competition for available projects was either the first or second most pressing challenge for their business moving forward. As a builder from the northern part of the district put it, “When the overall market is down, the competition gets tougher.”