Construction activity softens under rising costs and uncertainty

Lackluster project volumes, higher material costs, and tight labor availability dampened activity for many construction firms in the Ninth Federal Reserve District.

Respondents to the Federal Reserve Bank of Minneapolis’ spring Construction Survey painted a business environment more muted than vibrant. Persistent uncertainty was met with further inflationary pressures for many businesses. Pockets of strong activity were mostly in industrial and infrastructure projects. But those were just a ray of light on an otherwise gloomy business landscape.

Ongoing uncertainty

Construction firms continue to shoulder evolving and persistent economic uncertainty. Last year their operations were impacted by new tariffs. Those concerns remain, but are now secondary to impacts from the war in the Persian Gulf, including higher costs and general nervousness among clients.

More than half of respondents (54 percent) reported lower activity in the six months ending in April 2026. Roughly 1 in 5 businesses reported improved conditions. How well companies did was dependent on their portfolio composition.

Companies that did most of their business in industrial, infrastructure, and heavy construction projects experienced the largest increases in activity (Figure 1). Some businesses stayed busy with data center work, a higher number of industrial projects out for bid, and public infrastructure projects.

The reality was different for residential and commercial construction companies, which were the majority of survey respondents. Approximately one-quarter of residential firms and about one-third of commercial businesses reported significant decreases.

A North Dakota insulation installer said that “people are in a holding pattern before wanting to build.” They were not alone; there was a prevailing sense that costly materials and shrinking purchasing power were decreasing confidence and limiting investment.

As more projects were put on hold, the race to secure new ones intensified. One in three respondents shared that competition for available projects was the most pressing challenge being faced by their business.

A story of two prices

District construction firms are facing a difficult balancing act. On the one hand, they face rising costs for materials and other inputs. On the other hand, to secure new projects, which are increasingly scarce, they must submit competitively priced proposals. As one respondent summarized it, “increasing competition for a smaller pool of projects with increasing input costs is not a great recipe for growth and profitability.”

When asked how input prices changed between November 2025 and April 2026 compared with the same period the year prior, 90 percent of businesses reported increases (Figure 2). A smaller but still significant share (72 percent) reported their own prices increasing in the same period.

Price pressures appeared to have deepened in the two months ending in April as rising oil prices drove up the cost of fuel and materials.

A Minnesota company noted rapid price increases on petroleum-derived products during that period. “We tried to hold our prices for the first 30 days but now have begun passing these costs increases along to our customers.”

Labor challenges linger

Despite tough conditions for some, roughly 4 in 10 businesses reported hiring more workers and/or increasing hours for existing employees in advance of the busy season. In addition, more than half had open positions waiting to be filled, mostly for full-time work.

In general, labor supply remained steady, as about the same number of companies said that applicant availability had improved as those who said it had worsened. In some cases, one company’s loss was another one’s win. “Poaching by competitors and headhunters is a constant challenge,” shared a Montana respondent.

Skilled labor remained scarce, even more so in rural parts of the district, where the number of younger people joining the trades can’t keep up with vacancies due to retirements. Adding to the mix, 1 in 10 respondents reported that the supply of immigrant workers declined after a spike in immigration enforcement earlier in the year.

The tug of war between construction companies for skilled labor has been one of the contributors to recent wage increases.

Overall, 73 and 63 percent of employers reported increasing wages for skilled workers and laborers, respectively. Most increases exceeded 3 percent. “The typical cost of living increase is 2.5–3% for admin in our modular plant scenario,” shared a Minnesota residential builder. However, they reported increasing skilled-labor wages by up to 5 percent in order to keep up with nearby wages.

Subdued optimism

Compounding factors were complicating pro forma projections for many companies. As energy prices have climbed at the onset of the typically busy summer season, optimism has headed in the other direction.

About 3 out of 10 businesses expected activity to increase over the next six months, but the overall outlook remained net negative. Nearly 4 in 10 firms expected business activity to decrease, and even many of those expecting it to remain flat were already operating at reduced levels.

The top challenge weighing on construction firms was heightened competition for a reduced number of projects. A contact from an architectural firm illustrated the challenge, noting they were “seeing larger architecture firms going after smaller projects that larger firms do not normally do.”