The construction industry and manufacturers can look forward to a gradually improving operating environment in 2025, thanks to lower interest rates, moderating inflation and steady, if unspectacular, growth in the nation’s overall economic activity.
“We look for real GDP growth of 1.9 percent in 2025,” says Bernard Yaros Jr., lead U.S. economist at Oxford Economics.
The good news is that a 1.9 percent boost is not far off what economists call the nation’s “natural growth rate” – one that supports business activity and maintains full employment. Reduced volatility in the GDP growth pattern in recent years suggests the nation is on a glide path to a so-called “soft landing,” avoiding a recession after a lengthy inflationary binge.
Despite its positive nature, the GDP figure for 2025 is slightly lower than the 2.6 percent anticipated when 2024 numbers are finally tallied. That’s because the nation is in a so-called “late-stage expansion,” characterized by a tendency to slow down while maintaining sufficient force to invigorate commercial operations.
Fair winds
In 2025, construction operations and manufacturers can look forward to declining interest rates and inflation – two bugbears that have drained profits recently.
“We anticipate a federal funds interest rate of 2.75 percent by the end of 2025, down from a recent 4.75 percent,” Yaros says. “And we look for inflation to average 2.2 percent in the final quarter of 2025, which will be within spitting distance of the Fed’s 2 percent target.”
That’s an improvement from the 2.5 percent inflation level toward the end of 2024. Relief from the costs of interest and inflation will help fatten the bottom lines of businesses everywhere.
“We anticipate corporate profits will increase 7.1 percent in 2024 and 5.8 percent in 2025, up from their 1.5 percent gain in 2023,” Yaros says.
Reports from the field confirm economists’ optimistic view.
“Our members are looking forward to a growth year in 2025, largely from expectations that interest rates will decline,” says Tom Palisin, executive director of The Manufacturers’ Association, a York, Pennsylvania-based consortium with nearly 500 member companies. “High interest rates have been putting constraints on many of our members who have been trying to maintain their financial margins, so relief in this area will be helpful.”
Construction rebounds
Analysts expect construction companies and manufacturers to share in the nationwide economic upsurge. Economists anticipate healthy growth in housing activity, a mighty economic driver.
“We forecast housing starts to increase by 6.2 percent in 2025, after falling by 4.7 percent in 2024 and declining 8.4 percent in 2023,” Yaros says.
A decline in the cost of money, accompanied by a loosening of credit standards, is expected to drive this rebound.
“Lower mortgage rates should help the single-family home market,” says Bill Conerly, principal of Conerly Consulting. “It will be a little less painful for people with 3 percent or 4 percent mortgages to give them up, sell their current houses and move up.”
Housing is not the only construction sector that will do well.
“This is the era of the megaproject, and future prospects are quite positive for contractors who are able to participate in major public works,” says Anirban Basu, chairman and CEO of Sage Policy Group and chief economist at the Associated Builders & Contractors.
Basu notes that much construction activity is being driven by the re-emergence of industrial policymaking in the U.S., an economic transformation that led to programs such as the Inflation Reduction Act, the Chips & Science Act and the Infrastructure Investment & Jobs Act.
“Manufacturers are receiving billions of dollars in subsidies for large-scale infrastructure projects, computer chip and battery manufacturing plants, and data centers, many in support of technological transformation such as the growth of artificial intelligence,” Basu says.
For contractors dependent on multifamily construction, hotels or retrofits of existing office space, the 2025 outlook is a bit more bleak.
“High interest rates have led to very high financing costs, along with the general inflation experienced within the construction sector,” Basu says. “And banks have become more reluctant to lend, partly because of an increase in regulatory oversight. As a result, certain contractors have become vulnerable to a lack of work, and they are quite concerned about 2025.”
A change will not happen overnight.
“With lower interest rates, there’ll be an easier time lining up project financing at an acceptable cost,” Basu says. “But these things take time. We might see some softness in a meaningful fraction of contractors in 2025. And then, perhaps, things get a bit better in 2026 as these lower interest rates prompt more activity.”