A modest uptick in economic growth, beneficial legislation from Washington and lower interest rates will help the construction industry boost profitability in 2026.
The increasing costs of doing business, though, combined with uncertainty and consumer malaise will reduce the number of business initiatives that make it off the drawing board. Companies need to double down on smart tactics to boost productivity in the face of a decelerating population.
After a tenuous and uncertain 2025, the construction industry can look forward to a gradually improving, though challenging, operating environment in 2026.
Oxford Economics expects real GDP (GDP minus the effects of inflation) to grow 2 percent in 2026, a slight increase from the 1.7 percent expected when this year’s numbers are tallied. Both years, among the most sluggish growth environments of the past decade, are still underperforming the 2.8 percent increase of 2024.
“The U.S. economy is holding up admirably well despite a major trade shock caused by tariffs,” says Bernard Yaros Jr., lead U.S. economist at Oxford Economics. “We look for an acceleration in growth in 2026 as stimulus from the One Big Beautiful Bill gets underway.”
The nation’s economic growth depends largely on the launch of new business initiatives. Companies are holding back for several reasons, however.
Interest rates, while declining, remain at their highest levels since 2022, material and supply costs are increasing and there is uncertainty about the nation’s future trade policy. Lower- and middle-income consumers, nervous about inflation, are tapped out and closing their wallets. Against such headwinds, a host of otherwise attractive projects can look less promising.
One might also expect business profitability to suffer. However, Oxford Economics expects it to follow the same general pattern as GDP.
“We look for corporate profits to rise by 4.9 percent in 2026,” Yaros says. “That’s up substantially from the 0.5 percent expected when 2025 numbers are finalized.”
That projected 2026 pace remains slower than the 7.9 percent reported in 2024. The expected 2026 rebound in profitability stems from a belief that stimulus from Washington will lift all boats.
Anirban Basu, chairman and CEO of Sage Policy Group and chief economist at the Associated Builders & Contractors, believes the passage of the One Big Beautiful Bill should help the economy regain some steam in early 2026 through the bill’s tax cuts for businesses and households.
It’s anticipated that the legislation’s 100 percent bonus depreciation should help fuel business investment, while large tax refunds should invigorate consumer spending. Both activities are important drivers of the nation’s economy.
This stimulus from Washington arrives at the same time companies are getting a firmer footing amid the nation’s shifting trade policy.
“There has been a bit of a shock to the system in and around tariffs over the past year, and it is taking some time for many operators to understand their impact,” says Andrew Petryk, head of industrials at investment banker Brown, Gibbons Lang & Co.
Specifically, companies have responded to China tariffs by sourcing imports from other countries – a move which has also lent succor to the nation’s recent supply chain ills.
“Lead times have diminished as companies have found alternative or additional suppliers,” Petryk says. “Those that relied on one or two vendors now have three, four or five.”
Businesses should also benefit from a decline in the cost of money over the coming months, as the Federal Reserve shifts its focus from fighting inflation to bolstering employment.
“We look for inflation to peak at just above 3 percent when 2025 numbers are finalized, and for the Fed to cut interest rates into 2026 until the federal funds rate falls to about 3 percent,” Yaros says.
That rate, while higher than the rates of early 2022, would be a welcome step down from the 4.3 percent of mid-2025. Declining interest rates, which encourage the launch of new projects, are also a reflection of looser pockets on the part of the nation’s lenders.
“Credit conditions have improved significantly for businesses,” Basu says. “Companies with strong balance sheets will find bankers very willing to supply debt. We also know that equity investors, including private equity, remain quite aggressive in supplying capital.”
Housing doldrums
Lower interest rates can’t come soon enough for a major driver of construction activity and the nation’s economy: the housing sector.
“Housing is in a funk,” Yaros says. “Single-family homebuilders are contending with a growing supply of unsold, completed new homes, as well as greater competition from the resale market and falling home prices in a rising number of regions.”
The current high cost of money is not helping matters.
“A significant increase in interest rates since the summer of 2022 has increased the monthly payments required from buyers of new or existing homes,” Petryk says. “They have also led to a significant market shortage because families who bought homes three to five-plus years ago are loath to surrender their sub-3 percent mortgages.”
Mortgage rates have a significant impact on consumer attitudes, which are vital drivers of the economy. While lower short-term rates may be coming from the Federal Reserve, it’s unclear how much effect they will have on the longer-term ones that apply to the funding of new homes.
“I do not forecast mortgage rates coming down enough to make a big difference in single-family construction,” says Bill Conerly, principal of his own consulting firm in Lake Oswego, Oregon.
Wary builders. Reluctant sellers. Sluggish buyers. All are influencing the housing market.
Oxford Economics expects housing starts to fall by 4.3 percent in 2025 and decline by another 2.3 percent in 2026. Starts fell 3.5 percent in 2024.
Prices for existing homes are expected to increase by 1.5 percent in 2025 and 2.3 percent in 2026, after rising 4.4 percent in 2024.
Concerned about the rising cost of living, consumers are cutting back on spending across the board. Their hesitancy affects the retail sector, which is an important driver and bellwether of the economy.
“Our forecast for year-over-year retail sales growth is 3.8 percent for 2026, down from the 4.5 percent of 2025,” says Scott Hoyt, senior director of consumer economics for Moody’s Analytics. “High prices are a bit of a mixed bag. They undermine consumer purchasing power and confidence, but they also support nominal sales by lifting the prices of the goods retailers are selling.”
Construction woes
Outside of the single-family home market, contractors are having problems of their own. Multifamily builders, working through a backlog of units under construction, are hesitant to break ground on new ones.
“I think we’ll see less multifamily construction in 2026,” Conerly says. “Vacancy rates are going up and rents have been coming down at the rate of about 1 percent a year.”
Meanwhile, contractors attached to the commercial, office and hotel markets are feeling the sting of a slowing economy, high interest rates and an environment rife with uncertainty.
“Many areas of nonresidential are trending flat or edging down,” Conerly says. “Even the chip fabs, while still strong, are tapering down.”
The one bright construction sector: data centers. They show no signs of diminishing and are big customers for electricians, plumbers and suppliers of scaffolding and manufactured products of all kinds.
“When I look at the detail and the economic statistics of what kind of capital equipment is being bought, I am seeing a lot of data center-related equipment in there,” Conerly says. “Data centers also require a lot of garden-variety wiring, connectors and plumbing for cooling.”
Every sector of the construction industry shares a common challenge: labor availability. Oxford Economics forecasts an unemployment rate of 4.4 percent and 4.3 percent at the end of 2025 and 2026, respectively. That’s not much higher than the 4.1 percent clocked at the end of 2024.
Low unemployment, largely due to slowing growth in the nation’s working-age population and aggressive immigration policies, can result in rising labor costs.
Business confidence
For all business sectors, money and labor are not the only production factors on the rise.
“The real problem is the world has become much more expensive in the last few years,” Basu says. “Construction materials are more expensive. And, of course, there are tariffs on items like steel, aluminum and copper.”
It’s little wonder the high cost of doing business is top of mind for many operators.
“As we head into 2026, the area of most concern for the construction industry is profit margin,” Basu says. “Many operators are simultaneously experiencing an increase in costs of delivering services while demand fades.”
Given the variety of business concerns, it also makes sense that projects are being put on hold.
“It’s hard to engage in cost savings when both materials and labor are becoming more expensive,” Basu says. “Too often, the pro formas don’t pencil out. Many companies are responding by not expanding their operations and trying to trim expenditures at the margins. They are focusing more on cash flow preservation by slowing hiring, and being less aggressive in leasing and purchasing equipment, particularly equipment impacted by tariff pricing.”
This generalized business hesitation is evidenced in the numbers. Yaros says Oxford Economics is projecting business investment to increase 1.6 percent in 2026, following a 3 percent gain in 2025. For added context, business investment grew 3.6 percent in 2024.
Looking ahead
Entering the early months of 2026, economists suggest that companies in the construction industry watch these key economic indicators for an idea of how the year will turn out:
■ Employment: “I would pay close attention to the unemployment rate,” Yaros says.
An unexpected decline in employment would spur faster interest rate cuts as the Fed seeks to reinforce economic expansion.
■ Consumer spending: “How is the consumer faring,” Basu asks. “Bear in mind that many low- and middle-income people are exhausted financially. Indebtedness and delinquencies are up for credit cards, mortgages and loans.”
■ Inflation: “If we get stubbornly high inflation, that will prevent further progress on interest rates,” Basu says.
Oxford Economics still expects the nation to avoid a recession, and the expected 2 percent GDP growth is right around the level economists peg as the nation’s “natural growth rate” – one that supports business activity, maintains full employment and avoids triggering inflation.
Perhaps even more important, though, is a little-heralded threat to productivity.
“One thing that sort of permeates the whole economic picture right now is the nation’s low population growth rate,” Conerly says. “Immigration is down, due to Trump administration policy. The next generation entering their working years is about the same size as the retiring boomers, so there will be no net growth in the labor force.”
Responding to this trend, companies in the construction industry will look for ways to maximize their return on labor by increasing output per worker.
“The focus of businesses in 2026 will be increasing productivity,” Conerly says. “Not by whipping people harder, but by providing them with better tools, better training and better first-level managers.”
Phillip M. Perry is an award-winning journalist who is published widely in the fields of business management, workplace psychology and employment law.
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