Industry Optimism Fades

It has been a mystery. Why have financial professionals devoted to the U.S. construction industry been so optimistic regarding industry prospects? With fears of recession, stubbornly high interest rates, tariffs, evidence of stagnant construction spending, and long-lived structural skills shortages, contractors have had many reasons for concern.

Nonetheless, through the early stages of 2025, construction financial professionals were generally upbeat, reporting stable margins and healthy backlog. For their part, Confindex readings slid only modestly during the year’s initial quarter.

Alas, all good things must come to an end. Confidence among financial professionals working in construction dove during the second quarter. The Overall Confindex reading dipped to 101, a decline approaching 11% on a quarterly basis. The weak second quarter more than wiped out what had been a year-over-year gain in confidence and the Overall Confindex now stands nearly 5% below its year-ago level.

The largest quarterly decline was registered by the Business Conditions Index. That sub-index was down 15% on a quarterly basis and 9% from a year-ago. 

Clearly, something that CFOs and other financial professionals anticipated did not occur. Or perhaps something undesirable that was not expected transpired.

There are many candidate explanations for the second quarter’s decline in confidence. It may be that CFOs were expecting more international trade deals that would quickly curb proposed tariffs and take pressure off materials prices, including heavily tariffed goods like steel and aluminum. Perhaps CFOs expected the Federal Reserve to begin reducing interest rates, or at least to express expectations that rates will decline later this year. Neither of those things have occurred.

Or it may be that a combination of stubbornly elevated borrowing costs and an economic environment rife with uncertainty produced an abundance of project postponements and cancellations, unnerving construction industry leaders in the process.

There is little doubt that CFOs and their ilk have become more concerned by the specter of rising materials prices. The share of respondents that feel that construction input prices are worse expanded from 38% during the first quarter of 2025 to 66% during the second. More than 60% (61%) of respondents expect input prices to be worse a year from now, up from 51% during the prior survey. Only 14% expect prices to be better a year from now. The words “tariff” or “tariffs” emerged 39 times in the survey’s comments section.

Not only are costs set to rise, but demand for construction services appears to be on the wane. Concern regarding skilled worker shortages declined once again and is presently at its lowest level since 2021. Sagging demand helps explain the nearly 10% decline in the Current Confidence Index, which now stands at a reading of 95 and is down more than 10% on a year-over-year basis.

No index reading has declined as much over the past year as the Current Confidence Index, suggesting that financial performance has already begun to decline among many contractors. 

The Financial Conditions Index also eroded during the second quarter, down 7% on a quarterly basis and down 3% from a year ago. The bond market has seen considerable volatility during much of the second quarter, with treasury yields often drifting higher.zWhile inflation has been in decline recently, concerns regarding a reacceleration are pervasive, in large measure because of the anticipated impact of tariffs on prices as inventories of un-tariffed goods run out. Indeed, levels of concern regarding demand for construction and availability of financing for projects both increased in the second quarter.

Looking Ahead

Circumstances are set to deteriorate further. The Year-Ahead Outlook Index plunged nearly 12% during the second quarter. After remaining steady during 2024’s final quarter and 2025’s initial one at a reading of 122, the latest reading stands at a lackluster 108.

What goes down can go back up. All it would require for confidence to be restored are another set of inflation readings that prove more benign than expected, a Federal Reserve interest rate cut or two, and a bevy of trade deals and pronouncements that tariffs will be lower and more stable going forward. 

Unfortunately, none of those things are guaranteed. Inflation may reaccelerate going forward, with the recent breakout of hostilities in the Middle East pushing oil prices higher and the pause of Liberation Day tariffs schedule to lapse on July 9. Trade deals have been few and far between thus far, and it remains unclear whether announced trade deals are in fact fully negotiated, or simply announcements of intentions to iron out critical details that have historically been difficult to negotiate. Finally, tariff policy may not stabilize.