Construction and engineering activities thriving in urban areas.
The Federal Reserve’s latest report indicates that the Construction & Engineering sector has shown significant growth, outperforming slower industrial sectors. Fueled by government spending, particularly in infrastructure, the sector has benefitted from a 0.3% rise in the Construction Supplies index and a notable 3% annual growth in civil engineering. However, defensive sectors like utilities lag behind. Despite challenges such as labor shortages and tariff impacts on materials, ongoing investments from the Infrastructure Investment and Jobs Act are expected to provide sustained momentum for the sector’s growth.
The latest Federal Reserve Industrial Production report for Q2 2025 shows that the Construction & Engineering (C&E) sector is experiencing considerable growth, standing out amid varied economic performances across different industries. While overall industrial output saw a modest increase of 0.3% in June 2025, the C&E sector has exceeded expectations thanks to government stimulus and heightened infrastructure spending.
Within this thriving sector, there has been a significant rise in the Construction Supplies index, which went up by 0.3%. Additionally, the Civil Engineering sub-sector has witnessed an annual growth rate of 3%, underpinned largely by initiatives from the Infrastructure Investment and Jobs Act (IIJA). This act has begun driving increased civil engineering activities, especially in areas such as road repairs and renewable energy projects. Such initiatives have provided a solid foundation for the sector, leading to its continued success in a challenging economic environment.
In contrast to the construction sector’s resilience, more defensive sectors like utilities and consumer staples have struggled to keep pace. Both the Electrical Equipment and Motor Vehicles sectors reported declines of 2.5% and 2.6%, respectively, negatively impacting overall manufacturing performance. In mining, a critical supplier for construction, capacity utilization reached 90.6%. In stark comparison, the utilities sector remained low at 70.1%, falling below long-term averages.
While the construction sector flourishes, it is not without its hurdles; labor shortages are causing companies to innovate by using prefabrication and Building Information Modeling (BIM) to improve their efficiencies. Additionally, the industry faces increasing costs due to tariffs imposed on steel and rare earth elements. Despite these challenges, many U.S. firms are actively working to diversify their supply chains and seek exemptions from these tariffs, showcasing a commitment to maintaining productivity and profitability.
The Nonresidential Construction Index (NRCI) has dropped by 24% in Q2, attributed to delays resulting from tariffs. However, civil engineering projects funded by government initiatives remain relatively insulated from these tariff-related challenges. Notably, the construction of data centers and semiconductor plants is thriving, buoyed by a substantial $200 billion allocation from the IIJA.
As this sector heads into a promising future, investment strategies are being recommended to adjust towards overweighting C&E stocks, particularly focusing on companies engaged in civil engineering and infrastructure. Conversely, it is advisable for investors to consider underweighting defensive sectors due to structural issues stemming from inflation and ongoing policy uncertainties.
Investors are encouraged to keep a close eye on labor and tariff-related risks, favoring companies with well-diversified supply chains and partnerships with trade schools to mitigate potential setbacks. The growth of the C&E sector appears robust and is bolstered by bipartisan support for infrastructure spending as well as ongoing technological innovations.
The Infrastructure Investment and Jobs Act’s total allocation of $1.2 trillion is largely unspent, marking a continued commitment to support the construction sector and fostering its potential for outperformance. In light of these market dynamics, a swift rotation into construction and engineering equities is advised while scaling back investments in defensive sectors.
As changes in the construction and engineering landscape evolve, potential investors should think about consulting financial advisors prior to making alterations to their portfolios. This thoughtful approach will help navigate emerging opportunities and challenges within the dynamic marketplace.
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