Key Takeaways:
US nonresidential construction spending fell for the seventh straight month in May as tariffs, labor shortages, and surging data center demand reshaped the industry's cost structure.
US nonresidential construction spending slid 1.5% in May to a seasonally adjusted $1.267 trillion, as three structural forces — trade policy, labor constraints, and data center crowding — pushed costs well above pre-pandemic trend lines.
"Private nonresidential construction spending shrank for the seventh consecutive month and is now down 6.6% on a year-over-year basis," said Anirban Basu, chief economist at Associated Builders and Contractors. "There are few sources of momentum in the segment."
The decline was broad-based. Warehouse construction spending fell for three straight months and is down 8.5% year-over-year, while the general office category dropped 11.9% since May 2025, according to Census Bureau data analyzed by ABC. Manufacturing-related spending continued to slide as CHIPS Act-supported projects wind down. The only bright spot: data centers, where contractors carry backlogs of 11.6 months versus 8.6 months for those without data center exposure.
The spending data reflects a cost environment that multiple independent trackers say is structural rather than cyclical. JLL's 2026 mid-year update put final-cost indices roughly 5% higher year-over-year, with further acceleration expected. Mortenson's Q1 index recorded 6.8% national nonresidential cost growth over 12 months, while ABC's input price data showed a 12.6% annualized surge in early 2026 — the fastest since the supply-chain disruptions of early 2022.
Tariffs Add $15-$25 Per Square Foot to Steel-Heavy Projects
Trade policy has moved from background risk to a direct line item. A June 8 expansion of Section 232 tariffs brought metal furniture and workstations under rates as high as 50%, on top of existing duties on structural steel, aluminum, and copper. Steel-intensive mid-rise multifamily projects now absorb an estimated $15 to $25 per square foot in embedded tariff costs, according to a Q2 2026 construction cost outlook. Copper-heavy mechanical, electrical, and plumbing packages have been hit particularly hard, a dynamic that matters for data center and industrial projects where copper demand is already elevated.
A Supreme Court ruling has curbed the use of broad emergency powers to impose tariffs, pushing policymakers toward targeted tools — Section 232 national security tariffs and Section 301 unfair-trade-practice tariffs — that have kept steel, aluminum, and copper duties at 50%. The renegotiated USMCA removed some country-level surcharges on qualifying goods but did not touch Section 232 metals tariffs.
Labor Markets Cannot Relocate to Where the Work Is
If tariffs are the more visible pressure, labor may be the more durable one. Construction employment growth is tracking at just 0.6% in 2026, far below the historical average of 2.7%, according to JLL. Some 61% of US metro markets are currently supply-constrained for construction labor, a figure projected to rise to 72% by 2027. Industry estimates put the shortfall at roughly 439,000 additional workers needed in 2025 and nearly 500,000 in 2026, with 94% of contractors reporting difficulty filling open positions.
Construction workers cannot easily relocate to fill gaps in other regions, making the imbalance structural rather than a temporary bottleneck. Wage growth is following: construction wages are up more than 4% year-over-year nationally and 9% to 11% in high-demand markets and specialized trades.
Data center starts are up more than 15% year-over-year, with over $400 billion in future projects already announced, making 2026 the most active year on record for the sector. That demand is pulling crews, subcontractors, and materials away from other work. Contractors with data center exposure carry average backlogs of 12.2 months, compared with 8.3 months for those without it, JLL data shows. Non-data-center commercial construction spending for office, industrial, or mixed-use projects is growing at under 1% in real terms.
"Contractors competing for the same crews as data center work will feel it in cost and schedule now," said Louis Molinini, head of project and development services for the Americas at JLL.
Cost escalation is not uniform. Mortenson's Q1 index recorded some of the sharpest twelve-month gains in Salt Lake City (9.75%), Denver (10.37%), and Milwaukee (10.32%), while Portland (2.55%) and Seattle (4.15%) posted far more moderate increases. Markets with heavy data center or advanced manufacturing activity are absorbing a disproportionate share of the labor and materials squeeze. For contractors bidding across multiple US metros, the gap between the fastest- and slowest-escalating metros now exceeds seven percentage points.
Despite the headwinds, fewer than one in five contractors expect profit margins to compress over the next six months — a level of confidence not seen since early 2025 — suggesting the industry is pricing the higher cost baseline into bids rather than absorbing it. Molinini's assessment is blunt: firms planning projects over the next three to five years will not benefit from waiting for conditions to ease.
This article is for informational purposes only and does not constitute investment advice.
