After a strong start to 2025, the construction industry entered the third quarter with momentum slowing and warning lights beginning to flash. Employment growth has slowed, backlogs have softened and project costs continue to edge higher even as spending levels flatten. While certain sectors — particularly data centers and infrastructure — remain bright spots, most contractors are shifting from expansion to caution, focusing on cost discipline, workforce stability and maintaining healthy pipelines as the year comes to a close.

Employment and Labor Conditions

Despite some pockets of resilience, labor metrics in the construction sector are showing signs of softness and structural stress. According to our folks at ABC National (ABC), industry employment increased by just 2,000 net jobs in July, representing only a 1.2% year-over-year increase. By August, the sector lost 7,000 jobs, marking the third consecutive monthly decline. On a year-over-year basis, employment growth in August was only 0.7% (58,000 jobs).

Moreover, job openings in the field went down: As of the last day of August, there were only 188,000 job openings in construction nationally, down 115,000 from the previous month, the lowest in nearly a decade. Meanwhile, the quit rate has fallen to a nine-year low, suggesting reduced worker mobility and perhaps a more cautious labor market. From a strategic standpoint, this suggests two simultaneous pressures: labor demand is weakening (fewer jobs, fewer openings), and labor supply remains constrained (given very low unemployment in the sector and upward wage pressure). ABC economists had warned that the industry might need to attract roughly 439,000 net new workers in 2025 to meet anticipated demand — or else risk wage escalation and constrained growth. To summarize, labor markets remain tight from a supply perspective, but demand is under pressure, setting the stage for wage pressures even amid slower growth.

Backlog and Spending

Activity-pipeline indicators are sending mixed signals. ABC’s Construction Backlog Indicator (CBI) dropped from 8.8 months in July to 8.5 months in August. While that is still ahead of August 2024’s 8.2 month reading, the downward move signals weakening momentum. Notably, the backlog decline is concentrated in smaller firms, while larger firms still enjoy 13.5 months backlog and increasing pipelines. Turning to construction spending, nonresidential spending was about $1.241 trillion in June, though June registered a 0.1% monthly decline in that series per ABC. Taken together, backlog remains elevated (especially for large firms), but the trend is downward, and spending is slipping. For contractor executives, this means that while near-term pipeline may still hold, the risk of softening in the next 6-12 months is increasing.

Cost Pressures and Materials

Cost inflation remains a core concern. ABC reported construction input prices rose by 0.2% in August, with nonresidential input prices also up 0.2% on a monthly basis. But deeper commentary suggests that the risks lie with tariffs, raw-material categories and labor. More than 80% of contractors reported recent supplier notices of higher prices, often associated with iron and steel, copper wire, cable and other elements. For example, ABC economists note that iron and steel prices are up 9.2% year-over-year, and copper wire and cable prices are up 13.8%.

ABC consultants highlight that multifamily construction materials costs have begun accelerating again, up 2.5% since January 2025, the largest six-month jump since late 2022. They also note that cost escalation remains elevated, and that even if month-to-month changes seem modest, the cumulative pressures matter deeply for project feasibility. Thus, firms are facing a dual challenge: moderate monthly inflation in inputs, but sizeable cumulative cost escalation and uncertain pass-through to project owners. This raises risk of profit margin losses, project delays or outright cancellation.

Some Sector-Specific Observations

Data Centers and Tech-Related Construction

Everyone is talking about data centers. Data centers, data centers, data centers! They are a bright spot as private data center construction spending has increased by roughly $15.2 billion since the start of 2024, while all other private nonresidential spending declined by about $52 billion over the same time frame. ABC economists observe that about 1 in 7 ABC members is currently under contract on a data-center project. This suggests that for firms positioned in that niche (tech/wholesale data centers), there is a meaningful growth driver despite broad softness in nonresidential construction.

However, there is always a place for caution, as the sustainability of these investments depends on actual returns from AI/data infrastructure, which remain unclear right now.

Factory/Manufacturing Construction

Factory construction has faltered, unfortunately, despite the earlier narrative of reshoring and government-driven incentives. This signals that the goods-side construction rebound may not be as strong or broad as expected. For contractors oriented toward manufacturing or industrial builds, caution is warranted.

Healthcare and Institutional Construction

There also appears to be softness in institutional/health-care builds, according to ABC consultants. While healthcare is typically a resilient segment, that may be shifting given slower fundamentals (capital spending by health systems, deferred expansions). This exacerbates the challenge for commercial/institutional contractors already facing tight owner budgets and elevated costs.

Multifamily Residential/Multifamily Cost Pressure

Though residential single-family continues to struggle, multifamily remains better positioned — but cost pressures are increasing as previously noted. For firms engaged in multifamily construction, careful cost control and contingency assumptions are increasingly important.

Key Takeaways for Q3 2025

• Employment growth in construction is weak and even negative in recent months; job openings are down substantially, implying demand softening.
• Backlog remains elevated but is beginning to decline, particularly for smaller contractors; spending in nonresidential is showing slight contraction.
• Cost inflation — both materials and labor — remains a drag and increasingly a risk to project margins.
• Some sectors (data centers) continue to provide growth pathways, but many traditional segments (manufacturing, healthcare, institutional) are showing signs of strain.
• The industry is shifting from growth-expansion mode toward defensiveness: cost discipline, pipeline quality, exposure management and labor strategy will determine winners and losers.

In sum, Q3 2025 is marked by a plateauing and gradual softening of what has been a strong run for the construction industry. The good news is the industry is not collapsing of course, as backlog remains high.