As debate over the health of the U.S. economy heats up, a key recession indicator has been flashing red for months, raising concerns about a looming slowdown amid tariffs, stubborn inflation, and major revisions to job growth.
According to Bank of America Global Investment Strategy, construction — long considered a bellwether for economic activity — is in a pronounced slump.
In July, residential and commercial construction spending fell 2.8% year-over-year, one of the sharpest drops since the 2008 financial crisis. It was also the sixth straight monthly decline, with spending down in ten of the past 11 months.
“Over the last 50 years, such a sustained decrease in construction expenditures has occurred only during recessions, except in 2018,” The Kobeissi Letter noted.
Employment in the sector is sliding as well, falling for three consecutive months — the longest stretch of losses since 2012.
The reasons are clear: elevated interest rates and the Fed’s unwillingness to ease policy have made financing prohibitively expensive, freezing the housing market. On the commercial side, office real estate remains under severe pressure, curbing demand for new projects.
Construction spending peaked in mid-2024
Data from the Federal Reserve Bank of St. Louis confirms a sharp slowdown in U.S. construction spending, which appears to have peaked in mid-2024 before entering a decline.
On an annualized basis, spending hit just over $2.2 trillion in May 2024 but has since fallen to roughly $2.13 trillion. While the drop may look modest, it amounts to tens of billions of dollars — a sign the industry is stalling, if not contracting.
The Fed data shows that such sustained pullbacks have historically coincided with recessions, most notably in 2008–09 and again during the 2020 pandemic.
The Associated Builders and Contractors (ABC), a national trade association representing construction companies across all sectors, warned that the downturn is even more severe when adjusted for costs.
“With construction materials prices rising rapidly in recent months and set to continue as higher tariff rates go into effect, the recent decline in construction activity is even larger than this data series suggests,” said Anirban Basu, ABC’s chief economist.
ABC noted a spending decline in seven of 16 nonresidential categories.
Recession signals piling up
The slump in construction spending is the latest in a string of warning signs pointing to growing recession risks.
Other red flags include rising unemployment, major downward revisions to job growth, and a breakdown in the Leading Economic Index — a composite gauge published by the Conference Board that tracks forward-looking data such as factory orders, jobless claims, and consumer expectations.
In late August, market observer StockMarket News noted that while the economy may appear stable on the surface, “the indicators that usually predict trouble ahead are flashing red.”
The warning referred to the Leading Economic Index and the Coincident Economic Index, which tracks current conditions through payroll jobs, real income, industrial production, and business sales.
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