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 report from the Federal Reserve on industrial production for the second quarter of 2025 showcases a significant upward trend in the construction and engineering sector, driven largely by government initiatives and infrastructural spending. Overall industrial output experienced a modest increase of 0.3% in June 2025, but it is the C&E sector that truly outperformed expectations amid broader economic disparities.
The Construction Supplies index saw a rise of 0.3%, while the civil engineering segment marked an impressive growth of 3% year-over-year. This growth reflects the positive impact of government stimulus measures and the ongoing implementation of projects under the Infrastructure Investment and Jobs Act (IIJA). Notably, civil engineering activities, especially in road repairs and renewable energy projects, have been bolstered by significant investment allocations.
In contrast, defensive sectors such as utilities and consumer staples have struggled, falling behind in performance. The report highlights sharp declines in other areas, including electrical equipment and motor vehicles, which reported decreases of -2.5% and -2.6%, respectively. These downturns have negatively impacted the manufacturing landscape, underscoring the uneven nature of economic recovery.
Capacity utilization in the mining sector, which is crucial for supplying the construction industry, has reached 90.6%; however, utilities are lagging at only 70.1%, below their long-run averages. This imbalance highlights vulnerabilities and varying capacities among different sectors within the economy.
While the construction sector thrives, it is not without its challenges. Tariffs on steel and rare earth elements have increased costs for construction firms, prompting many to consider diversifying their supply chains and seeking exemptions wherever possible. However, the Nonresidential Construction Index (NRCI) has seen a drop of 24% in Q2, primarily due to delays relating to these tariffs. This decline serves as a reminder of the ongoing challenges the sector faces.
Despite these hurdles, the C&E sector is clearly primed for resilience. Investment strategies are now recommended to favor the construction and engineering stocks, with an emphasis on companies engaged in civil engineering and infrastructure development. Notably, $200 billion allocated under the IIJA significantly supports projects, including the construction of data centers and semiconductor plants, further solidifying opportunities in this sector.
Given the current market dynamics, investors are advised to shift toward overweighting positions in the C&E sector. In contrast, defensive sectors are suggested to be underweighted, as they face structural problems linked to inflation and policy uncertainties. Monitoring potential risks related to labor shortages and tariffs is essential, favoring companies that boast diversified supply chains and established partnerships with trade schools.
The infrastructure spending initiated by bipartisan efforts and technological advancements is expected to continue fueling growth in the C&E sector. With a notable portion of the $1.2 trillion allocated by the IIJA remaining unspent, the construction sector is positioned for ongoing support and potential outperformance over the coming months. Investors are advised to consult financial advisors before adjusting their portfolios to capitalize on these lucrative opportunities in construction and engineering.
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