U.S. construction spending sinks to near three-year low as data centers mask a broader slump

U.S. construction spending fell for the second straight month in July, dropping to its lowest level in nearly three years as a slowdown in homebuilding and a fading factory-building boom offset a continued surge in data center construction, according to figures the Census Bureau released Tuesday.

Total construction outlays fell 0.5% in July to a seasonally adjusted annual rate of $2.158 trillion, down from a revised $2,167.7 billion in June. Economists surveyed by Bloomberg and Reuters had expected spending to hold roughly flat, making the decline an unwelcome surprise. The July reading was 3.8% below the year-earlier level and the weakest since October 2023. Through the first seven months of 2026, cumulative spending totaled $1.245 trillion, down 3.5% from the same stretch of 2025.

A widening housing drag

Private residential construction led the pullback, falling 1.3% for the month and 7.3% from a year earlier to an annual rate of $859.0 billion. New single-family construction, the largest component of the housing market, dropped 3.2% in July and is down 6.5% year over year. Homebuilders have been squeezed by a combination of elevated borrowing costs and a buildup of unsold inventory that has made it harder to justify breaking ground on new projects.

The average rate on a 30-year fixed mortgage stood at 6.66% in Freddie Mac's weekly survey in late August, its highest level in roughly a year. Multifamily construction has held up somewhat better, rising 0.2% for the month, but it too remains below year-ago levels as developers work through a glut of apartment units delivered over the past two years.

Data centers carry nonresidential building

Private nonresidential construction, by contrast, edged up 0.4% in July to $755.2 billion, but the increase was driven almost entirely by one category. Office construction, the Census Bureau line item that captures most data center projects, jumped 3.3% for the month and 21.3% from a year earlier, while power-related construction, which includes the electrical infrastructure that supports server farms, rose 6.5% year over year.

Factory construction told a very different story. Manufacturing spending fell 0.8% in July and is down 21.7% from a year earlier, as the wave of semiconductor, battery and electric-vehicle plant construction spurred by the 2022 CHIPS and Science Act continues to wind down. Industry analysts have noted that outside of data centers, private nonresidential construction has fallen for two consecutive months and now sits at its lowest level since September 2023.

"The increase in nonresidential construction spending that occurred in July was entirely due to data centers," said Anirban Basu, chief economist at the Associated Builders and Contractors trade group. "Nonresidential activity is even more concentrated given that the power category, which has been boosted by the electricity needs of data centers, has also grown substantially over the past year."

Who is exposed

The divergence has left the construction industry increasingly reliant on a narrow slice of the economy. Homebuilders, materials suppliers tied to residential projects, and manufacturers of factory equipment are contending with real declines in demand, while contractors with data center backlogs, electrical contractors, and power infrastructure firms are seeing some of the strongest activity of the cycle. Public construction spending, which includes highways and schools, slipped 0.2% for the month to $543.4 billion but remained 1.7% higher than a year ago, with highway construction alone down 0.2% for July at a $150.3 billion annual rate.

The spending divergence is already visible in payrolls. The construction industry added a net 22,000 jobs in July, with nonresidential firms accounting for nearly all of the gain even as residential building continued to shed workers, according to an analysis of Bureau of Labor Statistics data by the Associated Builders and Contractors. Nonresidential specialty trade contractors, the electricians and mechanical firms that wire and cool data centers, accounted for 15,400 of those jobs on their own. The construction unemployment rate held at 3.7% in July, well below the 4.1% rate for the economy as a whole. Basu attributed the hiring strength to the same forces lifting nonresidential spending, saying employment in the category "continued to expand at a healthy pace in July as the data center investment boom fuels ongoing demand for specialty trade contractors."

In its analysis of the report, ABC noted that contractors overall remain relatively optimistic about the coming six months, according to its Construction Confidence Index, but that outlook is leaning more heavily on a single category than at any point in the current building cycle. A concentration of this kind raises the stakes for the broader industry if the pace of data center construction, which is itself tied to continued capital spending by technology companies racing to build out artificial intelligence infrastructure, were to slow.

What comes next

The Census Bureau's monthly figures are preliminary and subject to revision; July's construction total will be updated twice more before being finalized, and June's estimate was itself revised lower in Tuesday's release. The next monthly report, covering August, is scheduled for release on October 1.

Housing economists will be watching mortgage rates closely in the weeks ahead, since further increases would add pressure to an already-weak single-family market heading into the fall selling season. On the nonresidential side, the durability of the data center buildout remains the central swing factor for the industry's overall health. Should that spending slow even modestly, the broader softness already evident in manufacturing and other nonresidential categories would likely show up more directly in the headline construction spending figure.