In June, US construction spending fell by 0.4% from the previous month, bringing the annual rate to $2.14 trillion. This marks a 2.9% decrease compared to the same time last year. Spending in the first half of 2025 is 2.2% lower than in the same months of 2024. Private construction dropped by 0.5% month-to-month, now at $1.62 trillion. Residential construction decreased by 0.7% to $883.1 billion, while nonresidential construction fell by 0.3% to $738.8 billion.

Public Construction Spending

On the other hand, public construction spending went up by 0.1% from May, totaling $514.3 billion. The education and highway sectors saw small increases, with spending rising by 0.4% to $112.7 billion and by 0.6% to $144.1 billion, respectively. Overall, the construction industry weakened in June, mainly due to drops in the private residential and nonresidential sectors. However, public construction showed slight growth, especially in education and highway projects. The construction spending report for June 2025 highlights a slowdown, falling short of expectations and signaling weakness in the private sector. This data suggests that the economy is cooling more than expected, indicating that the Federal Reserve may have less flexibility to keep interest rates high.

Market Adjustments and Economic Outlook

Markets are adjusting to this new reality, with changes in CME FedWatch tool probabilities. For example, after the weak jobs report in early July 2025 and this construction data, the chances of a rate cut by December 2025 have risen to over 50%. The weak economic data, combined with a core PCE price index of 2.8% in the latest reading, creates a complex situation for the Fed. The significant 0.7% decline in private residential spending raises concerns for the housing market. With 30-year fixed mortgage rates averaging about 6.5% in July 2025, affordability pressures remain for homebuilders. We believe that buying put options on homebuilder ETFs like ITB and XHB could effectively hedge against or speculate on further declines in the coming weeks. This downturn also affects suppliers of construction materials and industrial equipment. Companies supplying lumber, cement, and heavy machinery are likely to encounter challenges, which may not yet be reflected in their stock prices. Looking back to the slowdown of 2022, we remember that industrial stocks were quick to respond to falling demand. With mixed signals of slowing growth and ongoing, though easing, inflation, we expect market volatility to rise. The CBOE Volatility Index (VIX), which has been relatively low, may experience upward pressure as uncertainty increases. Purchasing call options on the VIX or VIX-related futures could serve as a helpful hedge against broader market turbulence. Create your live VT Markets account and start trading now.

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