Construction activity across the Federal Reserve’s Ninth District declined slightly over the past six months, with nearly half of the firms surveyed reporting lower activity compared with the same period in 2024, according to results from the Minneapolis Federal Reserve’s fall construction sector survey.
The results, which were presented during a Dec. 12 webinar, showed that rising input costs continue to pressure margins, with 80% of firms reporting higher costs, while only 63% said they raised prices charged to clients. The result has been increasing competition for nonresidential work, Federal Reserve Bank of Minneapolis Regional Outreach Director Erick Garcia Luna said during the webinar.
Despite softer activity, labor demand remains strong, with nearly half of respondents actively trying to hire, driven by retirements, specialized labor shortages and continued demand in select nonresidential segments such as industrial, infrastructure and healthcare.
Construction firms in the region are facing a more competitive and uncertain environment as activity softens, costs remain high and project pipelines shrink, according to the survey. Conducted twice a year, the survey polled more than 260 construction firms across Montana, North Dakota, South Dakota, Minnesota, northern Wisconsin and Michigan’s Upper Peninsula.
Garcia Luna noted that construction activity declined slightly compared with the same period last year, with nearly 50% of respondents reporting lower activity, while about one-third reported growth, highlighting uneven conditions across the district.
Residential construction continues to face the strongest challenges. Nonresidential segments have shown greater resilience, but that comes with a growing caution.
“When you isolate nonresidential construction, particularly industrial and infrastructure, the picture looks a little better,” Garcia Luna said. “There are still pockets of projects that are keeping firms busy, especially in industrial construction.”
However, he noted that may just be temporary as nonresidential contractors also reported shrinking backlogs and fewer requests for proposals, signaling a slowdown in future work.
“Uncertainty is keeping some project owners on the sidelines,” Garcia Luna said. “People are still nervous to invest. That wait-and-see attitude is showing up in diminishing backlogs and fewer projects entering the pipeline, and firms expect that to continue into the new year.”
Cost pressures and competition intensify
Another big takeaway from the webinar was that cost pressures remain widespread.
“That’s impacting how firms compete for projects,” Garcia Luna said. “Smaller companies, in particular, are losing work to better-capitalized firms that can absorb higher costs or accept tighter margins.”
The confusion surrounding tariffs has added another layer of risk for nonresidential contractors, complicating both pricing and bidding decisions.
While materials such as aluminum remain a concern, Garcia Luna noted that contractors also pointed to increasing costs tied to heavy equipment and machinery components, especially in industrial and infrastructure construction.
“We often think about tariffs in terms of materials,” he said. “But components for machinery, repairs and specialized equipment are also becoming more expensive, and that’s contributing to uncertainty.”
Data centers and healthcare offer opportunity
Data center construction continues to provide some support in the region, though Garcia Luna cautioned against overreliance on the sector.
“There are only a handful of active data center projects in the district,” he said. “The concern we hear is that these projects are absorbing skilled labor, particularly electricians and pipefitters, which can create shortages for other types of nonresidential work.”
Beyond data centers, healthcare construction emerged as one of the most consistent sources of opportunity in the nonresidential sector, with steady permitting activity and hospital investment across parts of Minnesota and the Dakotas.
“Healthcare is where we’re seeing sustained project flow,” he said. “Outside of data centers and healthcare, it’s harder to identify other segments generating that same level of consistent work.”
Outlook remains cautious
Even with a reported slowdown, the demand for labor has continued climbing.
“Replacing retiring workers is a challenge,” Garcia Luna said. “In many cases, the skills needed just aren’t easy to find.”
Looking ahead to 2026, contractors’ outlook remains cautious. While expectations vary by sector, uncertainty continues to shape decision-making.
“We’re hearing many of the same concerns we heard earlier in the year,” Garcia Luna said. “That persistence matters. It suggests uncertainty isn’t going away quickly, and firms are planning accordingly.”
