In June, US construction spending decreased by 0.4% month-on-month, reaching an annual rate of $2.14 trillion. This represents a year-on-year decline of 2.9%. Spending for the first half of 2025 is 2.2% less compared to the same period in 2024.
Private construction saw a 0.5% month-on-month drop, settling at $1.62 trillion. Residential construction declined by 0.7% to $883.1 billion, while nonresidential construction fell by 0.3% to $738.8 billion.
Public Construction Spending
In contrast, public construction spending inched up by 0.1% from May, totalling $514.3 billion. The sectors of education and highway construction experienced modest increases, with spending up by 0.4% to $112.7 billion and 0.6% to $144.1 billion, respectively.
Overall, the construction industry experienced a weakening in June, mainly due to declines in the private residential and nonresidential sectors. However, public construction showed slight improvements, with education and highway projects being the areas of growth.
The construction spending report for June 2025 shows a clear slowdown, missing expectations and pointing to weakness in the private sector. This data reinforces the view that the economy is cooling more than anticipated. For derivative traders, this suggests the Federal Reserve may have less room to maintain a hawkish stance on interest rates.
Market Adjustments and Economic Outlook
We are seeing markets adjust to this reality, with CME FedWatch tool probabilities shifting. For instance, following the weak jobs report from early July 2025 and this construction data, the odds of a rate cut by December 2025 have now increased to over 50%. This weak data, combined with a core PCE price index that we saw was still at 2.8% in the latest reading, creates a complex picture for the Fed.
The sharp 0.7% drop in private residential spending is particularly concerning for the housing sector. With 30-year fixed mortgage rates averaging around 6.5% in July 2025, affordability continues to pressure homebuilders. We anticipate that put options on homebuilder ETFs like ITB and XHB could be an effective strategy to hedge against or speculate on further declines in the coming weeks.
This weakness extends to the suppliers of construction materials and industrial equipment. Companies that provide lumber, cement, and heavy machinery will likely face headwinds, which may not be fully priced into their stocks yet. Looking back to the slowdown of 2022, we recall that industrial stocks were among the first to react to signs of falling demand.
Given the conflicting signals of slowing growth and persistent, though moderating, inflation, we expect market volatility to increase. The CBOE Volatility Index (VIX), which has been relatively subdued, could see upward pressure as uncertainty grows. Buying call options on the VIX or VIX-related futures could provide a useful hedge against broader market turbulence.
