Construction’s Economic Outlook Is Increasingly Cloudy

Why It Matters

The data‑center boom masks underlying weakness in core construction markets, signaling a fragile recovery that could stall if AI spending eases or cost inflation persists.

Key Takeaways

• Data‑center projects drive most of construction backlog growth
• Backlog for data‑center contractors is about four months longer
• Construction input prices rose 12.6% annualized, near 2022 peak
• Non‑data‑center sectors see muted starts and slower hiring
• AI infrastructure spending projected up to $725 billion this year

Pulse Analysis

The construction industry’s headline numbers for the first quarter of 2026 look upbeat, but a deeper dive reveals that the surge is narrowly concentrated in data‑center builds. Hyperscalers are pouring roughly $700 billion into AI‑related infrastructure, fueling a wave of new facilities that inflate overall backlog and start metrics. While these projects boost aggregate figures, they also create a bifurcated market where firms with data‑center contracts enjoy a healthier pipeline, whereas traditional commercial builders face stagnant demand.

Cost pressures compound the divide. Input prices—materials, labor, and transportation—have risen at a 12.6% annualized pace, approaching the peaks seen in mid‑2022. Data‑center contractors can mitigate these hikes by leveraging longer‑term contracts and higher backlogs, effectively smoothing out price volatility. In contrast, firms focused on office, retail, or multifamily projects lack such cushions, leaving them exposed to rising expenses and tighter margins. This cost environment is unlikely to ease soon, as raw material shortages and logistics bottlenecks persist.

Looking ahead, the sector’s broader health remains uncertain. Outside the AI‑driven niche, construction starts have cooled across office, retail, and logistics properties, with total square footage under construction retreating to 2016 levels. Trade policy uncertainties and regional demand imbalances further dampen optimism. Analysts expect 2026 to bring a stabilization phase, but the data‑center boom is not infinite; once AI spending plateaus, the industry could face a sharper correction unless diversification and cost‑management strategies take hold.