2026 Will Tell the Tale

The economics of heavy highway construction continue to grow more complex and become more uncertain. While public funding authorized by 2021’s Infrastructure Investment & Jobs Act (IIJA) continues to flow through the veins of the economy, that money has begun to run out. The IIJA’s authorization ends September 30, 2026. Moreover, with tariffs impacting key inputs like steel and aluminum, driving up the cost of construction, and with many state and local governments facing fiscal shortfalls, the outlook for heavy highway financing becomes murkier by the day.

Make no mistake, the last several years have been good ones for contractors. The principal complaint has not centered around deal flow, but around a combination of worker shortages and supply chain mishaps. True, it took quite some time before IIJA monies entered the commercial bloodstream, but once it did, contractors found themselves very busy. The IIJA is in the process of pumping $350 billion in federal highway funds into the economy through 2026. 

It is, of course, conceivable that the Trump 2.0 administration will see fit to authorize another large-scale infrastructure package, but perhaps not. The administration cut taxes in 2025, and while many business operators are delighted by various provisions of the One Big Beautiful Bill, the nonpartisan Congressional Budget Office indicates that the tax reform will add $3.4 trillion to the national debt over 10 years, $4.1 trillion if one adds in interest. With many in Congress alarmed by a national debt that surged over $38 trillion as of October 2025, another massive infrastructure package may be too much for which to hope.

The administration has also indicated that philosophically state and local governments should step up and take on more of the responsibility for infrastructure financing, but unlike the federal government, those governments have to balance their operating budgets each year. Those operating budgets incorporate debt service. Accordingly, it is only the federal government that can borrow on a massive scale to fund infrastructure. Many state and local governments are already facing revenue shortfalls.

For instance, according to the Pew Charitable Trusts, at least 20 of the nation’s 25 largest cities face fiscal budget gaps in 2026 and perhaps beyond. The State of Maryland just suffered its first debt rating downgrade in 52 years. In short, state and local governments may not collectively be ready to step up to the plate, particularly in the context of a softening economy.

Such dynamics have captured the attention of the analytical community. For instance, according to Deloitte, a multinational consulting and professional services firm, the construction industry faces “moderate growth” ahead, a sharp downshift from years of brisk expansion. Indeed, overall nonresidential construction spending has been in decline since early 2024.

The Big Three Major Challenges

Tariffs

At a time when public dollars are poised to become scarcer, tariffs have increased the cost of materials and therefore construction service delivery. Steel and aluminum tariffs doubled to 50% in June 2025, adding an estimated $50 billion in tariff costs to construction’s supply chain. Domestic steel producers raised prices in response to diminished competition from foreign producers, leaving many fixed-price contracts to absorb additional costs in the form of shrunken margins.

Worker Availability

Simultaneously, labor availability deteriorated alongside rising construction materials costs. Associated General Contractors reports that 92% of firms have struggled to fill open positions, with 45% experiencing project delays directly attributable to workforce shortages. Immigration enforcement affected 28% of respondents. Five percent faced on-site visits from immigration agents, while 20% witnessed subcontractors losing workers as immigration enforcement ramped up.

For better or for worse, the construction industry has been among the segments to most aggressively utilize the services of undocumented workers. The impact of intensifying immigration enforcement varies geographically. For example, 75% of Georgia contractors reported enforcement effects compared to just 8% in Idaho.

Cost Escalation

For some projects, cost escalation became the breaking point as pro formas no longer pencil out. Construction Dive reports that 43% of contractors experienced at least one project cancellation, postponement, or scope reduction due to higher costs during the six months ending August 2025.

On a year-ago basis, iron and steel prices recently registered a 9.2% increase, while copper wire and cable, critical for public construction along with data centers, surged 13.8%. Jeffrey Shoaf, CEO of the Associated General Contractors of America, summarized circumstances by indicating that, “There is a limit to how many price increases the market can absorb before owners put projects on hold.” Correct.

The impact of the Big Three can be readily observed in employment and spending data. Based on the Job Openings and Labor Turnover Survey, construction industry job openings plummeted to a near decade low. This has much to do with declining construction spending, including in a variety of residential and commercial segments.

While publicly financed construction continues to expand on a year-over-year basis, it is conceivable that even this momentum will soften in 2026 as state and local governments embrace more cautious fiscal approaches.

2026

Oxford Economics projects nonresidential construction will grow just 0.6% after contracting 6.2% in 2025, with tariffs continuing to stymie activity. S&P Global, a financial intelligence and analytics firm, identifies uncertainty as the primary constraint on construction spending.

Much of this uncertainty emerges from Washington, D.C. Fluctuating tariff policy on steel, aluminum and other construction inputs has caused contractors to freeze investment decisions, with several multibillion-dollar projects already announcing postponements or cancellations. 

The good news is that much has been accomplished in America in recent years. Data from the American Road & Transportation Builders Association (ARTBA) indicate that states have put IIJA funds to work, including in the form of 90,000 road improvements and 19,000 bridge upgrades.

Some states remain on the front foot, including Texas, the nation’s second largest state economy with gross state product approaching $3 trillion per annum. The Texas Department of Transportation announced more than $146 billion in highway spending through 2035, with major projects like the I-35 Capital Express North ($606 million, completion 2029) and the I-35 Northeast Expansion ($3.2 billion, multiple phases through 2029) advancing in the Austin and San Antonio corridors. 

Looking Ahead

In the final analysis, it comes down to decision-making in Washington, D.C. Trade deals continue to be negotiated, whether with China, South Korea, or many others. That opens the door to possible tariff relief, though one wonders if tariffs are likely to decline dramatically from current levels given the substantial revenues they are presently generating for federal coffers.

Immigration policy does not appear to be shifting, however, though that could change with the stroke of a pen or a single comment on Truth Social. It is conceivable that the pleas of agriculture, food processing, construction, manufacturing, hospitality, childcare, landscaping, etc. will be heard, and that policymakers in Washington, D.C. will find ways to keep more people with documentary challenges in the country and at work. But unless that happens, many employers will find it difficult to staff up fully even as the economy continues to downshift.

The biggest question mark for 2026 is reauthorization of infrastructure funding. With midterm elections on the way and the economy having weakened, it is conceivable that policymakers will see fit to once again supply large-scale public funding for roads, bridges, mass transit, water, sewer, and other systems to satisfy the desires and demands of constituents. Conversely, the federal government may simply leave it to states and municipalities, many of which are presently struggling simply to balance their respective budgets.