Perc Pineda, PhD
Chief Economist
The latest revision of third-quarter U.S. Gross Domestic Product (GDP) reaffirmed the resilience of the economy, with output expanding at a robust 4.4% annualized rate. Attention now turns to February 20, 2026, when the advance estimate for fourth-quarter GDP will be released. Growth in the fourth quarter is widely expected to have slowed relative to the second and third quarters, reflecting a gradual cooling rather than a reversal in economic momentum.
Beneath the headline GDP numbers, a familiar pattern has persisted. Household demand remains strong, with personal consumption expenditures rising 2.5% in the second quarter and 3.5% in the third quarter. Business fixed investment also posted solid gains, increasing 7.3% and 3.2%, respectively. These components continue to anchor overall economic growth.
In contrast, investment in structures—both nonresidential and residential—has been a persistent laggard. Nonresidential structures, including commercial buildings, industrial and manufacturing facilities, institutional projects, and data centers, have contracted for seven consecutive quarters. Residential investment has fared marginally better, posting positive growth in just two of the past seven quarters, with notable pullbacks in several quarters this year. It is unlikely that either category returned to growth in the fourth quarter, making the 2026 outlook critical for sectors tied to building and construction.
Why this matters for plastics manufacturers
Building and construction is a key end market for plastics. According to PLASTICS’ 2025 Size and Impact of the U.S. Plastics Industry report, plastic products account for 2.3 cents of every dollar of final demand in single-family residential structures. In 2024, plastics content embedded in single-family residential construction was estimated at $10.1 billion, with an additional $9.4 billion tied to other residential structures. Plastics content in commercial structures—including farm buildings—added another $6.9 billion.
Given this exposure, the central question for plastics manufacturers is straightforward: How will the building and construction market perform in 2026?
Five considerations stand out.
1. Different drumbeats: residential vs. commercial construction
Residential and commercial construction respond to different demand signals. From the household side, residential construction is governed largely by affordability—whether households can buy or rent at prevailing prices, incomes, and borrowing costs. Home sales tend to rise when affordability improves and softens when it deteriorates.
Commercial construction, by contrast, is driven by financial feasibility. Capitalization rates, expected cash flows, and financing conditions determine whether projects move forward. In other words, demand depends less on sentiment and more on whether returns justify investment. These differing “drumbeats” help explain why residential and nonresidential construction often diverge over the business cycle.
2. For plastics, home sales are not the main signal
For plastics manufacturers, neither existing nor new home sales are the primary metrics to track. Plastics sit upstream and midstream in the construction value chain, used as intermediate inputs in products such as pipes, fittings, siding, insulation, flooring, and profiles.
As a result, plastics demand in construction is better monitored through construction-related manufacturing activity, particularly the Industrial Production Index for construction supplies manufacturing. Since the end of the COVID-19 recession in April 2020, construction supplies manufacturing rose sharply, underscoring the strong linkage between physical construction activity and plastics demand—even as housing market indicators weakened.
3. What the data say: construction activity drives plastics output
A simple regression model using monthly changes in plastics production from January 2000 to October 2025 shows that construction supplies production is the dominant driver, with housing starts contributing positively and new home sales playing a smaller, later-cycle role. A one-point increase in the Industrial Production Index for construction supplies manufacturing is associated with roughly a 0.6-point increase in plastics production, highlighting a strong short-run linkage between construction-related manufacturing and plastics output. Industrial production indices for construction supplies manufacturing and plastic products manufacturing have a 0.90 correlation, further emphasizing the close connection between these sectors. Total construction spending also matters, though primarily as a broad macro signal rather than a direct volume driver. Together, these factors explain about half of the variation in monthly changes in plastics production, a solid result for a short-run model.
The implication is clear: plastics production follows construction activity, not housing sentiment.
4. Borrowing costs still matter—especially for residential construction
The housing market’s weakness over the past several years can be traced in large part to higher interest rates. The average 30-year fixed mortgage rate climbed from 2.67% at the end of 2020 to a peak above 7% in late 2022, sharply reducing affordability and slowing residential investment.
More recently, financial conditions have begun to ease. With the Federal Reserve shifting from tightening to easing and markets repricing long-term rates in anticipation, mortgage rates have declined to about 6.1% in January, down from over 7% a year earlier. Lower borrowing costs tend to support housing demand, but the transmission is gradual and sensitive to labor market conditions and price dynamics.
5. Labor and prices shape the path forward
Labor availability and costs continue to shape both residential and commercial construction. Tight labor markets can limit supply even as demand improves, while input price dynamics influence project feasibility and timing. As of November 2025, the Producer Price Index for Building Material and Supplies Dealers was down 0.09% year over year, a smaller decline than the 1.9% and 1.5% decreases recorded in September and October, respectively.
On the demand side, a strong labor market—marked by solid job growth and low unemployment—tends to support housing demand. The unemployment rate edged up to 4.5% in November before easing to 4.4% in December, while nonfarm job openings declined to 7.1 million in November, down from 8.0 million a year earlier. Together, these forces will be critical in determining whether construction activity—and plastics demand more broadly—regain momentum in 2026.
The bottom line for plastics manufacturers
Despite strong headline GDP growth, construction remains the soft spot in the U.S. economy. For plastics manufacturers, the signal to watch is not home sales, but construction-related manufacturing activity. Housing starts matter more than sales, and construction supplies manufacturing matters most of all.
In 2026, the trajectory of borrowing costs, labor market conditions, and investment in structures will determine whether building and construction shift from a drag to a tailwind for plastics demand.
