Although inflation eased somewhat this quarter, U.S. economic growth lost momentum in the first quarter, largely due to rising uncertainty around fiscal policy. New tariffs and growing trade tensions added to the unpredictability, creating headwinds for businesses. At the same time, short-term inflation expectations have ticked up. Despite these challenges, the labor market remained solid, leading the Federal Reserve to hold interest rates steady at 4.25%–4.50%.
Fiscal Developments:
Following a reset of the debt limit to $36.1 trillion, the U.S. Treasury began using extraordinary measures to stay under the cap, with the Congressional Budget Office projecting a potential default risk between August and September. Consequently, the Treasury reduced bill issuance by $212 billion. Despite these fiscal pressures, interest rate expectations remain stable, credit conditions are supportive, and liquidity is ample.
Trade and Tariffs:
The reintroduction of tariffs is accelerating the shift toward economic nationalism, disrupting global supply chains and causing price adjustments. While some domestic manufacturers may benefit, most firms with complex international operations face significant transition challenges. Consumers, meanwhile, are likely to bear the cost of higher prices. This evolving trade environment creates winners and losers, and increased market volatility is likely.
Sectoral Impacts:
Retail and Consumer Spending: U.S. retail sales are at record highs, supported by rising incomes and a strong labor market. However, overall spending growth is being restrained by inflation, high interest rates, and weak stock performance.
Construction: Nonresidential Construction growth is slowing due to high financing costs and waning government support. Single-family housing starts are plateauing with a downward bias, while multi-unit starts are modestly rising.
Manufacturing: Output is slightly above last year’s levels, with further gains expected based on leading indicators. Despite the cost of tariffs, high corporate cash reserves position the sector well.
Outlook and Recommendations:
The macroeconomic forecast calls for modest industrial growth, persistent inflation, and elevated interest rates. Businesses should strengthen their supply chains by examining upstream vulnerabilities and create pricing and labor strategies to navigate ongoing uncertainty.
Here is a summary of the economic metrics we follow:
Retail Sales Market:
U.S. Total Retail Sales rose 2.9% year-over-year through March, with a continued mild rise expected into 2026, driven by rising real incomes. However, inflation is prompting consumers to substitute lower-cost items, and volume growth is likely to remain weak. Ongoing tariff uncertainty may cause near-term volatility, as part of the increased costs will likely be passed on to consumers. This could dampen discretionary spending, especially among lower- and middle-income households. However, Leading indicators point to continued growth, though sentiment remains low and is not a reliable predictor. A stock market downturn could risk further slowing high-income consumer spending.
Growth is increasingly concentrated among higher-net-worth individuals, while lower-income groups face challenges from elevated prices and housing costs. Retailers should tailor strategies based on the economic health and preferences of their specific customer base. Additionally, Consumers are shifting toward online shopping, with non-store sales (up 6.7%) outpacing in-store sales (up 2.0%). Over 17% of total U.S. retail sales now come from non-store channels.
In summary, the outlook for U.S. Retail Sales is cautiously positive, with modest growth (around 2 to 3%) expected through 2025 and into early 2026. The pace of growth will be slow and uneven due to fiscal policy.
Construction:
As noted last quarter, the U.S. construction industry continues to show both strength and strain across different segments. While it's currently facing some mild recession-like pressures, we expect a modest pickup in activity later in 2025, with stronger growth likely in 2026 and 2027. In the near term, however, progress may stall or dip slightly, mainly due to affordability issues—mortgage rates are hovering around 6.7%—and ongoing labor shortages. That said, the longer-term outlook remains optimistic, especially as we move into the second half of 2025 and beyond.
Sector-Specific Insights:
Residential Construction: In March 2025, Total U.S. Construction spending was up 3% from year ago levels while private construction grew by 2% YOY. Single-family starts were down 0.2% and multifamily starts were down 14%.
Nonresidential Construction: The overall trend is slowing growth, peaking in early 2025. Growth created by the CHIPS Act and reshoring is waning and will negatively impact this sector. On the positive side, hospital construction should show a steady rise through 2027, driven by an aging population and strong revenue growth. Office construction should rise through 2025 with return-to-work mandates becoming more prevalent. And finally, Retail & Warehouse construction should see strength in 2025 due to moderate rising retail activity and an increasing shift to e-commerce.
Outlook
Material costs are in flux this quarter due to the potential impacts of tariffs. Until the tariff situation is resolved, we anticipate volatility in price trends through 2025. The industry continues to face skilled labor shortages, leading to increased wages. Potential deportations of undocumented workers could accelerate and increase wages while posing a risk to productivity in the short-term. This trend is expected to persist, especially in regions benefiting from heightened public infrastructure investments.
In summary, while the U.S. Construction industry once again demonstrated stability in Q1 2025, it navigated a complex landscape of sector-specific performances, cost fluctuations, and labor challenges. The outlook remains cautiously optimistic, with expectations of continued long-term growth tempered by ongoing economic uncertainties.
Manufacturing:
In Q1 2025, the U.S. manufacturing sector experienced a mix of positive and negative trends. While productivity increased, concerns about trade uncertainties, raw material costs and global demand were also rising. It has now contracted for the second straight month in April, following a brief two-month expansion. While the overall economy continues to slowly expand, manufacturing is struggling.
Economic Indicators
Core Capital Goods Orders: Non-defense capital goods orders, excluding aircraft, rose by 0.7% in November following a 0.1% decline in October. This increase, driven by strong machinery demand, signals a potential rebound in business investment.
Purchasing Managers' Index (PMI): The Institute for Supply Management’s PMI improved to 48.4 in November from 46.5 in October, indicating a slower pace of contraction. Although still below the expansion threshold of 50, this upward movement suggests potential stabilization in manufacturing activity.
Key Challenges
Tariffs: Disruptive to heavy import sectors, increasing prices and risking lower volumes. The trend to onshoring and focusing on domestically sourced sectors like food, petroleum, and paper face less impact and should help stabilize the industry.
Demand Weakness, production cuts and staff reductions: Tariffs are the dominant issue causing uncertainty, rising costs, delays and supply chain strain. Many firms are postponing orders or passing on costs to the customers.
Employment Conditions: While employment levels showed signs of stabilization, they remained below expansionary levels. Workforce attraction and retention continued to be a major concern, with 55.8% of manufacturers citing labor shortages as a key issue.
Outlook
While we reported the U.S. manufacturing was showing resilience in the face of changing times, it is slipping deeper into contraction, with weak demand, falling production, and widespread tariff-related disruptions. Despite some growth in key industries, the broader outlook is uncertain and fragile. Continued tariff fallout issues and policy uncertainty will continue to dominate the industry.
Services:
In the first quarter of 2025, the U.S. services sector experienced moderate growth, continuing its expansion for the eighth consecutive month in February. The Services PMI® rose to 53.5% in February from 52.8% in January, indicating sustained, albeit modest, growth in the sector.
Looking ahead, services sector executives anticipate a 3.9% increase in revenues for 2025 compared to 2024. Industries such as Professional, Scientific & Technical Services; Accommodation & Food Services; and Construction Services are among those expecting the most significant growth.
Forward-Looking Considerations
Market Adaptation: Companies increasingly focused on operational efficiencies, automation, and strategic pricing adjustments to mitigate cost burdens.
Economic Conditions: While demand remained stable, businesses monitored evolving monetary policy and consumer confidence levels, which could shape spending behavior into 2025.
Outlook
Overall, the U.S. services sector demonstrated resilience in early 2025, with steady growth and positive expectations for the remainder of the year, despite ongoing challenges related to pricing and supply chain dynamics.
Specific Items to Consider at the Macro Level are:
Retail Sales:
Do market research to understand the price sensitivity of your customers and adjust your product mix and marketing messaging accordingly.
Avoid making fear-based decisions.
Evaluate your supply chain to help ensure your business can capitalize on upcoming market growth.
Construction:
Try to build redundancies into your supply chain. Prepare for the possibility of longer lead times and U.S. steel mills.
Labor constraints may be especially acute in this industry. Ensure you have cross-trained key workers to mitigate any potential disruptions to your labor force.
Identify and focus on markets that may benefit from onshoring initiatives or government spending.
Manufacturing:
The market is volatile. Do not overreact to short-term swings in spending when the long-term trend could potentially rise.
Investing in efficiencies for your business will both prepare you for the eventual production rise in the latter half of this year and allow you to maintain margins in the case of adverse tariff impacts.
Boost your competitive advantages and capture some of the upcoming growth.
Given the potential for price volatility in response to tariffs, ensure your contracts include appropriate price escalators.
Services:
Take advantage of downtime to develop training programs that can increase efficiencies ahead of the more pronounced macroeconomic growth expected in the second half of 2025.
Keep up with market research to understand the needs and preferences of the demographics you serve.