Lower Gains and Soft Losses: A US Macroeconomic Update

Real GDP fell at an annualized rate of 0.3% in Q1 2025, reflecting increased economic uncertainty. Although the labor market experienced slight growth, this was outweighed by rising unemployment, which stemmed from job cuts in specific private sectors aimed at reducing costs and federal workforce reductions intended to curb government spending. The construction sector showed mixed performance: there was growth in large multi-family housing projects, but single-family, commercial and manufacturing construction declined. Investors moved away from riskier US assets, favoring gold and foreign investments in financial markets. Rising imports weakened economic growth, as companies stockpiled supplies ahead of new tariffs, alongside reduced government spending. Consumer spending remained sluggish because of persistent inflation, concerns about tariffs and saturated demand for durable goods, all of which limited gains. These conditions resulted in broadly modest or negative growth across most economic sectors.

Labor market

• The labor market expanded, adding 398,000 jobs, a modest climb of 0.3% from Q4 2024. While higher spending and rising demand for essential workers contributed to this growth, the gains were slightly lower than those of the previous quarter. Mounting economic pressures influenced employers’ decisions, causing them to hesitate to boost job growth or prompting them to limit headcount, which slowed job gains during this period.
• The education and health services sectors led to job creation. Growth in the aging population and rising healthcare demands expanded the workforce in nursing, allied health and mental health specialties. Also, steady enrollment at vocational schools contributed to hiring in these institutions as they sought to accommodate staffing needs.
• Despite total job growth, unemployment also rose. By March 2025, the unemployment rate increased to 4.2%, up from 4.0% in January and higher than the 3.9% rate a year earlier in March 2024. Several factors led to this uptick: tech-heavy industries, especially Information, experienced the most layoffs as companies cut costs. Also, ongoing government job cuts, driven by the Trump administration's actions, especially in the federal workforce, pushed unemployment higher.
• Average hourly wages reached $36.00 in March 2025, with real wages up by 1.4% versus the previous year. This wage growth comes as unions impact the labor market and states like California and Michigan have instituted minimum wage increases. Employers also raised pay to attract and retain talent and address labor shortages, particularly for in-demand skilled positions that command higher compensation.

Consumer spending

• Consumer spending rose 1.3% from Q4 2024 to Q1 2025, supporting modest quarterly growth as households became more selective, focusing on essentials and recreation. However, overall spending growth slowed compared to the previous quarter, as higher prices and increasing economic uncertainty prompted consumers to prioritize specific categories within their budgets rather than boosting spending across the board.
• The nondurable goods segment notably rose by 1.4%, driven mostly by elevated spending on gasoline and other fuels, reflecting more frequent travel. This trend was furthered by companies enforcing in-person or hybrid job arrangements, requiring many more employees to commute by driving.
• Durable goods struggled this quarter, declining 0.6%. Motor vehicles, related parts and other durable goods showed particular weakness. This was largely because of robust sales in Q4 2024, which left demand saturated entering this quarter. Also, high prices discouraged strong market demand when consumers were cautious about spending.
• Service spending rose 1.6% for the quarter, led by sizeable gains in recreational services, financial services and insurance. Live tours by top musicians and major sporting events—especially football and college athletics—drove hefty recreation and ticket sale hikes. Meanwhile, the country's aging population boosted spending on healthcare insurance and 401(k) service fees. At the same time, robust home purchases and hefty reliance on automobiles raised spending on home and auto insurance plans.

Inflation

• Inflation has remained a prominent issue. Average prices ticked up 1.0% from Q4 2024 to Q1 2025, lifting the March 2025 year-over-year (YOY) Consumer Price Index (CPI) to 2.4%. This figure, remaining above the Federal Reserve's 2.0% target, kept policymakers from reducing interest rates, even with steady job growth and resilient consumer spending.
• Energy prices rose sharply. Fuel oil and energy goods jumped 6.3% quarterly because of OPEC+ oil output cuts and domestic refining problems in the US, as maintenance and production challenges held back supplies and pushed prices higher.
• Prices in the hospitality sector also climbed as lodging rates surged 4.3% and coffee prices rose 3.8% quarter-over-quarter. Hotel price inflation stemmed from the strong demand for domestic leisure travel in Q1, which was bolstered by local live and conference events, mitigating the impact of declining international tourism. Coffee prices reflected tighter global supply because extreme weather battered Brazil's crops, feeding into US import prices.
• In contrast, airline fares and public transportation costs fell by 2.2% and 2.1%, respectively. The drop in airfare followed a dip in demand as international travelers pulled back over rising US geopolitical tensions. Public transit became more affordable as fare discounts and programs, especially for states like Minnesota which cut fares as part of their Transit Assistance Program and with expanded access to New York's "Fair Fares" program, made transportation less costly, particularly for low-income individuals.

Residential construction

• In the first quarter of 2025, residential construction grew 1.2% from the previous quarter, mainly because of a 1.9% climb in starts for large multi-family units with five or more units. Developers focus on these bigger projects because they offer better returns and address strong demand amid limited housing supply. This shift helped stabilize the market even as smaller multi-family projects declined, especially in March. Conversely, single-family home construction saw only a modest 0.2% increase in starts, but experienced a sharp drop in March as high costs pushed more buyers toward larger multi-family options. This shift in market attitudes is leading developers to prioritize larger multi-family developments over single-family homes.
• The market found stability thanks to a 7.4% gain in new home sales from February to March, reflecting persistent demand from buyers, particularly as steady interest rates made mortgages more manageable. This robust demand for new constructions, which were built in large numbers, helped regulate price growth. Because of this, the average price of newly constructed homes fell slightly to $503,800 in Q1, compared to $510,900 in the previous quarter, offering the market some relief and signaling a healthy recovery without a dip in sales volume.
• Conversely, the existing home market showed more volatility. After a 4.4% increase in existing home sales from January to February, sales declined by 5.9% in March. The median sales price of existing homes approached a record $403,700, driven higher by the ongoing shortage of listings. These climbing prices and limited options pushed many buyers to seek alternatives, such as new builds in desirable neighborhoods or multi-family properties, increasing the appeal of newly constructed homes over the older housing stock.

Nonresidential construction

• Nonresidential construction spending registered a modest 0.3% increase in Q1 2025 versus Q4 2024, reflecting cautious optimism in the sector. Healthcare construction was robust: private expenditures in specialized care, such as nursing homes, increased 11.6% quarter over quarter, driven by the needs of the aging population, illustrating ongoing resilience where other categories remain hesitant.
• Conversely, the momentum in manufacturing construction cooled, with spending down 0.8% over the previous quarter. Ongoing uncertainty—stemming from new tariffs and delays related to CHIPS and Science Act disbursements under the Trump administration, plus project budget challenges—pushed the start of many anticipated semiconductor manufacturing projects to a later date, leading to industry delays and reevaluation.
• Commercial construction struggled, with investment dipping 0.6%. Warehouse construction, which had previously boomed, fell because of shifts in both retail and e-commerce. Retailers reevaluated store footprints amid consumer hesitation to return to physical shopping. Although e-commerce spurred initial warehouse needs, the saturation of warehouse space, rising store closures and increased import tariffs diminished grander expansion. The earlier wave of intensive warehouse buildout means there is currently ample capacity, reducing current demand.
• In contrast, data center construction solidly outperformed, growing 5.5% for the quarter. Strong public support from the Trump administration fostered regulatory stability and investor confidence in these projects. The rapid expansion in business applications like cloud computing, enterprise software and artificial intelligence drove continuing demand, prompting ongoing development in this bright sector despite uneven conditions elsewhere.

Financial markets

• During the quarter, the Federal Reserve kept interest rates unchanged in the 4.25%-4.50% range during both its January and March meetings. While the Fed acknowledged that new tariffs could pose risks to the economy, Chairman Jerome Powell noted these tariffs would likely only create a short-term, one-time boost to prices rather than sustained long-term inflation. Powell stressed the importance of closely evaluating incoming economic data before making significant moves on interest rates. This eased concerns about a possible rate hike and signaled that an immediate rate cut was unlikely.
• The S&P 500 recorded a 4.6% quarterly loss, marking its weakest performance since 2022. The announced tariffs heightened economic uncertainty, making US equities appear riskier and holding back growth for top-performing stocks. This was reflected more sharply in the NASDAQ's 10.4% loss, driven by fears about declining consumer spending on goods and concerns over competition from Chinese AI models like DeepSeek. These uncertainties particularly impacted the market outlook for major US tech companies heavily invested in AI.
• US equities broadly performed poorly, suffering their worst quarter since 2022 as investors sought shelter in safer-haven assets like gold in response to political and economic uncertainty over tariffs and trade policy. This flight to safety sent gold rallying 19.0% in the quarter. Meanwhile, EU equities and emerging market stocks fared well as investors perceived them as attractive alternatives for global investment growth opportunities. In contrast, valuations in US large-cap, small-cap and Bitcoin fell sharply as uncertainty made riskier investments, such as cryptocurrencies, less appealing. Both businesses and consumers remained hesitant about spending and investing amid heightened trade and economic risks.

Risk ratings

• Inflation and supply chain issues were consistently prominent in 2022. As such, 29.4% of industries were rated as medium-high or under greater risk as the world began to respond to such pressures on the economy.
• Since inflation remained an issue, interest rates scaled up in 2023. This led to nearly 45.6% of industries being rated as medium-high or even higher during the year, as markets struggled to respond to such factors.
• In 2024, inflation and interest rates contracted, with the latter starting to drop back in September. This reduction slightly lowered costs for businesses and consumers. But despite these cuts, YOY price growth was at 2.9%, slightly above the Federal Reserve's target rate of 2.0%, moderating these rate cuts. This enabled only a modest dip to 38.4% of industries classified as having a medium-high or higher risk throughout the year.
• Beginning in 2025, tariffs will pressure the economy, leading to higher prices and slower export growth as other countries respond with retaliatory tariffs or boycotts of US products. Although new trade deals are being negotiated, it’s uncertain how quickly they will be finalized, which means tariffs are likely to remain in place for most of the year. This situation will create an unfavorable environment for investment and productivity, as companies must manage increased costs and weaker trade demand. Because of this, 39.6% of industries will remain at medium-high or higher risk levels throughout the year.

Sector rankings

• Agriculture, Forestry, Fishing, and Hunting: Volatile weather like storms, droughts and wildfires will continue to weigh heavily on this sector, especially in key farming regions like California and Florida. Ongoing bird flu outbreaks are another challenge, limiting relief efforts despite nearly $1.0 billion in government investment to control the disease. The result is stressed poultry markets that must carefully navigate disruptions. Furthermore, the imposition of tariffs has disrupted trade relationships. For instance, countries like Canada are protesting these tariffs by boycotting American agricultural products in favor of domestically or otherwise sourced goods. Until trade tensions ease, these pressures will hamper US agriculture providers. Industries such as Orange and Citrus Groves and Chicken Egg Production will face challenging conditions.
• Manufacturing: Tariffs remain a significant impediment in this sector, especially for manufacturers aiming to boost exports. Inputs such as plastics and rubber now cost more, hiking expenses for factories producing goods like shoes and automobiles, which leads to higher prices for consumers and hurts the competitiveness of US products and companies when facing imports. In retaliation, trading partners like China imposed major tariffs on American-made goods, but recent negotiations have resulted in some backtracking and relaxed tariffs. The sector will see some relief if these discussions end in a new agreement. On another note, automation continues to reshape manufacturing. Workplace automation helps address labor shortages and raises productivity, allowing factories to offset rising costs. The net result is a mixed environment for key subsectors such as Automobile Engine and Parts Manufacturing and Shoe and Footwear Manufacturing. They face cost pressures now, but will eventually benefit from automation-driven workplace improvements.
• Information: The adoption of digital work platforms is boosting demand for industry software as companies seek simple, AI-driven tools for daily operations. Platforms with features like real-time analytics and AI-powered chatbots for customer service are particularly well-positioned for growth. The rising demand for streaming content will further fuel the sector, especially as major providers win licensing rights for sought-after events. For example, Amazon will begin streaming NBA games in the fall of 2025 and Disney+ will add more sports content through its ESPN brand. These developments will significantly bolster sectors like Business Analytics and Enterprise Software Publishing, as well as Media Streaming, Social Networks and Other Content Providers.