Okay At The Half
July 3, 2025 -- Half of the year has already passed, and it certainly hasn't been without its drama. The economy sputtered a little in the first quarter, as the measure of GDP was profoundly affected by a surge of imports in attempts to front-run higher costs from tariffs. Underlying growth, though appears to be cruising along at an unspectacular pace, and is likely running somewhere in the neighborhood of 2% in the second quarter, if we split the difference between the GDPNow estimate from the Federal Reserve Bank of Atlanta and the GDP Nowcast from the New York Fed.
Significant tariffs were announced in April, then largely "paused" in favor of a blanket approach as deals are hammered out with individual countries or blocs. That 90-day reprieve ends next week, and it's not clear what may come after. However, at least so far, the impact of widespread levies hasn't had much effect on inflation, with the Fed's preferred measure of prices (Core PCE inflation) only edging a tenth-percentage point higher for May, moving to a 2.7% annualized rate. While not a move in the right direction, it's the same rate as was seen in March, before increased levies were implemented.
Tremendous uncertainty upended financial markets, but this has faded, with some equity indexes reaching new highs. Consumer and business moods darkened appreciably, but have again brightened somewhat, moving up from recent bottoms. During the first half, hopes for a near-term cut in rates by the Fed diminished and longer-term yields were mostly rangebound. Thirty-year mortgage rates spent much of the first half of the year square in the middle of a 7.04% and 6.62% pair of bookends.
Concerns about rapidly-weakening labor conditions have so far proven to be unfounded. It is true that labor conditions have softened, but they certainly haven't done so in an alarming manner as yet. The latest group of data covering labor conditions in May and June was pretty fair, and at least for now, doesn't suggest the kind of conditions that might see the Fed make a move at its meeting later this month.
The Job Openings and Labor Turnover Survey (JOLTS) for May came in more solid than expected. The number of available positions rose to 7.769 million from 7.395 million in April and was a second consecutive monthly increase. That said, while there may be more available jobs, companies hired new employees at a slower clip in May, as there were only 5.503 million positions filled, down from 5,615 the month prior, but still the second highest figure since last September. Total separations edged lower, with the voluntary "quits" rate rising slightly, while the layoffs pace settled back somewhat.
Of course, that covered a period more than a month ago. What about more recent data? Well, the employment report for June was also fair enough, allaying concerns about a stall in job creation. Forecasts pegged new hires at perhaps 110,000 for the month, but a very soft number from payroll processor ADP prior to the government report put even this modest figure in doubt. Surprise! New hires came in at 147,000 for June, and there was a total of 16,000 hires added across May and April, too. The unemployment rate declined by a tenth of a percentage point, revisiting a 4.1% level after three months at 4.2%. The size of the labor force did contract for a second month, with another 130,000 folks dropping out, and this did drag the participation rate down to 62.3%, the lowest it has been since December 2022. Wage growth also eased last month, with a 0.2% gain leaving the annual increase at 3.7%, a level that is still generating "real" (after inflation) gains.
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That's not to say that the JOLTS or Employment Situation reports didn't have at least a concerning aspect or two. In the JOLTS data, the increase in new openings were concentrated in accommodations and food services and largely across the south, which could be an indication of the impact of more aggressive immigration enforcement. New hires tallied in the Employment Situation data were split nearly evenly between state and local government hires and private concerns, so while the totals are solid enough, the breadth of job creation and fulfillment is pretty narrow, and not especially indicative of a wholly-healthy job market.
While hiring seems to be happening in a modest fashion, the number of folks losing jobs due to layoffs has also moderated. The outplacement firm of Challenger, Gray and Christmas tallied 47,999 announced job cuts in June, just about half the number reported for May, and the lowest figure for this year so far. As well, we note that initial claims for unemployment assistance declined for a third consecutive week, landing at 233,000 in the week ending June 28. The was the fewest new applications for assistance since mid-May, and another step down from an early June peak of 250,000. That said, when folks do lose jobs, they are having somewhat more difficulty in locating new positions; continuing claims for assistance remained at 1.964 million in the latest week, still holding at a level last seen in mid-November 2021.
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Two wide-ranging looks at the broad economy come from the Institute for Supply Management each month, detailing activity in the manufacturing and service sectors. Both measures for June were essentially at a par level, with neither really improving nor declining much. The ISM manufacturing barometer edged 0.5-point higher for the month, rising to a value of 49.0 for June As a reading of 50 is the delimiter between expansion and contraction, this measure is still sub-par, but only modestly so. Components of the index don't lead one to expect to any immediate improvement, either, as the measure of new orders settled back by 1.3 points to just 46.4 last month. The employment gauge retreated by 1.8 points to 45.0 while the "prices paid" gauge of inflation edged up 0.3 points to 69.7, putting in a fourth consecutive month with an elevated 69+ reading.
The larger service side of the economy showed a modest overall gain for June, and a 0.9-point increase in the non-manufacturing business gauge lifted it to 50.8 for June, a value mirrored by an identical figure back in March, with April and May readings averaging out to a nearly identical value. In other words, a flat trend for months now. New orders for services did pick up, though, with this measure posting a 4.9-point increase to 51.3, returning to positive territory after a one-month dip. Retreating from positive territory into negative was the employment gauge, which dropped 3.5 points to 47.2 for the month. As with manufacturing input costs, prices paid by service businesses remained high, although slightly less so than in May, with a 1.2-point decline in this index to 67.5 for June.
Taken together, there's nothing especially positive to be seen here, but also nothing so negative as to set off alarms. It appears that economic activity has become tentative, waiting to see what develops with regard to tariffs, inflation and other policies before setting a course forward.
The nation's imbalance of trade looks to be returning to its typical position after some wild moves earlier this year, but trade flows are still distorted. Imports declined by $0.3 billion in May, easing to $350.5 billion in goods coming into the U.S., a level last seen last October. The large pre-tariff blowout in imports took place in the first three months of the year, and will likely keep the dollar value of imports at modest levels for a time yet. Exports also moderated in May, declining by $11.6 billion for the month, falling back to about where they were in February. With the fall off in exports, the gap between the value of imports and the value of exports came in at $71.5 billion, up from $60.3b in April but in the ballpark of gaps seen before the elections took place.
Also surging to avoid tariff-based price increases in March and April, auto sales have settled back down to a more muted trend. According to Bureau of Economic Analysis data, 15.34 million (annualized) vehicle sales took place in May, down slightly from April's 15.6 million pace (March and April were in the 17+ million range). The advanced demand of those months will likely continue to damp sales volumes for a time yet, and the auto industry faces considerable impacts from current and expected prices increases due to levies on steel, aluminum and the countries in which their suppliers are located. New vehicle costs seem likely to rise more as the year goes on, denting demand. That said, at least some offset to costs may be coming, as some auto-loan interest may again be tax deductible for many borrowers. The budget bill expected to be signed into law contains a provision for up to $10,000 in auto-loan interest to be deductible from income taxes.
For homeowners, the bill also includes a provision to make premiums paid for Private Mortgage Insurance tax deductible permanently, too, ending the on-again, off-again nature of this deduction that has vexed homeowners for years.
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Spending on new construction projects contracted for a seventh straight month, as May's overall figure was a 0.3% decline from April. Outlays for residential construction shrank by 0.5%, a fifth consecutive retreat and a contributor to why homebuilders have increasingly had the blues this year. Commercial development spending fared little better and sported a -0.4% decline for May, a third drop in a row. Public-works spending edged 0.1% higher for the month and has managed to see a gain in each of the last three months. Housing construction is usually the biggest driver for this series, and housing starts in May were down from earlier this year and also below year-ago levels.
Mortgage rates ease a little bit and more folks come out to apply for loans, a tidy cause-and-effect relationship. That was the case in the week ending June 27, as the Mortgage Bankers Association reported a 2.7% increase in requests for mortgage credit. While applications for funds to purchase homes rose by the barest possible amount (0.1%), those to refinance existing loans posted a 6.5% increase. With mortgage rates down a little bit further over the last week, there's a good likelihood of another lift in mortgage applications for this week when all is tallied, although the Independence Day holiday and beginning of vacation season may temper any gains.
Current Adjustable Rate Mortgage (ARM) Indexes
| Index | For The Week Ending | Year Ago | |
|---|---|---|---|
| Jun 27 | May 30 | Jun 28 | |
| 6-Mo. TCM | 4.27% | 4.36% | 5.36% |
| 1-Yr. TCM | 3.98% | 4.14% | 5.10% |
| 3-Yr. TCM | 3.74% | 3.92% | 4.49% |
| 10-Yr. TCM | 4.30% | 4.44% | 4.29% |
| Federal Cost of Funds |
3.662% | 3.663% | 3.956% |
| 30-day SOFR (daily value) | 4.31091% | 4.31355% | 5.33303% |
| Moving Treasury Average (MTA/12-MAT) |
4.308% | 4.398% | 5.173% |
| Freddie Mac 30-yr FRM |
6.77% | 6.85% | 6.95% |
| Historical ARM Index Data | |||
Here at the mid-point of 2025, the collective tenor for the economy is okay. Not great, not terrible, and there are some encouraging signs of resiliency, but also with some less encouraging signals, too. Despite some improvement, considerable uncertainty still hangs over consumers, businesses and the path for monetary policy, and there are still plenty of nagging concerns suggesting that economic conditions aren't likely to improve much very soon. Perhaps with the budget bill completed, a flurry of trade deals will come next, clarifying the picture, and in turn allowing consumers and businesses to start to adapt to whatever the new price climate may be as a result of them.
Interest rates have trended slightly lower in recent weeks, and mortgage rates declined for a fifth straight week this week. Is this from economic pessimism? Inflation optimism? Slack demand for credit? The answer is likely yes to all three. Of course, there may be some reversal of these given the fair labor market metric out this week, with perhaps a little more economic optimism and a little more inflation pessimism emerging next. We'll find out as the second half of 2025 gets underway, and find out how the Fed members felt about all this a few weeks ago when the minutes of the June meeting are released next week./p>
Mortgage rates have been mostly rangebound for several months now, although they have trended toward the lower end of that range in recent weeks. We expect to see the downward trend come to an end next week, as the yields that most influence mortgage-rate movements reversed course slightly just before the Independence Day holiday. Coupled with a light slate of new economic data between now and next Thursday, we expect to see a 3-5 basis point increase in the average offered rate for a conforming 30-year fixed-rate mortgage as reported by Freddie Mac.
Spring has given way to the lazy days of summer, but what's the outlook for mortgage rates between now and September? Check out our latest Two-Month Forecast for mortgage rates covering July and August.
See our 2025 Mortgage and Housing Market Outlook, covering mortgage rates, housing conditions, the Fed and lots more. Our mid-year review of our expectations is coming next week.
Also, for a really long-run outlook, you'll want to review "Federal Reserve Policy and Mortgage Rate Cycles".
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