Awaiting Impacts
June 6, 2025 -- The broad-based imposition of tariffs was announced back in the beginning of April, but scrambling by businesses and consumers to try avoid higher costs started rather before that, distorting the economic data, most especially in the calculation of first quarter Gross Domestic Product.
Since then, while there have been expansions and contractions in the amount of levies on certain countries and goods, a 10% tariff baseline has been in effect for some two months now, so we'd expect to start to see at least some impacts showing up in the data. Except for consumer and business sentiment, there appears to be little impact showing up in the hard data, at least so far.
The most immediate impact should be reflected in manufacturing activity, and certainly, the sizable increase in orders placed at factories back in March (+3.4%) was likely to be followed up with a decline, and so was in April, when orders dropped off by 3.7%. After a pre-tariff announcement 7.6% gain in March, durable goods orders declined by 6.3% in April, while non-durable goods posted a 0.9% decline. Expensive aircraft and automobiles were the primary reason for the reduction in orders for durable goods, but even removing them and defense-related spending still left a core measure that approximates business investment with a 1.5% fall during the month.
So orders to factories were off in April. But what about May? Well, at least according to the Institute for Supply Management, things really didn't get any worse last month. The ISM's manufacturing barometer for May came in with a value of 48.5, down 0.2 points and just a half-point lower than March. New orders received managed to post a value of 47.6 for the month, and that was an increase of 0.4 points compared to April. The labor conditions gauge showed a similar modest improvement with a 0.3-point increase to 46.8, and while still quite elevated, the "prices paid" inflation measure actually settled back 0.4 point to ease to 69.4, where it was two months ago.
To be fair, none of these readings are stellar; the ISM uses a breakeven value of 50, with values above it signaling expansion and those below it, contraction. By this gauge, manufacturing is still soggy, but in reality little different than it has been for a long stretch now with just a few positive exceptions thrown in. As well, the prices paid indicator may have retreated a little, but only back to a level seen nearly three years ago. Overall, the point is that while manufacturing activity isn't great at the moment, it hasn't really been for some time, and at least doesn't appear to be worsening, so that's something.
That's roughly the same message that has been coming from the labor market. While backwards looking, the Job Openings and Labor Turnover Survey (JOLTS) didn't find much by way of deterioration in labor conditions back in April, when there was considerable financial and political upheaval occurring. In fact, job openings actually improved in April compared to March, totaling 7.391 million, up from an upwardly-revised 7.200 million. Hires also picked up, coming in for April at 5.573 million, improving on March and rising to the highest level since May 2024. Not as encouraging were separations, but there was only a mild rise overall of 105,000, lifting the figure to 5.288 million (from 5.183 in March). Voluntary quits slowed again, easing to 3.194 million, down 150K, but layoffs did move a bit higher again after a March retreat, moving back up to 1.786 million, about the same mark as February. Overall, and even with upheaval, April's labor conditions remained fair.
That's still the case even with payroll processor ADP's softer report covering private employer hiring in May. ADP said 37,000 new positions were filled last month, the lowest figure since March 2023, and down from 62,000 in April. While indicative, the ADP report doesn't always correlate very well with the monthly employment report, due Friday. For instance, the 62K in hiring tallied by ADP for April was far surpassed by the Bureau of Labor Statistics calculation of 177,000 new positions created, with this figure weighed down by a 13K reduction in government employees. Forecasts for May's employment situation call for a softening of new hiring in May compared to April.
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There may be at least one initial sign of tariff impact -- or at least impact from the considerable uncertainty injected into the broader economy from their imposition -- in the ISM's service-business barometer. The ISM's gauge of non-manufacturing activity downshifted in May, moving from a modestly positive value of 51.6 to a barely sub-par 49.9 for last month. It is the lowest value seen here since last June, but as that period obviously had no impact from trade changes it may be that the current dip below breakeven is just normal waxing and waning for an economy that's only simmering along. New orders for services did post a sharp decline, though, with a 5.9-point decline from a solid 52.3 to a weak 46.4 last month, and may be a harbinger of a more pronounced slackening in activity to come, as it was the lowest value for this component since December 2022. Employment conditions picked up a little, with a 1.7-point rise lifting this measure back to expanding territory at a value of 50.9, while "prices paid" expanded too -- the 68.7 mark for May is the highest reference for inflation in this series in two and a half years.
Indicative of a sluggish economy (and perhaps also one in a 'wait-and-see" mode rather than one seriously slumping) the latest regional summary of economic conditions (aka the "Beige Book") from the Federal Reserve pointed to a mixed-to-softer tenor for the economy in the six weeks leading up to May 23rd, when the survey closed. Of the twelve Federal Reserve Districts, six reported "moderate" declines in economic activity, three "no growth" and three "slight" growth. On a comparable basis, the previous edition (April) had four with slight-to-modest declines, three unchanged and five reporting slight growth. As such, there's been some economic deceleration in the "new tariff" era, but perhaps not all that much. Overall, employment conditions were "little changed", but "comments about uncertainty delaying hiring were widespread" while wages continued to grow at a "modest" pace.
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The Beige Book did pick up some acceleration in inflation, though. The summary noted that "Prices have increased at a moderate pace since the previous report" and "There were widespread reports of contacts expecting costs and prices to rise at a faster rate going forward... a few Districts described these expected cost increases as strong, significant, or substantial" and that "higher tariff rates were putting upward pressure on costs and prices." There were varied responses as to how these increased costs will be passed down the consumption chain, but respondents expected to be doing so within three months. This being the case, the inflationary effect of new levies may not start to show much for another month or two yet, but to what ultimate degree they will emerge is uncertain.
Overall outlays for new construction projects shrank for a third consecutive month in April, and it would be hard to blame the reductions strictly on tariff impacts. Changes in dollars spent are tracked here and turned into percentage changes from month to month so higher costs would tend to lift spending, all things considered. That said, spending for residential projects slid by another 0.9%; there is already ample inventory of new homes available, so builders are likely holding the reins on projects until cost inputs are better known. Non-residential projects also dipped, with the 0.5% decline a third reduction in outlays in the last four months. Public-works spending did push higher, rising by 0.4%, so taxpayers provided at least some support to construction activity through April.
A couple of weeks ago, we looked a little deeper into the construct of the spring housing market. Since the availability of homes to buy has improved, home affordability -- essentially, the intersection of interest rates and home prices relative to incomes -- has pushed further into the forefront of the reason for the sluggish market. High mortgage rates affect all borrowers, but folks purchasing brand new homes may find temporary or even permanent builder financing subsidies, helping to lower monthly carry costs; at the same time, they may also find that a new home may cost the same or less than an existing one in a given market. Coupled with builder financing subsidies, home affordability for new home purchasers would at least be improved to some degree.
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While new home prices are solidly below peak levels of a couple of years ago, it's not as though they have collapsed, but rather just trended downward gradually as pandemic supply issues corrected over time. Outside of routine seasonal declines, existing home prices have only continued to climb, and seem poised to press their way to a new record over the next couple of months. Unless mortgage rates decline materially, there is little affordability relief for the existing home market; as well, it's likely that any initial decline in mortgage rates (when and if they come) will likely only help demand to surge and prices to escalate further, at least for a time.
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Reflective of consumers trying to save a few dollars or more on a high-ticket item, sales of new cars and trucks bounced higher in March and April... and predictably slumped in May. The Bureau of Economic Analysis noted that sales of new vehicles dropped 9.3% in May compared to April, landing at a 15.65 million annual pace. Before you start to think that this is a huge slowdown, consider that the current level is the average pace seen in January-February, so sales only fell back to pre-tariff trend levels last month. The demand for new vehicles advanced into March and April was likely borrowed from future sales, so a modest pace of sales going forward is likely for at least a few months. We'll have to wait to see if the proposed deduction for auto-loan interest makes it through the Senate; if it does, it would likely help lift sales of new vehicles to some degree.
As the spring wends its way to a close, housing activity doesn't seem poised to increase much, if at all. Already soft and softening somewhat more in recent weeks, applications for mortgage credit turned down again in the week ending May 30. The Mortgage Bankers Association reported an overall 3.9% reduction in mortgage applications, a third consecutive weekly decline. Requests for funds to buy homes stepped back by 4.4%, reversing a small gain in the prior week, while those to refinancing existing mortgages eased 3.5%, a fourth consecutive retreat.
Current Adjustable Rate Mortgage (ARM) Indexes
| Index | For The Week Ending | Year Ago | |
|---|---|---|---|
| May 30 | May 02 | May 31 | |
| 6-Mo. TCM | 4.36% | 4.22% | 5.43% |
| 1-Yr. TCM | 4.14% | 3.92% | 5.20% |
| 3-Yr. TCM | 3.92% | 3.68% | 4.74% |
| 10-Yr. TCM | 4.44% | 4.23% | 4.55% |
| Federal Cost of Funds |
3.663% | 3.661% | 3.927% |
| 30-day SOFR (daily value) | 4.31355% | 4.35001% | 5.32374% |
| Moving Treasury Average (MTA/12-MAT) |
4.308% | 4.398% | 5.173% |
| Freddie Mac 30-yr FRM |
6.86% | 6.76% | 7.03% |
| Historical ARM Index Data | |||
Interest rates and mortgage rates continue to wax and wane near the middle of a fairly narrow band held for some months now. As we approach the halfway mark of 2025, the average offered rate for a conforming 30-year FRM has been no higher than January's 7.04% and no lower than April's 6.62%. If the economy does show some signs of slowing -- and provided inflation doesn't rise much at the same time -- there's a chance that rates might start to trend toward the bottom of the recent range. That said, the inverse is also true, where still-fair growth is accompanied by firming prices, lifting rates more toward the top of it. For now, continued relative stasis for rates seems the most likely outcome.
Certainly, that's much the case for next week, although there's a reasonable expectation that we'll see a modest retreat in the average offered rate for a conforming 30-year fixed-rate mortgage as reported by Freddie Mac. We think that the decline will likely be something in the five basis point range or so -- enough to return to an early-May level. The modest easing won't have much impact on housing, but every little bit helps.
Although there is much uncertainty and the financial markets have been volatile, we're undaunted, and offer our latest Two-Month Forecast for mortgage rates covering late April through late June.
See our 2025 Mortgage and Housing Market Outlook, covering mortgage rates, housing conditions, the Fed and lots more.
Also, for a really long-run outlook, you'll want to review "Federal Reserve Policy and Mortgage Rate Cycles".
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