August 04, 2025 – The U.S. economy is navigating through a period of uncertainty as we progress into the latter half of 2025. While there are signs of a weakening labor market with slower job growth and rising unemployment, there has been a slight improvement in consumer confidence. The economy showed some recovery in the second quarter, but underlying demand remains fragile. The ongoing decline in residential construction spending also highlights persistent challenges in the housing market. Meanwhile, the Federal Reserve has opted to maintain current interest rates, though it is highly likely that there will be a downward adjustment on the fed funds rate in the near future. The housing market could definitely benefit from it if that turns out to be the case.

Labor market is worse than previously thought: U.S. job growth came in weaker than expected and downward revisions of prior months’ data suggest that the U.S. job market is slowing down faster than what was reported earlier in the second quarter. Nonfarm payrolls increased just 73k in July and were below consensus expectations of 100k projected by economists polled by the Wall Street Journal. With revisions for May and June that reduce the previously reported job growth figures by a combined 258k, the 3-month average job gains registered a soft 35k, or less than a third of what the pace was a year ago. Health care and social assistance (+73k) continued to be the primary support to the overall job gains, while professional & business services (-14k) and manufacturing (-11k) continued to struggle. Government employment (-10k) dipped again last month and has pushed the sector’s payroll down 84k since the start of the year. The unemployment rate, meanwhile, inched up from 4.1% to 4.2%, despite the labor force participation rate declining for the third consecutive month. With the latest report clearly showing signs that the labor market is softening, the Federal Reserve will likely start cutting the federal funds rate in their next FOMC meeting in September or sooner if necessary.

Fed continues to hold rates unchanged: The Federal Reserve decided to keep the federal funds rate steady at a target range of 4.25% to 4.5% after the conclusion of the July FOMC meeting but should begin adjusting rates downward at their next meeting. Fed Chair Jerome Powells acknowledged that there are risks to both the inflation and the employment goals of the central bank, despite the economy remaining in “good shape.” The Fed cited elevated uncertainty in the economic outlook as growth slows while inflation ticks up in latest readings. The latest Fed announcement was the fifth consecutive meeting without a rate change, although markets now expect a rate cut at the next meeting in September, especially after the weak July jobs report. The resignation of Governor Adriana Kugleser may also shift the Fed’s balance toward a more dovish stance as President Trump nominates a new member to the voting committee. 

U.S. economy bounces back in Q2 but underlying demand cools: After a contraction for the first time in three years in Q1 2025, the U.S. economy rebounded solidly in the Q2 2025. Despite the gross domestic product (GDP) bouncing back more than expected last quarter, the strong headline number could be misleading as the overall economic growth was pushed up by a sharp decline of 30.3% in imports, which boosted the real GDP by over five percentage points. Consumer spending, in fact, only increased modestly by 1.4%, while private investment declined sharply by 15.6% in the second quarter. Inventories subtracted 3.2 percentage points from growth, reversing their Q1 contribution. While government spending (+0.4%) inched back up after a first dip in 11 quarters, its growth rate remained the second smallest in the last three years. With the labor market showing signs of weakness in the second quarter and tariffs likely to begin adding upward pressures on prices in coming months, consumer spending and overall economic growth could weaken further in the second half of 2025.      

Residential construction spending declines for the sixth straight month: U.S. construction spending extended its decline in June as elevated interest rates and lingering economic uncertainty continued to weigh on both the demand and the supply sides of the housing market. According to the latest Commerce Department’s monthly report, total outlays dropped 0.4% month-over-month in June and fell 2.9% year-over-year from June 2024. Private residential construction spending dipped 0.7% from the prior month and recorded its sixth straight month of decline as both single-family (-5.3%) and multifamily (-9.5%) dropped sharply from their year-ago levels. The $895.1 billion pace in June in residential construction spending was the lowest level in 22 months. With labor supply remaining tight in the construction sector and building material costs being pushed up by tariffs, construction activity may not see any meaningful bounce back in the months ahead.

Consumer confidence improves and appears to be stabilizing: Americans felt slightly more confident in July compared to a month ago, but remained less positive relative to a year ago, according to the latest report from the Conference Board. The U.S. consumer confidence index rose two points last month to 97.2 from the revised 95.2 in June. The increase was driven primarily by an improvement in short-term expectations, as the Expectations Index climbed 4.5 points to 74.4 but remained below the threshold of 80 for the sixth consecutive month. Consumers remained concerned about tariffs pushing up prices, as suggested by the survey’s write-in responses. Consumers also believe mortgage rates, auto loan rates, and credit card rates were more likely to rise than other types of interest rates. Those who planned to purchase a car/a home declined in July but remained stable on a 6-month moving average basis.

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