The Calm Before the Storm

Everything Suggests Bad News Is On The Way

Introduction

Only weeks ago, harsh tariff talk had some expecting an economic downturn. Since then, a guarded sense of optimism has set in. The tariffs were reduced and postponed – at least for now. Jobs grew at a solid pace in April. Unemployment remained steady. Surprisingly, the rate of inflation improved. Some trading partners showed a willingness to negotiate. Reflecting this spate of good news, consumer sentiment climbed and the stock market recovered. Economists have backed away from dismal talk. Things were all going to be OK.

To top it all off, this optimism will likely be reinforced by data released in the next month or two. And perhaps the recent court ruling against the imposition of some tariffs will add to the optimism.

Unfortunately, this may all be the calm before the storm. The prospects of tariffs will disrupt an already fragile economic growth path. Other factors will weight against near term growth. These factors include a weakened dollar, aggressive illegal immigration control, pauses in funding on government contracts, and looming increases in federal debt.

Even if the courts bar the reciprocal tariffs, those on steel, aluminum, automobiles, and lumber are likely to materialize. These impacts could be significant and won’t show up in the marketplace until the tariffs are in full effect. That means we won’t see it in data reports until at least a month after that. The skies won’t really begin to darken until mid-summer.

Economic Context

Let’s put things into context. Prior to all the recent economic policies, the economy’s growth was slowing. Much of the softening can be attributed to the maturing of the business cycle. Real GDP recorded an outright decline in first quarter – the first time in five years. Despite this, labor markets remained relatively solid. This gradual easing of economic growth was expected to continue until the Federal Reserve began cutting interest rates – ushering in modest growth recovery. All that was expected to take place within 2025.

Then came the economic policies. And with them the chaos, and the spin. Let’s be fair, the genesis of some of the recent policies have their place. There are international markets, for example, where the playing field is not even and trade is biased against US companies. And the national debt is growing to such a level it poses a long-term threat to future economic growth. Each these structural issues cannot be addressed without controversy. And some credit must be awarded for facing these difficult issues and not running from them.

From an economic point of view, however, it’s the execution of policy that has contributed to a near term uncertainty and the dimming of economic growth prospects. The US Court of International Trade’s (USCIT) recent ruling against the imposition of some tariffs and the Administration’s push-back to the ruling just adds to an uncertain economic environment. Uncertainty causes consumers to postpone big purchases. It causes business to pause on hiring and investing. It weakens near-term economic growth at a time when the economy was already slowing.

Near Term Concerns

The tariffs themselves, and their secondary impacts, weigh as the most critical near-term concerns facing the economy. Tariffs, once imposed, are expected to unleash some highly expected and some expected adverse impacts on the US economy. As many expect, they will result in higher prices. These higher prices hold the potential of curbing consumer spending and with that economic growth. Even if some tariffs are now barred by the USCIT ruling, several significant, sector specific, tariffs remain in play.

Even if many of the tariffs are avoided, the disruption in supply chains that has already occurred will result in lean supplies in retail stores and prompt a run-up in prices. Once disrupted, these critical global supply chains cannot be quickly repaired. Domestic alternatives need time. In the mean-time, retailer inventories will run lean. Competing for scarce supplies, prices will get bid up. Even if all the tariffs were settled tomorrow, and zero tariffs were imposed, there would be inflation due to the supply chain disruptions set in motion by the weaponization of tariffs.

The weaponization of tariffs on a broad scale and their on-again, off-again approach has created concern as to whether US policy still serves as a stable rudder for the global economy. Some seek an alternative to the dollar as the world’s reserve currency. This has weakened the dollar. In doing so, it also raises the cost of imports even further - adding to inflationary spirits in the US. Any advantages accrued to our exports from a weaker dollar will likely be small.

Aside from tariffs, there are other near-term concerns. One Big Beautiful Bill Act (OBBA), that recently passed the House of Representatives may support tax-related growth in 2026, but it also raises the likelihood that the Federal Budget deficit will widen. The Congressional Budget Office estimates the new bill will add $3.9 trillion to the federal debt by 2035. In 2024, the federal debt stood at 123% of total US GDP. Economists consider a debt-to-GDP ratio of 60% as sustainable on a long-term basis. We are more than twice the “acceptable level”. Concerns about the adverse impact on economic growth generally materializes around 100%.

Finally, the Administration has paused the disbursement of funds appropriated through the Inflation Reduction Act (IRA) and Infrastructure Investment and Jobs Act (IIJA). This action effectively freezes the funds, potentially impacting billions of dollars intended for infrastructure. While the impact may just result in a postponement of this construction to next year, it will likely have an adverse impact on 2025 volumes. Public sector cement consumption accounts for roughly 43% of total cement consumption.

All these forces are brewing now. Hard data clearly identifying these forces that are adversely impacting growth will not materialize until later in the year. By then, the storm will be underway.

Consumer & Job Market Strength

This pessimism could be all wrong. Time and again, during this cycle, the economy has been challenged with adversities and outperformed pessimistic expectations. Its resilience is largely accrued to strength in consumer spending and the job market. This tandem, perhaps reinforced by reduced taxes, could once again be strong enough to maintain growth.

Consumer spending and the job market seem to be a bit softer today compared to earlier in the cycle. Covid relief programs, which helped in the past, have run their course. Instead of drawing down debt, consumers are now relying on it more heavily. Consumer and student loan delinquencies are rising, albeit from low levels. This all signals that consumer stress brought on by the rising cost-of-living may be materializing. For now, the duress seems to be focused on the middle- and lower-income households. If an easing in consumer spending materializes, it will show in weaker employment.

The second revision of GDP was released today. It showed a downward revision to consumer spending. Consumer spending grew at a rate of 1.2%, well below the initial reading of 1.8%. More importantly, it shows a significant deceleration from 4.0% recorded in the fourth quarter of 2024. Consumer spending accounts for two out of every three dollars of economic activity generated by the economy.

What it all Means for Construction

From my view, construction activity will not strengthen until interest rates come down in the context of relatively strong labor markets. The prospects of higher inflation, larger federal deficits, a decline in the dollar’s status as a reserve currency all place upward pressures on interest rates. This, coupled with the likelihood that the Federal Reserve will take a careful and prudent approach by waiting on data before initiating policy, suggests monetary policy will not be quick to shield the economy from these adverse trends.

High interest rates mean single-family construction will continue to be hindered by adverse affordability conditions. Real economic growth will remain soft. Nonresidential vacancy rates will remain high and perhaps increase. As a consequence, leasing rates are expected to ease. Net operating income for many nonresidential properties will ease.

These hinderances impact private sector construction. Unfortunately, the Administration has paused the disbursement of funds appropriated through the Inflation Reduction Act (IRA) and Infrastructure Investment and Jobs Act (IIJA). This action effectively freezes the funds, potentially impacting billions of dollars intended for infrastructure.

All this sounds sour. For now, it may be prudent to take a cautious approach toward business decisions. Once the Federal Reserve acts to cut rates, the onset of construction’s recovery will be underway – not before then. By then, the 2025 construction season will have largely passed and by forfeit, the recovery materializes in 2026.

Note: The Sullivan Report publishes regularly on Substack. The articles concentrate on the general economy, the construction market, as well as the cement and concrete industries. A service separate from Substack is also published: the Cement Outlook Report. It is a detailed, forward-looking outlook for the construction industry. Compared to the consensus of forecasts for the US cement industry, the Cement Outlook Report forecast is more pessimistic for 2025. Taking this more guarded viewpoint into consideration could have a significant contribution on your business strategy.

If your business planning efforts are important, and you are in the cement or concrete business, perhaps you should subscribe to the report published by the most seasoned forecaster in the US cement industry. Contact Ed at edsullivan@thesullivanreport.com for information on how to subscribe and receive the Spring Forecast Report today.