By Gregory Heym, BHS Chief Economist and and host of Crossing The Line
This wasn't the most exciting week for economic releases, so let's take this opportunity to give our opinion of the state of the economy and housing.
Let’s start with Gross Domestic Product
GDP—the value of the final goods and services produced in the U.S.—had a bumpy first half due to the President’s new tariffs. A rush of imports before the tariffs took effect pushed the first quarter GDP figure into negative territory. A steep reduction in imports in the second quarter helped bring the annual rate of economic growth up to 3.0%.
All that said, you can ignore the headline GDP numbers in the first half of 2025 since they were driven by tariff-avoidance. Since 70% of GDP is based on consumer spending, let’s look at that data. After a recent peak of 4.0% in 4Q24, the annual rate growth of personal consumption expenditures came in at 0.5% during 1Q25 and 1.4% in 2Q25.
It shouldn’t be surprising that many consumers are spending less, given they already have $1.21 trillion in credit card debt. Add in the fact that inflation has ticked up in the past three months, and the outlook gets a bit more concerning. I wouldn’t count out the consumer just yet, as a recent report from Equifax found that consumers have been able to avoid delinquency so far despite their high levels of debt. Rising wages have also helped spending, but the latest news on the labor market has not been good.
Job Growth has Weakened
Employment rose by just 73,000 in July, while the figures for May and June were revised downward by 258,000. That means in the past three months, just 106,000 jobs have been added, the worst three months of job growth since the pandemic. A lot has been said lately about the reliability of the BLS employment reports. I don’t have much to add to that argument at this point, other than to say that accurate data is vital to governments and consumers so they can make informed decisions. Let’s hope we see smaller data revisions in the coming months.
The good news is that wages are still growing faster than prices and initial claims for unemployment remain at historically low levels. It is taking longer for those out of work to find jobs, as continuing claims for unemployment rose to their highest level since November 2021.
While it’s clear the labor market is softening, the unemployment rate is still very low at just 4.2%. The number of job openings was 7.44 million at the end of June, a very high number, but a lot could have changed in the month since that data was collected.
The Fed
After cutting the short-term rates by 1% last year, the Federal Reserve has yet to act in 2025. If they had known before their meeting about the sharp downward revisions to employment in May and June, they probably would have cut rates last month. Markets now predict there’s over a 90% chance of a rate cut at their September meeting. What will that mean for consumers? In the short term, not much. The 1% cut in rates last year didn’t bring down rates for credit cards and other short-term loans with any significance, and since Fed rate cuts have no direct impact on mortgage rates don’t expect any initial relief there either. For mortgage rates to come down inflation needs to go lower, and it would help if the federal government could reduce the national debt. With over $150 billion in tariff revenue through July of this year, let’s hope we can pay down some debt and help bring mortgage rates down.
Housing
Even with an increase in inventory, housing sales remain weak due to high prices and elevated mortgage rates. Prices are starting to come down in many markets, but a high percentage of potential homebuyers are still waiting for rates to come down. Pricing correctly will be very important in the second half of this year, as buyers will need to see value before they sign a contract. Housing has shifted to a buyer’s market, which should make sellers more willing to negotiate in the second half of 2025.
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