Trade Negotiations Add Certainty to the Outlook
NAHB Chief Economist Robert Dietz recently provided the following insights in his bi-weekly newsletter Eye on the Economy:
Initial trade arrangements with the United Kingdom and China are providing needed clarity for the international economic outlook. The U.K. deal illustrated that a 10% U.S. tariff wall may be where the Trump administration is pointing a new system.
And with the U.S. facing an impending supply shock from a virtual embargo on Chinese trade, the recently announced framework between the two countries temporarily lowered trade barriers for 90 days and set a path for future negotiations. These actions reduced the tariff rate on Chinese goods from 145% to 30%. As a result, goods should again flow between the two countries, tamping down near-term economic output declines and inflation effects from disrupted supply chains. This is a positive outcome, and stock markets have rallied as a result.
The timing is fortunate as well. With policy uncertainty at multi-year highs and survey data of economic conditions pointing to both slowing growth and rising inflation, these actions follow a weak reporting for first quarter GDP growth. The economy contracted at a -0.3% growth rate, with a huge swing for imports as U.S. businesses sought to bring goods into the country before the effects of the (previously enacted and later suspended) “reciprocal” tariffs would be implemented.
For an economy at stall speed, the best outcome would be for these reciprocal tariffs to never go into effect and for negotiations to continue to make progress toward reducing non-tariff trade barriers for U.S. exporters. This appears to be the outlook for now.
Aside from these tariff-associated risks, the U.S. economy is on a solid foundation. April data showed inflation continued to decline to a four-year low of 2.3%. Although shelter inflation remains too high at a 4% growth rate, that measure will improve with gains for housing supply. The overall inflation rate of 2.3% is gradually nearing the Federal Reserve’s 2% target.
If the economic costs of tariffs can be avoided, the Fed should be in a position to further lower short-term interest rates in the third and fourth quarters. The Fed has been on pause for all of 2025 thus far, after cutting the federal funds rate by 100 basis points at the end of 2024. Lower rates would help housing supply by reducing upward pressure on builder AD&C loan rates.
Housing demand remains solid, although weakened due to elevated interest rates. Nonetheless, a healthy labor market is supporting demand for rental and for-sale homes. The unemployment rate remains low at 4.2%, although hiring is expected to slow in the weeks ahead due to tariff uncertainty. Wage growth in the residential construction sector remains above trend at a 4.5% year-over-year growth rate.
Sentiment among residential construction firms has been weakening due to the macro uncertainties. The NAHB Multifamily Production Index fell back to a negative reading of 44 after a half year of gains. Single-family builder sentiment collected prior to the China trade arrangement was announced last week, and fell to 34 in May from 40 in April. However, with additional deals and further constraints placed on tariffs, the macro outlook should improve. While this may raise long-term interest rates, the positive growth effect should provide a lift for the residential construction sector.