Despite Labor and Tariff Challenges, the Economy Remains Resilient—for Now
By Haven Alfonsi
The Construction Association of Michigan (CAM) and the Home Builders Association of Southeastern Michigan (HBA) partnered to present the 15th annual Mid-Year Economic Forecast and State of the Industry Breakfast on Wednesday, June 11th. This event is intended to provide a comprehensive overview of the impact of current and projected economic factors on the construction industry. Elliot Eisenberg, Ph.D., chief economist for consulting agency GraphsandLaughs LLC, presented the forecast.
While challenges persist, 2025 might offer some economic resilience, according to Dr. Elliot Eisenberg. Ongoing interest rate cuts by the Federal Reserve could help reduce unemployment, though they may also add upward pressure on inflation. He described the U.S. economy as "fine," but noted that risks still loom on the horizon.
Known as the “Bowtie Economist,” Eisenberg’s voice has appeared in many publications, including Bloomberg, Business Week, Forbes, and Fortune. He is also a member of the expert advisory board of Mortgage Market Guide and is a regular consultant to several large real estate professional associations, hedge funds, and investment advisory groups. He addressed nearly 300 guests at the annual Mid-Year Economic Forecast and State of the Industry Breakfast, held at Suburban Collection Showplace in Novi on June 11th.
The Pillars of Our Economy: Consumer Spending and Wealth
A major portion of our nation's economic activity, approximately 69-70% of GDP, is driven by household consumption. Consumers are continuing to spend, demonstrating sufficient confidence despite some underlying nervousness. “The stock market’s gone bonkers … house prices have gone bananas nationally,” said Eisenberg, so household net worth has seen a substantial increase. While this wealth surge has underpinned consumer confidence and spending, Dr. Eisenberg noted that this growth is expected to flatten in the near future, with national home prices no longer increasing and the stock market showing less upward momentum.
Despite a broader manufacturing recession for the last few years, construction related to manufacturing has remained robust. This unexpected strength is directly attributed to notable legislative initiatives: the Inflation Reduction Act (IRA), the CHIPS Act, and the Bipartisan Infrastructure Bill. These bills, designed to boost U.S. competitiveness, modernize infrastructure, and incentivize domestic clean energy manufacturing, have propped up manufacturing construction and prevented it from dragging down GDP. For the construction industry, the message is clear: federal investments in infrastructure, technology, and sustainable energy are currently key drivers of demand for construction services.
Tariffs, Immigration Reform, and Uncertainty
Dr. Eisenberg also delved into challenges that the U.S. economy is currently facing, particularly tariffs and their far-reaching effects. He unequivocally stated his strong opposition to tariffs: tariffs misallocate resources, taking workers from highly productive, globally competitive sectors and redirecting them to less productive domestic industries. This fundamentally reduces overall GDP growth.
Compounding the problem is the uncertainty surrounding tariff policies. Dr. Eisenberg emphasized that the unpredictable nature of tariffs — their fluctuating levels, uncertain timelines, and legal challenges — is perhaps more damaging than the tariffs themselves. This lack of clarity makes it difficult for businesses, including those in construction, to make long-term investment decisions, plan supply chains, and determine where and what to build. Tariffs might persist, he noted, as they can generate revenue, potentially balancing out the fiscal deficit caused by tax cut extensions. However, this comes at the cost of overall economic growth.
Another major concern for the construction industry is immigration reform. Dr. Eisenberg raised a critical question: if efforts to deport undocumented immigrants are successful, "where [are] the construction workers going to come from?" He highlighted the practical difficulties and immense resources required to deport large numbers of people and emphasized that a significant reduction in the labor force, particularly in sectors like construction that are heavily reliant on immigrant labor, could lead to severe worker shortages and increased costs.
The overall sentiment among small businesses, households, and even CEOs remains uncertain and nervous. This elevated level of uncertainty, fueled by ongoing policy debates and global events, can hinder capital expenditures and slow down economic growth. While this soft data decline doesn't automatically trigger a recession, it does indicate a cautious approach by businesses and consumers.
Construction and Housing: A Detailed Look
Dr. Eisenberg's predictions for the construction and housing sectors are particularly salient. While public construction, propelled by substantial infrastructure spending, continues its upward trend, private residential construction is experiencing declines and non-residential construction is experiencing a noticeable softening. Construction as a whole has been down for the past two or three months.
Office buildings are grappling with record-high vacancy rates of 20.4%. However, there's a nuanced demand for premium "Class A" office space, suggesting that while traditional office construction may slow, sustainably built projects in prime locations could still find traction. In the e-commerce sector, growth has plateaued, but warehouses remain a bright spot, described as "doing fine" and poised to do "great" with the onset of tariffs, as businesses will require more space to store goods. This presents a clear opportunity for industrial builders.
The multifamily housing market is currently navigating a challenging phase, characterized by rising vacancy rates and either flat or slightly declining rents year-over-year. However, Dr. Eisenberg forecasts a turnaround: as new multifamily construction starts to slow down due to current market conditions, a future shortage is anticipated. "Now's the time,” he advises, “to begin thinking of building something or buying some land, going to an architect to start hitting the ground in a year and a half, [so] the place is ready in two years."
In the broader housing market, the inventory of existing homes for sale is rising rapidly, now back to pre-COVID levels. Existing home sales are low, but Dr. Eisenberg anticipates that they will not fall any lower. Meanwhile, the inventory of new homes is “high and getting ahead of itself” at 8.1 months' supply, exceeding a healthy 6 months. Therefore, builders are strongly advised to "pull back" and exercise caution, as a too-high inventory of available housing can cause home prices to decrease.
New home sales themselves are flat, leading builders to offer incentives to buyers, such as price cuts or mortgage buy-downs. This, coupled with a declining average new home size, is causing new home prices to decrease slightly. Despite these short-term pressures, the quality of current mortgages has "meaningfully improved and remains high," with borrowers typically possessing strong credit and substantial home equity. This reduces the risk of a widespread housing crisis, even if national home prices experience a 5-10% decline.
Critically, Dr. Eisenberg stressed that “it’s not ‘08, ‘09. Do not think that way.” Furthermore, with the average age of U.S. housing stock continually rising, there's a robust and sustained opportunity for renovation, alteration, and repair work.
The Labor Market and the Path Forward
The labor market remains one of the economy's most crucial components. As long as workers are employed, they continue to spend, and firms continue to hire and invest. Dr. Eisenberg indicated that a sustained job growth of 100,000 to 125,000 jobs per month is a healthy target, allowing for stability without excessive wage pressures or rising unemployment.
Although the labor market is currently strong on the surface, with low unemployment rates hovering between 4% and 4.2% for nearly a year, there are underlying signs of weakening. For instance, he pointed to a declining labor force participation rate, which makes the unemployment rate appear better than it might otherwise be. Furthermore, there's an increase in people working part-time because they can't find full-time jobs, and a slight uptick in permanent job losses. Wage growth, despite stable unemployment, has been steadily declining.
While layoffs are not currently prevalent, as evidenced by “stupendously low” initial unemployment claims, there's a clear slowdown in hiring. Firms, wary of repeating the mistakes of 2020 where they prematurely laid off workers, are now "hoarding" their employees. “No one’s getting fired,” Dr. Eisenberg said, “but what’s the catch? The catch is no one’s getting hired.” This makes the job searching process harder and longer, even with a low unemployment rate.
Regarding federal interest rates and inflation, the uncertainty around tariffs complicates the Fed's decision-making. Tariffs are expected to cause a temporary rise in prices, which could lead to a scenario where both unemployment and inflation rise – a difficult situation for the Fed, as they can only tackle one problem with interest rate adjustments. “So, before they cut rates, they want to be damn sure they’re picking the right one,” Dr. Eisenberg said, noting that the Fed’s likely bias will be toward addressing rising unemployment if it occurs. Therefore, he expects the Fed to wait until late Q3 or Q4 before cutting rates, and then act "hard and fast" once they are sure whether inflation or unemployment is more pressing. Overall, he anticipates at least one or two rate cuts this year.
Overall, Dr. Eisenberg's presentation offered a clear-eyed view of an economy that is "good enough" but operating with a degree of trepidation. For the Michigan construction industry, this means leaning into opportunities created by government investments in infrastructure, clean energy, and manufacturing. However, it also necessitates a keen awareness of the challenges posed by tariffs and their associated uncertainties, as well as the critical issue of labor supply. Staying agile and adapting to these evolving economic currents will be key to success in the near future.
An Event Powered by Partnerships
The day kicked off with valuable business networking, a cornerstone of the event’s success, featuring tabletop exhibits from 25 industry partners.
This gathering would not be possible without the generous support of our sponsors. This year’s Platinum Sponsors included Benetics, D.A. Alexander & Company, Doeren Mayhew, Lake Michigan Credit Union, and Michigan.com. Gold Sponsors included C.G. Financial, Operating Engineers Local 324—LMEC & JATF, Testing Engineers & Consultants, The Salvati Insurance Group, and VTC Insurance.
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Elliot Eisenberg, Ph.D. is an internationally acclaimed economist and public speaker specializing in making the arcana and minutia of economics fun, relevant and educational. He earned a B.A. in economics with first-class honors from McGill University in Montreal, as well as a Master's and Ph.D. in public administration from Syracuse University. Eisenberg, a former Senior Economist with the National Association of Home Builders in Washington, D.C., is the creator of the multifamily stock index (the first nationally recognized index to track the total return of public firms principally involved in the ownership and management of apartments), the author of more than eighty-five articles, serves on the Expert Advisory Board of Mortgage Market Guide and is a regular consultant to several large real estate professional associations, hedge funds, and investment advisory groups. He has spoken to hundreds of business groups and associations, often as a keynote speaker. Learn more at https://econ70.com.