Fed Holds Rates Steady as Retail and Housing Data Signal Economic Strain

Weekly Economic Review: June 20, 2025

May Retail Sales See Sharpest Decline of 2025; Housing Starts Hit Five-Year Low; Fed Holds Rates Steady, Projects Two Cuts, Slower Growth, and Higher Inflation and Unemployment

Key Summary:

This week began with news that retail sales declined for a second consecutive month in May, marking the first back-to-back drop since the end of 2023 and offsetting the significant surge seen in March. The decline suggests that consumers, wary of economic uncertainty, continued to scale back spending following a rush to purchase goods ahead of anticipated tariff-driven price increases.

Of the 13 retail categories tracked, seven recorded declines, including autos, building materials, and gasoline. However, spending rose in categories such as sporting goods, furniture, non-store retailers, clothing, and miscellaneous goods. Sales at food services and drinking places—the only services component in the retail sales report and a key indicator of household financial health—also declined in May. Notably, control group sales, which exclude food services, auto dealers, building materials, and gasoline stations and are used to calculate GDP, increased in May and exceeded expectations.

In May, housing starts fell to their lowest level since May 2020, driven primarily by a nearly 30% drop in multifamily construction. In contrast, single-family home starts posted a modest increase. Regionally, the West was the only area to show a solid rebound in both single- and multifamily starts, recovering from a 17.4% decline in April – the steepest monthly drop since March 2023.

Building permits, a leading indicator of future construction activity, declined unexpectedly to a five-year low, largely due to a drop in single-family permits, which fell to their lowest level since April 2023. This signals a likely slowdown in new construction in the coming months.

Homebuilders are facing multiple headwinds:
• High mortgage rates
• Elevated home prices
• Softening buyer demand
• A 16-year high in new home inventory

To attract buyers, builders are increasingly offering incentives such as price reductions and mortgage rate buydowns, which are squeezing profit margins. Additionally, rising construction costs—expected to increase by nearly $11,000 per home due to tariffs—are further eroding profitability and reducing the incentive to ramp up production.

According to the National Association of Home Builders, builder confidence declined in June to its lowest level since December 2022, reflecting concerns over high mortgage rates, tariffs, and broader economic uncertainty.
As expected, the Federal Open Market Committee (FOMC) voted unanimously to maintain the federal funds rate in the range of 4.25% to 4.50% for the fourth consecutive meeting. In its statement, the FOMC noted that recent data suggest economic activity continues to expand at a solid pace. The unemployment rate remains low, labor market conditions are strong, although inflation remains somewhat elevated.

The Fed also released its updated quarterly economic projections—its first since the “Liberation Day” tariff announcement. The revised outlook reflects slower economic growth along with higher unemployment and inflation. The projections continue to imply a total reduction of 50 basis points in 2025, likely through two 25-basis-point cuts.
During the press conference, Chair Jerome Powell acknowledged that tariffs are expected to contribute to higher prices over time. He emphasized that the Fed is monitoring how much of these costs will be passed on to consumers before making any policy adjustments. Powell reiterated the Fed’s “wait-and-see” approach. Markets are now looking to the September meeting for greater clarity on the Fed’s policy direction.

Let’s take a closer look at retail sales, new residential construction, and the latest FOMC meeting.

Retail Sales:

According to the U.S. Census Bureau, retail sales declined by 0.9% month-over-month in May, following a revised 0.1% decrease in April (originally reported as a 0.1% gain). This marks the lowest monthly level since the beginning of 2025. The May figure came in below market expectations, which anticipated a 0.6% decline. On a year-over-year basis, retail sales rose by 3.3% in May – the slowest annual growth rate since October.

Of the 13 categories tracked by the Census Bureau, seven posted declines in May. The steepest drop was in auto sales, which fell 3.5% month-over-month after a 0.6% decline in April. Sales of building materials dropped 2.7% following a 0.3% gain the previous month. Gasoline station sales declined 2.0%, marking the fourth consecutive monthly decrease after a 0.7% drop in April. Other categories posting declines included food and beverage, electronics, department stores, health and personal care, and food services and drinking places.

Conversely, six categories saw gains. Miscellaneous store sales rose 2.9% in May, rebounding from a 3.7% decline in April. Sporting goods sales increased by 1.3% after a 3.0% drop the previous month. Furniture store sales rose 1.2%, building on a 0.7% gain in April. Non-store retailers, clothing, and general merchandise also posted increases.
Excluding autos and gasoline, retail sales edged down 0.1% in May, following a revised 0.1% decline in April (previously reported as a 0.2% increase). This result also fell short of market expectations for a 0.3% gain. Meanwhile, control group sales—which exclude food services, auto dealers, building materials, and gasoline stations and are used to calculate GDP—rose 0.4% in May, beating the market forecast of a 0.3% increase and rebounding from a revised 0.1% decline in April (initially reported as a 0.2% drop).

New Residential Construction:

1. Housing Starts:
According to the U.S. Census Bureau and the Department of Housing and Urban Development, new residential construction declined 9.8% month-over-month in May, falling to a seasonally adjusted annual rate of 1.26 million units, down from 1.39 million units in April (revised up from a 1.6% to a 2.7% gain). This decline was steeper than market expectations, which had projected a 0.8% decrease.
• Single-family housing starts, which typically account for the majority of new construction, rose 0.4% to an annualized rate of 924,000 units.
• Multifamily starts dropped sharply by 29.7% to 332,000 units, following a 16.0% increase in April. This figure is also below the long-term average of 367,000 units (1959–2024).

Regional Breakdown:
• Northeast: -40.0%
• Midwest: -10.2%
• South: -10.5%
• West: +15.1% to 274,000 units, including:
o Single-family: 194,000 units (+10.2%)
o Multifamily: 80,000 units (+29.0%)

Annual Comparison:
Total housing starts were down 4.6% in May. This included a 7.3% decline in single-family starts, while multifamily starts rose 4.1%.

2. Building Permits:
Building permits declined 2.0% month-over-month in May to an annualized rate of 1.39 million units, falling short of both April’s figure and market expectations of 1.42 million units (which had anticipated no change). In May, single-family housing permits dropped by 2.7%, bringing the total to 898,000 units. Multifamily permits also saw a slight dip—down 0.8% to 495,000 units.

Regional Breakdown:
• Northeast: -8.8%
• South: -2.5%
• West: -5.2%
• Midwest: +9.8%

Annual Comparison:
Total building permits were down 1.0% in May.

FOMC Meeting:

The FOMC released its updated Summary of Economic Projections (SEP). The key takeaways from the update are as follows:
1. Interest Rate Projections (Dot Plot):
The Fed’s rate outlook remains unchanged from March, signaling a total of 50 basis points in cuts by the end of 2025. This would lower the federal funds rate target range to 3.75%–4.00%, implying two 25-basis-point reductions. The median year-end rate forecast for 2025 is 3.9%, followed by 3.6% in 2026 and 3.4% in 2027.
2. GDP Growth:
Real GDP growth for 2025 is now projected at 1.4%, down from the March estimate of 1.7%. Growth is expected to pick up modestly in subsequent years, with the longer-run growth rate forecast at 1.8%.
3. Unemployment Rate:
The unemployment rate is forecast to rise slightly to 4.5% in 2025, up from the previous projection of 4.4%. It is expected to remain at 4.5% in 2026, with a longer-run estimate of 4.2%.
4. Inflation (Headline PCE Price Index):
Headline PCE inflation is projected at 3.0% for 2025, an increase from the 2.7% forecast in March. It is expected to decline to 2.4% in 2026 and further to 2.1% in 2027, with the long-run target remaining at 2.0%.

Conclusion: The stock market ended the week relatively unchanged. The Nasdaq edged up by 0.2%, the Dow remained roughly flat, and the S&P 500 dipped 0.2%. Geopolitical tensions influenced oil prices during the week. Crude prices initially rose following Israel’s air campaign against Iran amid the on-going conflict. However, prices eased on Friday after President Trump announced a decision timeline of up to two weeks on potential U.S. airstrikes, aimed at encouraging Iran to return to the negotiating table. Ultimately, the U.S. conducted surgical airstrikes against Iran’s nuclear facilities on Saturday evening, and uncertainty remains over whether Iran will resume nuclear talks with the U.S. As a result, the continuing conflict is expected to keep markets on edge in the coming week.

Treasury yields declined slightly this week, with the two-year, five-year, and ten-year yields closing at 3.90%, 3.96%, and 4.38%, respectively—down 6, 6, and 3 basis points from the previous week. On the rate cut front, the market is fully pricing in two 25-basis-point cuts in 2025, totaling 50 basis points. The first cut is expected either at the September FOMC meeting, with an 82% probability, or at the October meeting, where the probability rises to 100%. A second 25-basis-point cut is anticipated in December, also with a 100% probability. Looking ahead to 2026, the market is fully pricing in two additional 25-basis-point cuts with 100% certainty, and a third cut with a 65% probability—effectively a coin toss.

Next Week’s Key Economic Data Releases:

• Monday: The week kicks off with the release of existing home sales data.
• Tuesday: The Conference Board’s Consumer Confidence Index will be published.
• Wednesday: Markets will see updates on weekly mortgage applications and new home sales.
• Thursday: Initial jobless claims data will be released.
• Friday (Main Highlight): Personal income and spending figures will be reported, alongside the Fed’s preferred inflation gauge—the Personal Consumption Expenditures (PCE) Price Index.
o The headline PCE is expected to rise 0.1% in May and 2.2% year-over-year.
o The core PCE, which excludes food and energy, is also projected to increase 0.1% in May and 2.6% year-over-year.

Mark Yoon, CFA CPA
EVP & CFO of Commercial Bank of California

Thomas McCullough
EVP of Commercial Bank of California

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