Economists view recent trends and offer words of caution for the road ahead

Article originally posted on CoStar on October 22, 2025

At the National Association of Business Economics’ annual meeting in Philadelphia last week, economists, executives and policymakers discussed a wide range of topics. Here are a few takeaways from conference speakers on the American consumer, artificial intelligence and immigration and trade policies that may interest the commercial real estate industry.

While the labor market has weakened, high-income households remain in a strong position and continue to support consumer spending. This holiday season will test just how strong that position is. 

Concerns about the precarious state of the job market dominated discussions throughout the meeting.

“This low-hire, low-fire type of environment is really unsustainable,” said Gregory Daco, chief economist for for the management consulting firm EY-Parthenon, summarizing the sentiment of CEOs across several industries. Chief executives are saying: “Either we get more confident about the outlook for final demand and start hiring more, or we get less confident about the outlook and we start to proceed with strategic layoffs.”

Still, although the labor market appears to have weakened, Americans continue to open their wallets.

“People are still spending,” said Brandon Isner, head of U.S. retail research for Newmark. “They are just being more deliberate on what they are spending their money on.”

He cautioned listeners on prospects for the upcoming holiday shopping season.

“Many people feel that we haven’t seen the full impact of tariff policy,” Isner said. “A lot of the summer spending, which has been outperforming the forecast, has been retailers offloading the inventory they picked up before trade policy kicked in. This holiday season is going to be key.”

Changes to federal immigration policies are creating significant disruptions in the labor market, but slower economic activity in key sectors such as construction may be masking the longer-term impact.

The rapid decline in immigration and increase in deportations since January have added challenges to measuring the labor market’s health. Fewer immigrants mean slower growth in the labor force, which reduces the number of jobs needed to maintain a stable unemployment rate. However, slower population growth is likely to weigh on consumer demand, lowering demand for jobs as well.

For employers in industries such as construction, where more than 25% of the labor force is foreign-born, labor supply challenges could be more intense. About 5% of respondents to a recent survey from the Association of General Contractors reported a direct visit from immigration agents this year, and 28% reported some impact on their operations, including workers avoiding job sites or subcontractors losing workers.

While a sharp and sudden decline in available labor might be expected to raise labor costs, the broader industry slowdown is limiting those increases, at least for now, according to participants. Commercial and residential construction starts have slowed for nearly the past three years, suppressing demand for construction labor.

“Private real estate development is in a recession right now,” Bailey Edwards, vice president at Texas-based real estate developer Stratus Properties, said at a panel presentation. “So that is masking the impact of the shortage” of workers.

Some developers, particularly those in states with higher concentrations of migrant labor, are bracing for rising labor costs amid worker shortages when the next construction wave starts.

“When the market turns around, everyone is going to try to move forward at the same time, and we are going to have a bidding war,” Edwards said. “There’s not enough labor.”

Tariffs have not boosted consumer inflation as initially projected. However, the uncertainty and supply chain disruptions caused by tariffs are challenges for small businesses and manufacturers.

Though newly implemented tariff policies have led to some price increases on goods, the pass-through of those costs to consumers has been slower than expected. In a recent survey, economists revised down their projection on tariffs’ inflationary impact in 2025, with 45% expecting less than a 0.5 percentage point impact.

“If you are given a new cost structure, you will learn to adjust to that cost structure,” said Adam Hersh, senior economist from the Economic Policy Institute, a Washington, D.C.–based think tank that focuses on economic issues affecting low- and middle-income workers. “What’s nearly impossible to adjust to is the uncertainty.”

So far, companies have adjusted the cost of tariffs by reducing their profit margins or negotiating with suppliers rather than passing their higher costs onto consumers. That has been an easier task for larger companies than smaller ones.

“The risk is that small businesses are really being crushed in this, because Amazon wants to maintain market share and Amazon can squeeze margin … Smaller companies can’t squeeze margins,” said Caroline Freund, dean of the School of Public Policy and International Affairs at the University of California, San Diego.

Instability in tariff policy may hinder the broader goals of boosting manufacturing in the United States in the short term, even as targeted tariffs incentivize some industries to locate more production here. Estimates from consultants and professional organizations indicate that it takes around 24 months to reshore a manufacturing operation.

A lack of stability in supply chains during this period can delay relocation. A recent survey from Oxford Economics of manufacturers reported that only 16% are considering shifting more heavily to suppliers in the United States, while 43% look to diversify their supply chains more broadly.

“I do believe these policies are likely to result in more U.S. manufacturing, or at least a greater share of U.S. manufacturing for final output,” said Robert Koopman, former chief economist of the World Trade Organization and current Hurst Professional Lecturer at American University School of International Service. “The question is how fast is that pie growing and how costly is that shift?”

The expansion of infrastructure for AI has driven a sizable share of economic activity and business investment so far this year. Competition between data centers and manufacturers for land and energy will likely influence the industrial real estate industry in the near term.

Efficiency improvements helped absorb some of the growth of electricity demand from the late 2000s through the early 2020s. Since 2022, however, the rapid rise of AI and efforts at reshoring high-tech manufacturing have led to substantial growth in energy demand to power data centers and semiconductor fabrication plants.

“We haven’t seen this level of electricity growth since the early 1970s when we did something called air conditioning,” said Kenneth Shiver, chief economist from Southern Co., a provider of electricity and gas to the Southeast.

Economists argue that some extreme estimates of potential power demand are exaggerated due to double or triple counting as firms identify multiple potential sites during their selection process. Still, the growth in demand is real, even if overstated, and competition for grid resources will likely be one of the bigger challenges of the next decade.

Battery storage of renewable energy sources has also grown as grid reliability concerns increase. So far, battery storage has been scalable largely in California, where policy has required it, and in Texas, where a deregulated market and swift permitting process have allowed for private development.

Despite the government shutdown, the Bureau of Labor Statistics recalled some of its workforce to complete its September consumer price survey. Nine days later than planned, it is now set to deliver its findings on Friday. September’s data is especially important as the Social Security Administration uses it to calculate the annual cost-of-living increases for monthly payments in 2026.

The release is set to come days before the Federal Reserve’s policy meeting next week. After cutting its target interest rate by 25 basis points at its last meeting amid more evidence of the weakening labor market, many analysts expect another cut is possible, given the lack of reliable data on other indicators.

The CPI print may help better inform that decision. A report showing a softer price increase would allow the Fed to make an insurance cut against further weakness in the labor market. Should inflation be hotter than expected, a second cut would be unlikely to happen.