Q1’25 Ends on a Discordant Note, But Consumers Hold the Key

Each spring, there’s an ancient tradition in cultures around the world celebrating renewal and transition. The Japanese marvel at cherry blossoms, a fleeting symbol of life’s uncertainty and beauty. Farmers till their fields, knowing growth relies on both risk and reward. This season of change feels particularly fitting for March 2025, where the economic landscape mirrors spring itself — moments of promise overshadowed by uncertainty.For community financial institutions (CFIs), tariffs, mixed consumer signals, and volatile projections have created a hazy environment that demands resilience and adaptability. Below, we break down the key trends from March 2025, offering insights into how CFIs can find clarity and chart a strategic course forward.Economic Trends and Consumer SentimentKey economic indicators continue to point to softness. The Atlanta Fed lowered its Q1 2025 GDP growth projection to -2.8% as consumers and businesses attempt to head off tariff implementations. However, the real story lies in what’s driving consumer behavior. Savings rates ticked up to 4.6% in February from 4.3% in January, meaning consumers are being cautious with spending as inflation persists. Along the same line, personal income grew 0.8% MoM, but retail sales only rose by 0.2%, with several categories experiencing declines.Adding to the fog, consumer confidence continued its downward trend. The University of Michigan Sentiment Index revealed plummeting consumer sentiment, with a 12% MoM decline from 64.7 to 57. The Conference Board’s reading on consumer confidence likewise showed mounting anxiety about economic and demand uncertainties.

Source: University of MichiganManufacturing output also faltered, hampered by concerns about tariffs, causing a dip in labor demand and hours worked. The one bright note was the increase in new jobs — an unexpectedly high 228K. After two months of job increases half of this amount, part of which can be attributed to adverse weather and strikes, the job market was expected to see a gain to offset those months. Yet, the unemployment percentage increased slightly from 4.1% to 4.2%. Although there are some glimmers of stability, weaknesses in consumer confidence, savings patterns, and trade policies suggest that resilience will require a cautious approach in the months ahead.Banking LandscapeFor CFIs, March reinforced a challenging reality for 2025. The impacts of tariffs and broader economic pressures are compressing growth, which will likely show in Q1 earnings reports. According to Federal Reserve data, US commercial bank deposits at small banks increased slightly to $5.59T as of mid-March, a sign of excess liquidity but limited deployment options.The H.8 report signaled some brighter spots, including an uptick in consumer loans, such as credit cards and home equity lending. However, the subdued appetite for M&A activity and the rising share of agency and Treasury paper in balance sheets underscores a strategic pivot toward risk aversion.One key takeaway for CFIs is that adaptability is critical. Managing shifting deposit costs while navigating a tight lending landscape requires a proactive strategy to stay ahead of potential job losses and further margin compressions later this year.Housing TrendsSpring’s housing market has brought mixed news. Building permits declined to a seasonally adjusted annual rate of 1.456MM in February, down from both January’s numbers and where the market was at this time last year. New housing starts, on the other hand, rose to 1.501MM, bolstered by a rebound after poor January weather.Existing home sales showed a 4.2% MoM improvement, but YoY sales fell 1.2%. Affordability is still a key challenge for would-be homebuyers, with mortgage rates still high, despite a modest decline from 6.88% in February to 6.77% in March. While homebuyers have more properties to choose from, homes are actually staying on the market longer — evidence of lingering issues for the housing market.The Fed and What’s NextMarch brought clarity on the Federal Reserve’s immediate direction. The Federal Open Market Committee (FOMC) held its target rate steady at 4.25%-4.50% but reduced its Treasury quantitative tightening program from $25B to $5B per month, signaling a careful pivot in monetary strategy. The Fed’s updated Summary of Economic Projections (SEP) illuminated key themes:

Fed Chair Jerome Powell acknowledged the uncertainty in economic conditions, particularly as tariffs introduce further inflationary pressures. Regional Fed leaders echoed concerns about the drag on business investment and the potential for delayed rate cuts. Markets have already priced in a 25bp cut for mid-2025, but any deviation from expectations could amplify volatility as the year progresses.Looking Ahead While March offered few clear answers, the broader economic trends underscore the importance of resiliency. For CFIs, strategic decision-making, grounded in forward-looking data analysis, will be critical to navigating an increasingly fragmented landscape. Tariff disruptions, evolving borrower demand, and monetary policy shifts will continue to define the year ahead.