The Fragile Resilience of Capital Goods: Navigating Tariff Uncertainty and Durable Goods Downturns

In the first quarter of 2025, the U.S. economy faced a stark reality: a 0.5% contraction in real GDP, driven by surging imports and dwindling government spending. Yet, within this downturn, the capital goods sector displayed a flicker of resilience. Nonresidential fixed investment, bolstered by equipment spending on information processing and communication technologies, grew despite broader economic headwinds. This duality—declining GDP and rising investment in key capital goods—highlights a critical question: can core capital goods spending endure in an era of policy-driven volatility, particularly as aggressive tariffs reshape business behavior?

Tariff Uncertainty: A Double-Edged Sword

The Trump administration's 2025 trade policies, including a 50% tariff on copper and 25% tariffs on steel and aluminum, have created a paradox. While these measures aim to protect domestic industries, they have also induced a “front-loading” of capital expenditures. In Q1 2025, equipment spending surged at the fastest pace since 2020 as firms scrambled to secure supplies before anticipated tariff hikes. However, this momentum collapsed in Q2. Core capital goods orders—a proxy for business investment—fell by 0.7% in June 2025, a reversal of a 2.0% May rebound. The volatility reflects a broader pattern: businesses are delaying investments until policy clarity emerges, creating a cycle of surges followed by sharp declines.

Stephen Stanley of Santander U.S. Capital Markets captures this dynamic: “The softness in capital goods orders is consistent with anecdotal reports of businesses postponing projects.” This hesitation is compounded by the One Big Beautiful Bill (OBBB), which, while offering tax incentives, has introduced inflationary pressures and fiscal uncertainty. The Congressional Budget Office estimates that the bill will add $3.4 trillion to the national debt over a decade, with minimal gains in inflation-adjusted GDP.

Sectoral Resilience and Vulnerability

The defense and manufacturing sectors exemplify the mixed impacts of policy volatility. In defense, non-defense capital goods orders excluding aircraft plunged by 24% in June 2025 after a 50% surge in May. This volatility, driven by large orders like Boeing's Qatar Airways deal, underscores the sector's sensitivity to tariff-driven front-loading. Meanwhile, the manufacturing PMI fell below 50 in July 2025, signaling contraction for the first time since December 2024. Yet, within this contraction, resilience persists.

The e-commerce sector, for instance, has thrived, with digital sales rising 24.1% year-over-year in June 2025. This growth, driven by demand for cloud-based services and software subscriptions, reflects a structural shift toward digital infrastructure. Similarly, the automotive sector has adapted to electrification trends, with hybrid vehicle sales capturing 14.1% of retail sales in June 2025. These industries demonstrate that resilience lies not in resisting policy volatility but in adapting to it—through innovation and supply chain agility.

However, not all sectors fare equally well. The building materials industry, for example, saw a 5.33% annual decline in June 2025, reflecting cautious consumer behavior amid fears of rising mortgage rates. This decline, though partly seasonal, highlights the fragility of capital-intensive sectors in a high-uncertainty environment.

Investment Implications: Balancing Short-Term Risks and Long-Term Gains

For investors, the key lies in distinguishing between sectors that can endure policy-driven volatility and those likely to be eroded by it. The durable goods downturn, exacerbated by tariffs, has created opportunities in industries that prioritize adaptability. For example, Tesla's shift to Southeast Asia for battery components and Intel's domestic chip fabrication under government incentives illustrate how firms can mitigate exposure to trade tensions. These strategies, though costly in the short term, position companies to capitalize on long-term structural trends like electrification and digitalization.

Conversely, sectors reliant on globalized supply chains—such as pharmaceuticals and steel—face significant risks. A 200% tariff on pharmaceutical imports, though delayed, has already pushed firms like Pfizer to vertically integrate production. While this may stabilize costs in the long run, it requires upfront capital expenditures that could strain profitability.

The Path Forward: Policy Clarity and Strategic Patience

The broader economy's resilience hinges on policy clarity. The current uncertainty—exacerbated by shifting tariff rates and fiscal policies—has created a “grinding lower” trend in capital investment, as noted by Pantheon Macroeconomics. To reverse this, policymakers must balance protectionism with the need for stable, predictable frameworks. For businesses and investors, the priority is to avoid overcommitting to near-term gains while remaining agile to capitalize on long-term opportunities.

In this context, the capital goods sector offers a microcosm of the broader economic challenge. While tariffs and fiscal policies have introduced volatility, they have also accelerated innovation in key industries. The e-commerce and electrification sectors, for instance, are poised to outperform as they align with structural shifts in consumer behavior and technology. For investors, the path to resilience lies in identifying these adaptive industries and avoiding those vulnerable to policy-driven shocks.

As the U.S. economy navigates this turbulent landscape, the lesson is clear: resilience is not about resisting change but embracing it—through strategic investment, innovation, and a willingness to endure short-term volatility for long-term gains.