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Public sector demand slumps as the government enters shutdown

• On October 1, the US federal government entered a shutdown after negotiations for a new appropriations bill failed.
• During a government shutdown, essential federal government operations, such as law enforcement, air-traffic control, and social security, persist, while nonessential operations are paused and workers involved in these operations are furloughed. Thus, the current shutdown is expected to result in 750,000 federal workers being furloughed, representing a $400 million reduction in daily expenditure by the federal government.
• This significant reduction in federal spending and operations will affect the entire US economy, weakening aggregate demand and slowing economic growth. For example, the 35-day government shutdown in Q1, 2019, reduced aggregate demand in both the public and private sectors, resulting in a 0.2% reduction in GDP growth that quarter.
• The effects of the shutdown are likely to be most acute in markets where the public sector is a major buyer segment, weakening demand and increasing average vendor risk by destabilizing important revenue streams.
• As negotiations for a new appropriations bill to reopen the government remain ongoing, ProcurementIQ will continue to monitor the situation and update this story with the latest information.

Tariffs to negatively impact the distribution and conditioning systems equipment sector

• The Trump Administration’s reciprocal tariffs, which apply general tariff rate increases to most leading US trade partners, are set to take effect on August 7, after the administration finalized the rates on August 1. These changes will significantly increase the tariff rate on leading distribution and conditioning systems exporting countries, including the European Union (15.0%), Canada (35.0%), China (54.0%), Mexico (25.0%), Japan (15.0%), and South Korea (15.0%).
• Distribution and conditioning systems equipment manufacturers in the United States will pay more for many foreign components and parts, such as heating and cooling equipment. Major manufacturers that operate in these markets, including Carrier, Daikin, Lennox, and Trane, have a manufacturing presence in Mexico and source components from tariff-impacted countries like China.
• According to the Heating, Air-Conditioning, & Refrigeration Distributors International (HARDI), over 66.0% of heating, ventilation, air conditioning, and refrigeration products are made in or use components imported from Canada, China, or Mexico. As price increases are passed down the supply chain, buyers will likely see price increases for key distribution and conditioning systems equipment.
• China is even more prevalent in several distribution and conditioning component markets, raising upstream supply chain risk following these tariffs. For example, according to the International Energy Agency, 95.0% of heat pump compressors were manufactured in China in 2023, and China accounts for half of the global trade in heat pump components.

United States announces new tariffs on all imported steel

• In February 2025, the United States announced 25.0% tariffs on all imported steel with no exemptions or exceptions. The tariffs took effect on March 12, 2025. On June 4th, these tariffs were increased further to 50%. These tariffs were not impacted by a recent court decision that temporarily suspended duties on certain goods as they were implemented under Section 232 of the Trade Expansion Act.
• Previously, countries such as Canada, Mexico, and Brazil, the top exporters of steel to the United States, had exemptions from tariffs. These have now been removed and all imported steel, regardless of origin, will be subject to the 50.0% tariff. However, on May 8th, the US announced an agreement with the United Kingdom to remove all levies on steel exported from the UK.
• When tariffs on steel imports were introduced in March 2018, they contributed to an increase in the price of steel and steel products. According to the Bureau of Labor Statistics, the price of steel-milled products increased by 10.2% in the year after the tariffs were implemented. This market heavily relies on steel as an input and may be impacted by this policy.