Headwinds Facing the SLED Market in 2025

Whether it’s the stock market or the SLED (state, local and education) market, uncertainty is a key factor in decision-making. It doesn’t mean a state of crisis exists or a major downturn is imminent, but that normal status quo patterns can’t be assumed. This has certainly been the case over the past year in 2024 for SLED even before the election. This uncertainty is grounded in some caution flags and newer developments that together add up to a more cloudy picture and cautious outlook for purchasing and government budgets.

One of the biggest considerations for those of us trying to track this market is “How does the caution already seen in 2024 going to evolve or be resolved in 2025?” From our standpoint at GovWin, we see this market facing multiple headwinds right now. While the issue of “which party will be in control?” has been decided, the focus now (as articles and blog posts keep reminding us) is on grappling with how the political changes might affect the everyday operations of this vast $1.5 to $2 trillion SLED marketplace and perhaps also affect the economy.

These new post-election policy concerns aren’t the only ones affecting the market, since we’ve shown that 2024 has already seen significant impacts from powerful forces that were already in play and been developing for some time.

1. Stimulus Uncertainty from ARPA Winding Down

The SLED market since 2021 has massively benefitted from multiple large federal stimulus programs, particularly the American Rescue Plan Act (ARPA) and the Infrastructure Investment and Jobs Act (IIJA). ARPA has been in the spotlight recently due to its winding down by the end of 2024 in terms of allocations. With a total price tag of $350 billion including broad unrestricted “revenue replacement” funds, governments needed to wean themselves off of it over the last 12 months and set new fiscal year budgets assuming no help. The “end of ARPA” has been described as a “fiscal cliff” for some entities while in other cases it was more of a “speed bump.”

A study by the Volcker Institute found that 12 states were particularly “at risk” from relying on ARPA in 2022 for at least 2.5% of total expenditures, and of this group five states were larger such as CA and NY. GovWin’s quarterly Procurement Snapshot reports have shown that the total RFP volumes issued declined much further last year (up to 10-13% year-over-year depending on the quarter) from these five larger states, versus the overall modest declines in RPFs of around 5% nationwide for the year. Recently, our analysis suggests that the ending of ARPA is associated with a more modest 1-2% reduction in total dollars that we can quickly and roughly calculate now. But if the growth would otherwise be 4% in a 12-month period for example, and there’s now a 1-2% impact here then 2.5% to 3% net growth will feel slower than 4%, to be sure. It’s definitely a major factor, but overall for government vendors that operate nationally it's probably more modest than severe or truly “cliff like.” For some states it will be more concerning. SLED governments right now seem to be adjusting and wanting to make sure they have their 2025 spending plans and priorities conservative enough to match up to the current post-ARPA reality.  For more information, we recommend watching our recent free webinar on the topic.

2. New Administration Uncertainty

The federal government has been in the crosshairs of the uncertainty around the new administration’s spending reduction and review efforts, but SLED can also be affected by any changes to grants and assistance to the states as well as changes due to the proposed tariffs, anti-DEI order, anti-EV policies, as well as alignment with the administration’s executive order related to illegal immigration. These can impact SLED budgets and staff, procurement processes, as well as contractors and contracts for joint funded projects. One of the reasons for the 5% dip in RFPs in 2024 was not just ARPA stimulus ending but also uncertainty about potential changes in Washington DC. A recent Reuters article covered the administration’s memo to pause all grants, loans and assistance to nonprofits and governments including SLED for a compliance review. That memo was quickly rescinded but a White House spokesperson then told reporters this would be challenged in court. This is an evolving story our research team will be monitoring.

The impact of the proposed tariffs can affect costs to procure SLED goods and services and force possible trade-offs in terms of the mix of products and services. In many cases, certain key economic inputs or commodities can spike higher while overall budgets remain mostly stable, requiring more reductions in non-commodities services or other areas. Also, the executive orders around anti-DEI and anti-ESG initiatives such as electric vehicles can affect planning and budgeting and procurement strategies as well as potentially require contractors to change their own DEI programs.

However, one very positive potential impact running through it all is a likely boost in demand for certain consulting services geared at guiding government officials and assisting them with making these adjustments, dealing with any legal challenges, and figuring out how to communicate it to the public. Those consultants who are already trusted to provide this guidance or support should consider how to stay ahead of these developments and lean-in to the emerging opportunities.

3. Economic Uncertainty

Even without political uncertainty, economic uncertainty has been a factor on everyone’s mind. As our annual SLED bid volume-oriented forecast report explained, with its legal balanced budget requirement, the SLED market tends to be more sensitive to the ups and downs of the US economy than does the often deficit-funded federal contracting market. If and when the next big downturn happens, its delayed impacts should at least slow the growth in dollars spent but likely will have larger impacts on the numbers of advertised opportunities. While the 2020 crisis was extremely short-lived in dollars due to unprecedented stimulus, RFP volumes declined by 15% partly due to the lockdowns, staff furloughs and school closures, and then took two years to mostly recover. In the Great Recession RFPs were initially stable until a 4% drop hit in 2010 but spending in dollars was more steady (supported by ongoing basic needs). That means the 2024 decline of 5% in RFP opportunities was in effect a “recession-level” decline—and it was driven not by economic turmoil as much as ARPA stimulus winding down. But that doesn’t mean SLED leaders are ignoring the potential for another big economic event that keeps being predicted each year.

Even without an imminent recession, economic uncertainty can still result in an outlook that is more prudent and cautious than robust and optimistic. It will tend to protect basic items while being slower to approve discretionary, higher risk or longer-term purchases that can be delayed without major push-back from stakeholders or the public. While our RFP forecasting suggests this was more of a one-time reset lower in opportunities getting started rather than a continued stair-step down, if a major recession did hit by 2026, for example, there would likely be further erosion in RFPs issued.

While many have called for further growth from possible tax cuts and less regulatory constraints for industries, others caution about inflation staying in place or spiking due to tariffs imposed as part of the new administration’s trade goals. If longer-term interest rates stay high or further grow, for example, it will hamper the ability of the federal government to keep borrowing at the current rate and also be able to afford transfers down to the SLED level. And if the policy changes result in economic decline, that will eventually trickle down to lower SLED budgets and fewer RFPs.  

Conclusion: Let’s take a breath…

This may be a time to step back and catch our breath. We have to resist the urge to speculate beyond the evidence and data available. As the past several years have taught us, our imaginations can lead us to more severe outcomes than what will actually happen. Seldom has there been more uncertainty and a lack of consensus about future directions for economic trends and government spending. But we continue to have confidence in the stability and potential of the overall SLED market. We’ll be following these developments closely in the coming months. And we’ll continue to report on trends in our upcoming quarterly Snapshot report and in other reports and webinars.

For more information on the potential impacts on the SLED market, our article on the details of the individual executive orders is worth reading.

Impacts on the Canadian public sector

In a recent article, GovWin’s senior analyst for Canada Brynn Bruder reports on possible impacts of the new Trump administration in terms of border issues and tariffs.

Impacts on the U.S. Federal market

The Federal Market Analysis (FMA) team is providing updates and analysis on key Trump Administration actions impacting government contractors. Learn more about their insights through the following links:

Webinars:

• Navigating the New Administration: Impacts & Opportunities Part 1
• Administration Transition 2025: Impacts and Implications for Government Contractors

Summary: First Look: Trump Administration 2.0

Articles:

• First 100 Days: Week in Review (Jan 20-24, 2025) 
• Part 2: The New Administration Takes Immediate Executive Action on Federal Technology
• Trump Executive Orders on Immigration and Border Security
• What the Hiring Freeze means for Federal Contractors 
• The New Administration Takes Immediate Executive Action on Federal Technology 
• The Potential Impact of Executive Actions on Select Environmental and Cybersecurity Initiatives