First-quarter growth slowed less than the government initially thought, but the National Association of Manufacturers says the U.S. economy continues to be challenged.

“Consumers and businesses were cautious in the first quarter, dampening real GDP growth and the strong U.S. dollar and struggling economies abroad meant that net exports subtracted from growth in the quarter,” NAM chief economist Chad Moutray said in a report on Tuesday.

Moutray said he expects a second-quarter rebound and predicts that the economy will grow 2.5 percent during the quarter.

He noted that durable goods orders rose 3.4 percent in April, but said much of the increase was in transportation equipment, particularly aircraft sales. When transportation is excluded, new orders rose just 0.4 percent, and during the past 12 months the figure was down 1.4 percent.

“This suggests that demand remains somewhat weaker than the headline number would seem to indicate — a sign that durable goods manufacturers continue to be challenged beyond automobiles and aircraft,” Moutray said. “The figures on durable goods shipments were similar.”

Moutray noted two bright spots in the economy — housing and consumer confidence. New-home sales rose 16.6 percent in April, the strongest pace since January of 2008. During the past 12 months sales have risen 23.8 percent.

According to the University of Michigan and Thomson Reuters, consumer confidence rose in May to its highest level since June 2015, he said.

“At the same time, consumers remain somewhat cautious,” he added.

He said manufacturing activity, employment and international trade will dominate the economic headlines this week. Manufacturer sentiment expanded for two straight months in the Institute for Supply Management’s survey after five months of declines.

On Friday, the government will issue its May jobs report.

“With the Federal Reserve contemplating raising short-term interest rates again at its June meeting, employment growth in this release will be highly scrutinized, with strong hiring likely tipping the scales toward a rate hike,” Moutray said.

“At the same time, manufacturing job growth has been very soft, up just 4,000 in April but down 23,000 through the first four months of 2016. Look for continued weakness in hiring in the sector, though job growth for manufacturers is likely to be slightly positive in May.”