Investor borrowing to fund stock purchases—known as margin debt—surged past $1 trillion in June 2025, eclipsing the previous record of $937 billion set in January. Margin debt doesn’t cause market crashes—but it certainly can magnify them. In this week’s “Three on Thursday,” we look at what margin debt is telling us now. For further insight, click on the link below.

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Implications:  Consumers started the summer on a healthy note, with both income and spending rising 0.3% in June.  Unfortunately, the news on the income side is not as strong as the headline appears. Private-sector wages and salaries rose a meager 0.1% in June – the smallest monthly increase in close to a year – although they are up 4.7% in the past year.  The largest driver of income gains in June was once again government transfer payments, up 1.0%, as a rise in social security payments led the category, while government sector wages and salaries increased 0.6% in June and are up 5.5% from a year ago.  These government led drivers are not reliable (or desirable) long-term sources of income, so while incomes rose in June, the mix of where that spending power came from was weak.  What was more constructive was the 0.3% rise in personal consumption, where spending on goods rose 0.5% while services spending increased 0.3%.  This may reflect tariff impacts on goods prices, but as we have noted in other pieces on inflation, higher consumer spending in some categories is largely being offset by declines in other categories, and inflation has shown little net movement in response to the tariffs.  PCE prices, the Feds preferred inflation metric did run a little hot in June, up 0.3%, and the year ago reading rose to 2.6% from 2.4% in May, but that largely reflects weak inflation readings from this time last year rolling off the books.  The six-month annualized change in PCE prices has been trending lower and with M2 growth running below the historical 6% rate, we believe inflation will continue to diminish in the months ahead. We believe that the Fed should have restarted the rate cut process yesterday, but now we must wait and see how the economic data, both inflation and employment, progress between now and September. In other recent news on the employment front, initial claims for unemployment insurance rose 1,000 last week to 218,000.  Continuing claims were unchanged at 1.946 million.  These figures are consistent with our expectation that tomorrow’s employment report will show around 132,000 nonfarm jobs created in July. On the housing front, pending home sales, which are contracts on existing homes, declined 0.8% in June following a 1.8% rise in May, suggesting existing home sales (counted at closing) will be roughly unchanged in July.  Finally on the manufacturing front, the Chicago Purchasing Managers Index (PMI) rose to 47.1 in July from 40.4 in June, signaling activity continues to contract, but at a slower pace than prior months.

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The Federal Reserve held rates steady for a fifth consecutive meeting, though murmurs have begun in the Fed ranks that the time for more cuts is approaching. Yet while the Fed statement acknowledged the weakening of fundamentals since the last meeting in June, today’s press conference suggests Powell and company are plenty willing to sit on the sidelines.

Starting with the Fed statement, the most notable change from June came in that two voting members – Fed Vice Chair for Supervision Michelle Bowman and Fed Governor Christopher Waller – dissented from today’s decision to hold rates steady, instead stating that they would have preferred a 25-basis point cut.  This is the first time since 1993 that two members of the Fed Board of Governors have dissented at a meeting. Other changes to today’s release included a softening in language around GDP growth, from June’s comment that activity “continued to expand at a solid pace” to now stating growth “moderated in the first half of the year”.  For our take on the Q2 GDP report released this morning, click here.  Finally, the Fed removed language that economic uncertainty “has diminished” and now simply notes that uncertainty remains elevated.  That seems a bit odd given the recent string of trade agreements that have removed unknowns around tariff rates as well as the passage of the OBBB which has removed uncertainty about the path forward on tax rates.

During the press conference, Chair Powell saw pushback from the start, as reporters probed for a better understanding of what, exactly, the Fed is waiting for.  Powell once again stated that the current level of the Fed funds rate is only moderately restrictive and isn’t having a dampening impact on the economy, yet at the same time acknowledged that real (inflation- adjusted) economic growth has slowed to a 1.2% annualized rate in the first half of 2025 from the 2.5% pace seen in 2024.  On the employment side he brushed off the slowing in nonfarm payrolls growth (nonfarm payrolls gains have averaged 130,000 per month through the first half of this year, down from 168,000 per month in 2024) and instead put the focus on the unemployment rate which has stayed in a relatively steady range.   

Even when it came to inflation, Powell wasn’t let off the hook.  In the five months since President Trump entered office, CPI has increased at a 1.8% annualized rate, below the Fed’s 2% target. Yes, year-ago readings remain elevated because of weak inflation data twelve months ago, but the focus should be on the current trajectory, not events well past.  But rather than acknowledge that tariffs may not be as inflationary as the Fed has anticipated, they have taken the same track as they did when they insisted inflation was transitory back in 2020 and 2021. It’s not that their models are wrong, we just have to wait longer. 

We believe that the Fed should act now, just as we believed they should have acted sooner to contain the rise in inflation from the COVID-era money printing, but we don’t think they read the Monday Morning Outlook.  While we wait on the Fed, we will continue to dive deeper into the data through our MMOs, Data Watches, Three on Thursday reports, and research pieces that we hope give you a window into how – and why – our views differ on both where we stand today, and where we see the economy heading in the months ahead.

Brian S. Wesbury – Chief Economist

Robert Stein, CFA – Deputy Chief Economist

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Implications:  Real GDP growth rebounded sharply from the decline in the first quarter, growing at a 3.0% rate in Q2.  However, this is not a signal of a new era of prosperity or that the underlying trend is now 3.0%.  Instead, it’s largely a reflection of how businesses reacted to the introduction of tariffs this year.  President Trump promised early this year to raise tariffs.  In response, businesses were front-running tariffs in Q1, rapidly filling orders from their foreign suppliers and putting some orders from US producers on the backburner.  As a result, we got lower real GDP in Q1.  But once higher tariffs arrived, businesses slowed orders from abroad and shifted some back to US producers, resulting in a rebound in real GDP.  Putting these two quarters together, real GDP is up at a modest 1.2% annual rate in the first half of the year, below the 2.0% average of the past twenty years.  In terms of the details for the second quarter, net exports added 5.0 percentage points to the growth rate in Q2, the largest contribution for any quarter since at least the 1940s (after Q1 was a record drag).  Meanwhile, with fewer imports, inventories were a 3.2 point drag on growth in Q2.  The good news is that inventories are very likely to help support growth in the third quarter.  We like to follow what we call “Core” Real GDP, which is consumer spending, business fixed investment, and home building, and excludes the most volatile categories like government purchases, inventories, and international trade.  Core GDP grew at a modest 1.2% annual rate in Q2, a 1.6% annual rate in the first half of the year, but is up a respectable 2.4% from a year ago.  Perhaps the best news is more evidence that the Federal Reserve has room to modestly cut rates.  Nominal GDP (real GDP plus inflation) is up 4.5% from a year ago, compared to 5.7% in the year ending in the second quarter of 2024.  The drop in the growth rate of nominal GDP signals that monetary policy has been tight and the 4.5% trend is already very close to the Fed’s target for short-term rates.  Note that GDP prices rose at a 2.0% rate in Q2, right at the Fed’s inflation target.  If the Fed doesn’t cut rates, we are headed for inflation below the 2.0% target.  In other news this morning, ADP reported private payrolls up 104,000 in July, consistent with our forecast for an increase in nonfarm payrolls of 132,000 to be reported on Friday.  On the housing front, home prices declined slightly in May, the second consecutive drop.  The national Case-Shiller index fell 0.3% for the month while the FHFA index declined 0.2%.  However, both indexes remain higher than a year ago, the Case-Shiller by 2.3% and the FHFA by 2.8%.  We expect very modest price gains in the year ahead.

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President Trump announced higher tariffs were on the way almost as soon as he took office.  As a result, businesses focused on buying foreign goods in advance, to front run those tariffs, putting some of their purchases from domestic producers on the backburner. The result was a massive surge in imports in Q1 that made trade the largest drag on real GDP growth for any quarter since at least the 1940s.

Now trade has gone in reverse, with purchases shifted back to US producers, which means trade will make a large contribution to real GDP in Q2 and real GDP will rebound sharply.  How much it will rebound will be unclear until Tuesday morning, when we get a report on June trade and inventories, which could lead to substantial revisions in our forecast.

In the meantime, we are forecasting 3.0% annualized growth in Q2 versus a consensus expected 2.4%.  But don’t get too excited if we’re right.  Real GDP has averaged 2.0% per year the past twenty years, so one quarter with 3.0% growth after a quarter of -0.5% is not a sign of an economic boom.

Consumption: Auto sales declined at an 8.6% annual rate in Q2 while “real” (inflation-adjusted) retail sales excluding autos rose at a 1.0% rate and real service spending appears up at a 1.0% pace.  This brings our estimate of real consumer spending on goods and services, combined, to a 0.5% rate, adding 0.3 points to the real GDP growth rate (0.5 times the consumption share of GDP, which is 68%, equals 0.3).

Business Investment:  We estimate a 2.1% growth rate for business investment, with gains in equipment and intellectual property leading the way.  A 2.1% growth rate would add 0.3 points to real GDP growth.  (2.1 times the 14% business investment share of GDP equals 0.3).

Home Building:  Residential construction declined at about a 5.0% rate in the second quarter, possibly reflecting a lack of workers to build homes while strict immigration enforcement makes more units available for rent.  A 5.0% annualized decline would be a 0.2 point drag on real GDP growth.  (-5.0 times the 4% residential construction share of GDP equals -0.2).

Government:  DOGE and other Trump Administration efforts are cutting back on federal payrolls and transfers to NGOs, but only direct government purchases (not government salaries or transfer payments) count when calculating GDP.  We estimate these purchases were up at a 1.2% rate in Q2, which would add 0.2 points to the GDP growth rate (1.2 times the 17% government purchase share of GDP equals 0.2).

Trade:  The trade deficit plummeted in Q2 as businesses stopped front-running tariffs.  This forecast may change a great amount when the “advance” report on trade arrives the morning of Tuesday July 29, but for now we’re projecting net exports will increase the Q2 real GDP growth rate by 3.4 percentage points.

Inventories:  After an import-related surge in Q1, inventories should grow much more slowly in Q2, generating what we are estimating as a 1.0 percentage point drag on real GDP growth.

Add it all up, and we get a 3.0% annual real GDP growth rate for the second quarter, a sharp rebound from the decline in Q1, but not a sign of an economic boom.

Brian S. Wesbury – Chief Economist

Robert Stein, CFA – Deputy Chief Economist

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Implications:  New orders for durable goods plummeted in June at the fastest pace since the COVID shutdowns in early 2020.  However, the 9.3% decline in new orders was almost entirely due to the very volatile category of commercial aircraft, where orders came back down to earth following the massive Boeing order from Qatar Airways during President’s Trump’s tour through Saudi Arabia, Qatar, and the United Arab Emirates. With the full expectation that airline orders would slow (and cancellations increase) as companies and countries navigate the ever-shifting trade and economic environments, ex-transportation orders provide a much better read on the health of activity and those improved in June.  Orders rose across all major categories, led by primary metals (+0.6%), computers & electronic products (+0.6%), machinery (+0.4%), fabricated metal products (+0.2%), and electrical equipment (+0.1%).  We welcome the broad-based gains, but it must be noted that ex-transportation orders – up 2.2% in the past year – are just barely keeping pace with inflation.  The most important number in today’s release, core shipments – a key input for business investment in the calculation of GDP – rose 0.4% in June and were up at a 3.1% annualized rate in Q2 versus the Q1 average.  The environment in Washington – and geopolitical events abroad – remains uncertain, and we expect volatility in the data to be the rule rather than the exception for the foreseeable future.  In turn, the Federal Reserve must navigate what these changes mean for the path of inflation.  While we don’t currently expect any movement from the Fed at the meeting next week, we do believe that cuts are on the table starting in September, as economic moderation brings the employment side of the Fed’s mandate into more central focus.  In other news this morning, the Kansas City Fed Manufacturing Index, a measure of factory sentiment in that region, improved to +1 in July from -2 in June, representing the first reading in positive territory for the index since late 2022. 

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Last week, Congress passed a landmark bill establishing the first national regulatory framework for stablecoins—digital assets designed to maintain a steady value, typically pegged to the U.S. dollar, or some other fiat currency or asset like gold, to maintain a stable price. In this week’s “Three on Thursday,” we break down the fundamentals of stablecoins, and explore how they’re being used today. For further insight, click the link below.

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Implications:  New home sales managed to eke out a small gain in June, kicking off the summer buying season on a disappointing note after May’s large decline. From a big picture perspective, buyers purchased 627,000 homes at an annual rate and sales have fallen year-over-year for six months in a row. Moreover, that pace remains well below the highs of the pandemic, and sales today are roughly where they were pre-pandemic in 2019.  It’s clear the housing market continues to face challenges. The biggest (and most obvious) is affordability. The Fed has paused their rate cuts, meaning the housing market is on its own for the time being with the average 30-yr fixed mortgage still hovering near 7%. However, in contrast to the existing homes market, buyers are seeing a decline in prices for new builds. Median sales prices are down 12.7% from the peak in October 2022 and have fallen 2.9% in the past year.  The Census Bureau reports that from Q3 2022 to Q1 2025 (the most recent data available) the median square footage for new single-family homes built fell 5.6%. So, while part of the drop in median prices is due to smaller/lower-cost homes, there has also been a drop in the price per square foot.  This is partially the result of developers offering incentives to buyers in order to move inventory. Supply has also put more downward pressure on median prices for new homes than existing homes.  The supply of completed single-family homes is up over 280% versus the bottom in 2022 and is currently at the highest level since 2009. This contrasts with the market for existing homes which continues to struggle with an inventory problem, often due to the difficulty of convincing current homeowners to give up the low fixed-rate mortgages they locked-in during the pandemic. While the future cost of financing remains a question, lower priced options and an abundance of inventories should give a modest boost to new home sales in 2025.  In other news this morning, new claims for unemployment insurance declined 4,000 last week to 217,000.  Continuing claims rose 4,000 to 1.955 million.  These figures are consistent with continued job growth.

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Implications:  Existing home sales came in weaker than expected in June, hitting a nine-month low as persistently high prices continue to put a damper on activity. The existing homes market has been characterized by fits and starts since 2022, with any positive upward trend eventually running into a ceiling of around 4.300 million.  Big picture, sales are still well below the roughly 5.250 million annual pace that existed pre-COVID, let alone the 6.500 million pace during COVID.  Affordability remains the biggest headwind, and unfortunately with the Federal Reserve still on pause with rate cuts, 30-year mortgage rates remain near 7%.  Unfortunately, buyers are getting squeezed at both ends, with the median price of an existing home up 2.0% from a year ago. Notably, that price increase has happened despite the inventory of existing homes rising 15.9% in the past year.  That has helped push the months’ supply of homes (how long it would take to sell existing inventory at the current very slow sales pace) to 4.7 in June, a considerable improvement versus the past few years, and approaching the benchmark of 5.0 that the National Association of Realtors uses to denote a normal market. However, many existing homeowners remain reluctant to sell due to a “mortgage lock-in” phenomenon, after buying or refinancing at much lower rates before 2022.  This remains an impediment to activity by limiting future existing sales (and inventories).  While the situation has clearly improved recently, a tight inventory of existing homes means that while the pace of sales looks like 2008, we aren’t seeing that translate into a big decline in prices.  Existing home sales also face significant competition from new homes, where in many cases developers are buying down mortgage rates to compete and move inventory (when interest rates are higher, firms, including homebuilders, forego more potential earnings by holding onto inventories).  Look for the housing market to remain stuck in low gear until affordability improves. In other recent news, the M2 measure of the money supply rose 0.6% in June and is up 4.5% from a year ago.  This remains below the 6% growth that has been normal over the past few decades, and as we argued in this week's MMO, we believe recent data supports modest rate cuts from the Federal Reserve. Finally, on the manufacturing front, the Richmond Fed index, a measure of mid-Atlantic factory activity, dropped unexpectedly to -20 in July from a reading of -8 in June.

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Every year the Per Jacobsson Foundation hosts and publishes a lecture on Monetary Policy.  Back in 1979, Arthur Burns delivered the annual lecture in Belgrade, Yugoslavia (link).  He titled the lecture “The Anguish of Central Banking” and he came clean about the Federal Reserve’s inflationary policies in the 1970s.

Burns said, “Every time the Government moved to enlarge the flow of benefits to the population at large, or to this or that group, the assumption was implicit that monetary policy would somehow accommodate the action.”  Not doing this, he explained, “would be frustrating the will of Congress to which it [the Fed] was responsible.”

In other words, Arthur Burns admitted the Fed was “not independent.”  If the people and their politicians wanted a larger government, the Fed can’t stand in the way.  In fact, as Burns said, the Fed’s role was to “accommodate” this new spending, whether inflationary, or not.

Does this sound familiar? The Fed used Quantitative Easing, during both the Financial Panic of 2008-09 as well as COVID, to help accommodate massive spikes in government spending.  Call it what you will, but monetary independence it was not.

If the Fed had remained truly independent it would not have printed money to finance COVID spending.  It would have forced the government to go into the open market to borrow more, at higher rates, to ramp up spending.  Instead, M2 soared like never before, and inflation followed.

But for some odd reason, Chairman Jerome Powell has drawn the “independence” line in the sand at accommodating tariffs. Even though President Trump raised tariffs in his first term, campaigned on raising tariffs again, and won the popular vote, the Fed has decided that tariffs are inflationary and cutting interest rates now would be risky.  So, we suppose whether voters support it or not, the Fed has decided that this policy can’t be “accommodated.”  Interesting.

To be clear, we do not think tariffs themselves are inflationary…they only cause the relative price of tariffed items to rise, whereas inflation is an excess of money printing that causes a general rise in prices.  So far, the data back up this theory.  Since January, when Trump took office, consumer prices are up 1.8% annualized and producer prices are up 0.2% annualized.  Inflation this low means monetary policy is at least moderately tight.

Monetary policy impacts inflation with a significant lag.  So, if monetary policy is already tight and inflation should hit the Fed’s 2.0% inflation target (on a year-ago comparison basis) sometime in the next year, then now is the time to cut rates.

But for some reason, the same Powell who was willing to hold the federal funds rate below inflation in late 2021– after vaccines had been released and inflation was taking off – won’t cut them now, even though inflation is well below the 4.375% federal funds rate and “real” (inflation-adjusted) interest rates are high relative to the past twenty years.

This brings us to discuss all the gnashing of teeth in recent weeks, by pundits and politicians who are now defending the Fed’s “independence.”  They know this history as well as we do, but evidently as long as no politician publicly asks the Fed to do something or threatens to fire a Fed official for resisting a presidential request, they think the Fed remains independent.

But true independence should also mean not accommodating the policy goals of Congress and the President – regardless of party – just because you think you’re supposed to.  It should also mean consistency in how that approach is applied.   And in that sense, Powell has failed and deserves to be replaced.

Unfortunately, doing so before May 2026, when his term as chairman runs out, would be bad for the markets for multiple reasons.  First, the courts could step in leading to Powell remaining on the job, but potentially digging in his heels even deeper against cutting rates.  Second, even if he’s removed promptly, the remaining policymakers at the Fed could dig in their heels even in Powell’s absence.  Third, even if Trump manages to get a replacement for Powell installed quickly and that replacement is able to persuade a Fed majority to cut rates, markets could sense that future Fed chiefs who refuse to cut rates will be replaced more quickly, leading to a spike in long-term interest rates.

The bottom line is that a truly independent Fed would be good for markets and the economy, but that’s not what we have now.  Powell deserves to be replaced, but with only ten months left in his term, the better move is to just wait him out.

Brian S. Wesbury – Chief Economist

Robert Stein, CFA – Deputy Chief Economist

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