Implications: We got another double dose of monthly data this morning as Federal agencies continue to catch up on the backlog from the government shutdown, and new home sales continue to show signs of life. While December showed a small decline in sales, that came on the heels of the largest monthly gain since 2022 in November. Looking at the big picture, buyers purchased 745,000 homes at an annual rate in December, and sales are up 3.8% in the past year. While the December pace remains below the highs of the pandemic, sales are at roughly the fastest pace since 2022 and above pre-pandemic levels which had been a ceiling of sorts for activity the past couple of years.  Although the housing market continues to face challenges, there are reasons for modest optimism. First, financing costs have been trending lower, with the average 30-yr fixed mortgage rate now around 6.2%. Notably, that is the lowest since 2022, and buyers have reasons for further optimism on financing costs. Several more rate cuts are expected from the Federal Reserve in 2026, the Trump Administration recently nominated a new Fed chair who is likely to be even more accommodative, and there is talk of Fannie and Freddie purchasing more mortgages as well. Meanwhile, prices have been trending lower for new builds in the past several years. Median sales prices are down 10% from the peak in October 2022.  The Census Bureau reports that from Q3 2022 to Q3 2025 (the most recent data available) the median square footage for new single-family homes built fell 6.3%. 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 300% 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 convincing current homeowners to give up the low fixed-rate mortgages they locked-in during the pandemic to list their homes. It looks like a combination of lower mortgage rates, less expensive options, and an abundance of inventories may give home sales a boost. On the housing front, pending home sales, which are contracts on existing homes, declined 0.8% in January after falling 7.4% in December, signaling that existing home sales (counted at closing) likely declined in February.

Click here for a PDF version

Implications:  Consumers closed out 2025 with healthy growth in both income and spending, up 0.3% and 0.4% in December, respectively.  Unfortunately, the news on the income side is not quite as strong as the headline suggests.  Private-sector wages and salaries rose 0.2% in December, the slowest pace in six months, although they finished up a solid 3.9% for the year.  The largest driver of income gains in December came from transfer payments, rising 0.8%, although more than half of that increase came from a settlement paid by a utility company for the damage caused by the 2023 Maui wildfire.  Government transfer payments increased 0.3% in December, finishing up a massive 9.0% in 2025.  We hope to see private earnings rise at a faster pace than government transfers in the year ahead, private earnings being a more reliable (and desirable) long-term source of income.  On the spending front, personal consumption rose 0.4% in December, led by a 0.7% increase for services, partially offset by a 0.1% decline in goods spending.  Service spending rose 6.1% for all of 2025, compared to a 1.6% increase for spending on goods.  The bad news in today’s report is that inflation accelerated unexpectedly in December, with PCE prices – the Fed’s preferred inflation metric – rising 0.4% while the year-ago reading rose to 2.9%, above the 2.7% rate for the twelve-months ending in December 2024.  “Core” prices, which strip out the volatile food and energy categories, also rose 0.4% in December, as well, with the year-ago comparison moving up to 3.0%, matching the increase for the twelve-months ending in December 2024.  Interestingly, the tariff-sensitive goods category was not the primary driver of inflation in 2025, rising just 1.7% over the past year. Instead it was services that led the way, increasing 3.4% over the same period. This will be worth watching in the months to come as both headline and core measures remain stubbornly above the Federal Reserve’s 2.0% target.

Click here for a PDF verison

Implications: Soft headline, respectable details, and a caution signal for the Fed.  Real GDP grew at a 1.4% annual rate in the last quarter of 2025, well below the consensus expected 2.8%.  However, the key components of the report that are most indicative of the underlying health of the economy were not the source of weakness.  For example, real consumer spending grew at a 2.4% rate, which was exactly as we expected.  Business fixed investment – including equipment, commercial construction, and intellectual property – grew at a solid 3.7% annual rate.  So why did real GDP grow more slowly?  Primarily because government purchases shrank at a 5.1% rate, led by the federal government, where purchases dropped at a 16.6% rate.  As a result, government purchases reduced the pace of real GDP growth by 0.9 percentage points.  Excluding government at all levels (federal, state, and local), real GDP grew at a 2.8% pace in Q4.  We like to follow Core Real GDP, which includes consumer spending, business fixed investment, and home building, and excludes more volatile categories like government purchases, inventories, and international trade.  Core Real GDP grew at a 2.4% annual rate in the fourth quarter and was up 2.6% versus a year ago.  In other words, we don’t think fourth quarter GDP signals some sort of change in the trend for growth.   The most worrisome part of the report was that GDP prices rose at a 3.6% rate in Q4 and are up 3.3% from a year ago.  As a result, the Federal Reserve is getting mixed signals on cutting rates, given that the recent CPI report shows a deceleration in inflation instead.  Nominal GDP rose at a 5.1% rate in the fourth quarter and is up 5.6% versus a year ago, both figures well higher than the current 3.625% target on short-term rates.

Click here for a PDF version

While often grouped together, gold, silver, and copper play unique roles in the economy. Over the past month, all three have reached historic price milestones, raising important questions about what lies beneath the rally. In this week’s “Three on Thursday,” we explore what is driving the surge in precious metals and what it may signal about the broader economy. Click the link below for more insight.

Click here to view the full report

Implications: After plummeting in November, the trade deficit widened sharply to $70.3 billion in December, rounding out the most volatile year of international trade in decades. The increase in the deficit for the month was due to both a rise in imports, which increased $12.3 billion, as well as a decline in exports, which fell $5.0 billion.  Roughly half of the increase in the deficit December came from nonmonetary gold – a category not included in GDP calculations – which softens the impact to net exports on Q4 GDP. We like to focus on total volume of trade, imports plus exports, as it shows the extent of business and consumer interaction across the border. That measure rose by $7.3 billion in December, finishing 1.2% higher in 2025 versus 2024.  Over the past year, exports have risen 6.3% while imports declined 2.6%. The GDP math related to the trade deficit suggests that with the fourth quarter numbers in, on net, more of what we purchased overall was made domestically, meaning faster real GDP growth.  Meanwhile, the landscape of global trade continues to evolve. China, once the dominant exporter to the U.S., has slipped to a distant third behind Mexico and Canada, with exports to the U.S. down 29.7% in 2025 versus 2024. Notably the accelerated demand for high tech equipment to fuel the massive AI investment is clear in the data: the U.S. imported almost $145 billion more of computer accessories than in 2024 and the trade deficit with Taiwan reached a record high $147 billion for the year. Also in today’s report, the dollar value of U.S. petroleum exports once again exceeded imports, marking the 46th consecutive month of America being a net exporter of petroleum products. In other news this morning, initial jobless claims declined 23,000 last week to 206,000, while continuing claims rose 17,000 to 1.869 million.  This is consistent with modest job growth in February.

Click here for a PDF version

Implications: Industrial production started 2026 on a healthy note, posting the largest monthly gain in nearly a year and beating consensus expectations. More broadly, industrial production is up 2.2% in the past year despite huge shifts in trade policy and tariff uncertainty that coincided with the Trump Administration taking office. Meanwhile, the manufacturing sector is up an even stronger 2.5% in the past year. While these numbers may seem modest, they represent the fastest 12-month growth rates for those series since 2022 during the COVID reopening. Digging into the details for January, manufacturing was the biggest source of strength, rising 0.6%. The volatile auto sector contributed to the gain, with activity jumping 1.4% in January.  Manufacturing ex-autos (which we think of as a “core” version of industrial production) also posted a gain of 0.5%. The typical bright spots in the “core” measure were present in today’s report as well.  Production in high-tech equipment, which has been a reliable tailwind recently due to investment in AI as well as the reshoring of semiconductor production, increased 1.9% in January.  High-tech manufacturing is up a strong 8.9% in the past year and has typically posted the fastest 12-month growth rate of any category. However, the manufacturing of business equipment overtook it in January, up 9.4% in the past year, signaling reindustrialization in the US outside of just the high-tech industries mentioned above. Utilities output (which is volatile and largely dependent on weather), was also a tailwind in January, rising 2.1%. Finally, the mining sector was a minor drag on growth in January, declining 0.2%. Declines in oil and gas production and the drilling of new wells more than offset a gain in the extraction of other metals and minerals.  In other recent manufacturing news, the Empire State Index – a measure of factory sentiment in the New York region – declined slightly to +7.1 in February from +7.7 in January.

Click here for a PDF verison

Implications:  Homebuilding finished 2025 on a positive note, with starts hitting a five-month high and rising 6.2% to a 1.404 million annual rate, beating even the most optimistic forecast for any Economics group surveyed by Bloomberg.  Despite the jump, starts remain 7.3% lower than a year ago, which is not surprising given the number of headwinds builders face, including the largest completed single-family home inventory since 2009, high home prices, restrictive local building regulations, stricter immigration enforcement that makes it difficult to find or replace workers, and the impact of tariffs on building costs.  All of this has translated into building rates reminiscent of 2020 – no growth in five years.  Digging into the details of the report, both single-family and multi-unit starts contributed to the increase in December itself.  Single-family starts rose 4.1% but remain 9.0% lower than a year ago. Multi-unit starts jumped 11.3% in December but are down 3.0% from a year ago.  Building permits rose 4.3% to a nine-month high in December, but that was completely due to a 15.2% jump from the volatile multi-unit category.  Single-family permits declined 1.7% and remain 10.9% lower than a year ago.  One way homebuilders had been combatting sluggish activity was by focusing their efforts on completing projects.  New home completions were red hot in 2024 but slowed in 2025.  Completions rose 2.3% in December itself to a 1.525 million annual rate but are down 0.1% in the past year.  Despite the slower trend, completions outpaced starts and permits in ten out of the twelve months in 2025.  With strong completion activity and tepid growth in starts, the total number of homes under construction has fallen 10.5% in the last twelve months.  In the past, like in the early 1990s and mid-2000s, this type of decline was associated with a housing bust and falling home prices.  But with the brief exception of COVID, the US has consistently started too few homes almost every year since 2007.  So, while multiple headwinds may hold back housing starts, a lack of construction since the last housing bust should keep national average home prices elevated. The encouraging news is that affordability has shown some signs of improvement, with the average 30-year fixed mortgage rate falling to 6.25% in December, the lowest level since August 2022.  However, affordability remains a major challenge for millions of would-be homebuyers as rates are still roughly double what they were for much of 2021.  Putting this altogether, it’s no wonder why the NAHB index, a measure of homebuilding sentiment, remains muted, slipping to 36 in February.  Keep in mind a reading below 50 signals a greater number of builders view conditions as poor versus good, now the 22nd consecutive month that has been the case.  

Click here for a PDF version

Implications:  New orders for durable goods closed out a volatile 2025 by falling for the second time in the past three months. That said, the details of today’s report were much better than the headline. The decline in new orders was driven by a 24.9% drop in commercial aircraft orders, following a 98.2% increase in November.  Transportation is a notoriously volatile category month-to-month, so we prefer to focus on orders excluding transportation for a better check on the broader economy. Orders excluding transportation continue to climb, rising 0.9% in December and finishing the year with the ninth consecutive monthly gain. All major categories outside transportation rose in December, led by computers and electronic products (+3.0%), primary metals (+1.7%), and fabricated metal products (+0.9%). Note that both computers and electronic products and machinery had strong growth in 2025, with each rising in at least ten months of the year. Particularly, machinery is up at a 11.2% annualized rate in the past six months.  These elevated new orders should translate into shipments in the months ahead.  Speaking of shipments, the most important number in today’s release, core shipments – a key input for business investment in the calculation of GDP – rose 0.9% in December and were up at an 8.2% annualized rate in Q4 versus the Q3 average. Core shipments consistently rose in the back half of 2025, which could be evidence of Trump Administration’s push for manufacturing reshoring beginning to take hold.  However, for the Administration’s goals to fully materialize, it will have to translate into a much-needed resurgence in payrolls in that sector in the year ahead.

Click here for a PDF version

If you’re grading the economy based on real GDP, it looks pretty good; if grading based on jobs, not so much.

As we explain below, it looks like the economy grew at a 3.2% annual rate in the fourth quarter, which would be the third straight quarter of 3.0%+ after the Q1 slump related to importers front-running the Trump tariffs.  It would also mean the economy grew 2.7% in 2025, a slight acceleration from 2.4% in 2024.

And yet job growth has sputtered.  Private payrolls rose 172,000 in January, the most in more than a year.  But the Labor Department also reported that including an annual “benchmark revision,” which factors in data on jobless claims, as well as updating a “birth/death” model tracking new businesses and ones that have closed, private jobs only grew 367,000 in 2025, slower than the 1.021 million in 2024.  Excluding health care and social assistance, payrolls declined last year.

One reason for the disparity is productivity, which appears to be picking up.  Another is the strict enforcement of immigration laws.  The US has gone from net immigration flows of 2.7 million per year to something much closer to zero.  Mathematically, if output grows faster than employment, productivity is rising, possibly because of AI.  However, we doubt real GDP will continue growing at 3.0%+ and expect slower growth for Q1.  It’s much too early to declare the start of a new technology-driven boom.   

Consumption: Auto sales dropped at an 18.6% annual rate in Q4 after the end of subsidies for EVs.  “Real” (inflation-adjusted) retail sales excluding autos rose at a 0.4% rate and real service spending appears up at a 3.0% pace.  Combined, this brings our estimate of real consumer spending to a 2.4% rate, adding 1.6 points to the real GDP growth rate (2.4 times the consumption share of GDP, which is 68%, equals 1.6).

Business Investment: We estimate a 3.1% growth rate for business investment, with gains in equipment and intellectual property leading the way.  A 3.1% growth rate would add 0.4 points to real GDP growth.  (3.1 times the 14% business investment share of GDP equals 0.4).

Home Building: Residential construction appears to have declined at about a 10.0% rate in the fourth quarter, possibly reflecting a lack of workers to build homes while strict immigration enforcement makes more units available for rent.  A 10.0% annualized drop would be a 0.4 point drag on real GDP growth.  (-10.0 times the 4% residential construction share of GDP equals -0.4).

Government: The Trump Administration has cut federal payrolls faster than at any time in many decades, but only direct government purchases (not government salaries or transfer payments) count when calculating GDP.  We estimate these purchases were up at a 1.8% rate in Q4, which would add 0.3 points to the GDP growth rate (1.8 times the 17% government purchase share of GDP equals 0.3).

Trade: It looks like the trade deficit shrank for the third straight quarter after the temporary surge in Q1.  This forecast may change when the trade report arrives Wednesday morning, but for now we’re projecting net exports will increase the Q4 real GDP growth rate by 0.8 percentage points.

Inventories: After a decline in Q3, it looks like businesses restocked shelves and showrooms in Q4, boosting inventories and generating what we are estimating as a 0.5 percentage point boost to real GDP growth.

Add it all up, and we get a 3.2% annual real GDP growth rate for the fourth quarter.  Good news, but we don’t expect growth as strong in Q1 or for 2026 as a whole.

Brian S. Wesbury – Chief Economist

Robert Stein, CFA – Deputy Chief Economist

Click here for a PDF version

Implications:  Inflation came in below expectations in January, with the Consumer Price index rising 0.2% and the year-ago comparison cooling to 2.4%.  “Core” inflation, which strips out food and energy, rose a consensus-expected 0.3%, while the year-ago comparison moved lower to 2.5%. Many analysts – including those at the Federal Reserve – warned of a renewed inflation surge from tariffs in 2025.   But if you’ve been reading our content over the past year, then you would have known to look past the tariffs and instead focus on the M2 measure of the money supply for understanding where inflation would go.  Tariffs shuffle the deckchairs on the inflation ship, not how high or low the ship sits in the water.  That’s up to the money supply – and given the slow growth over the last 3+ years – we were not surprised to see inflation continue its bumpy path downward in 2025.  Now, both headline and core inflation sit at or near their lowest twelve-month pace since the great inflation scare began nearly five years ago.  While progress has been made, inflation still remains above the Federal Reserve’s 2.0% target.  Looking at the details, headline inflation was held down by the volatile energy category in January, with prices dropping 1.5%, while its often-volatile counterpart, food prices, rose 0.2%.  Housing rents (those for actual tenants as well as the imputed rental value of owner-occupied homes) was the main driver of core inflation for the month and has been over the last few years.  The good news is that the category finally appears to be turning over, with rents rising only 0.2% and up at a 2.4% annualized rate over the last five months, lagging core inflation.  Meanwhile, airline prices continue to move in large swings, rising 6.5% in January after a 3.8% increase in December.  Putting it altogether, this report should provide further evidence to the Fed that inflation is trending down to its 2.0% target. There is a high chance that nothing happens on the rate front between now and the end of Powell’s term, but investors should watch for a substantive shift in tone come May when Kevin Warsh likely replaces him as Chairman.

Click here for a PDF version