In this week’s “Three on Thursday,” we examine the rapid growth of U.S. natural gas exports. Natural gas has become a cornerstone of America’s energy landscape—reliable, flexible, and far cleaner than coal or oil, emitting up to 50% less CO₂ when used for electricity generation. For further insight, click the link below.

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Implications:  Existing home sales posted a modest gain in October to hit an eight-month high, though activity continues to trudge along at a disappointing pace. The current rate of 4.100 million remains near the lowest since the aftermath of the Great Financial Crisis, and well below the roughly 5.250 million annual pace that existed pre-COVID (let alone the 6.500 million pace during COVID).  That said, affordability has been improving in several notable ways. First, 30-year mortgage rates have been trending lower since May and now sit around 6.3%, near the lowest rate since 2023. Meanwhile, the median price of an existing home is up just 2.1% versus a year ago. It looks like the inventory of existing homes rising 10.9% in the past year has helped put a lid on prices as more options become available for buyers.  That has helped push up the months’ supply of homes (how long it would take to sell existing inventory at the current very slow sales pace) to 4.4 in October, a considerable improvement versus the past few years, though still below the benchmark of 5.0 that the National Association of Realtors uses to denote a normal market. One last positive to note is that aggregate wage growth (hourly earnings plus hours worked) has begun to consistently outpace median home price gains over the past year for the first time since 2023, which improves affordability. That said, some challenges remain. 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). 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). Despite these cross currents, underlying fundamentals have improved recently, which should contribute to a modest rebound in sales. In other recent housing news, the NAHB Index (a measure of homebuilder sentiment) rose to 38 in November from 37 in October.  Keep in mind a reading below 50 signals a greater number of builders view conditions as poor versus good, now the nineteenth consecutive month that has been the case. On the manufacturing front, the Empire State Index – a measure of factory sentiment in the New York region – rose to a stronger than expected +18.7 in November from +10.7 in October. Meanwhile, its counterpart the Philadelphia Fed Index also rebounded to -1.7 in November from -12.8 in October.

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Implications:  The first official employment report released since the federal government shutdown showed the labor market was largely on firm footing in September.  However, it’s important to recognize that this information is now a little stale and new reports on jobless claims in October and early November suggest a slowdown in job growth. Initial jobless claims came in at 220,000 last week, roughly unchanged from where they were in late September before the shutdown; however, continuing claims came in at 1.974 million, about 50,000 higher than before the shutdown.  Regarding September itself, nonfarm payrolls rose 119,000 in September, beating the consensus expected 51,000 and coming in higher than the prediction of any economics group filing a forecast with Bloomberg.  Notably, even with a downward revision of 33,000 to prior months, the net gain of 87,000 still beat the consensus forecast.  These figures are impressive in light of strict enforcement of immigration laws, as well as uncertainty around trade policy and tariffs.  Meanwhile, civilian employment, an alternative measure of jobs that includes small-business start-ups, increased 251,000, while the labor force (people who are either working or looking for work) grew 470,000.  This report also shows signs of strict immigration enforcement, with native-born employment up 2.6 million compared to January while foreign-born employment is down 1.0 million.  However, not all the news on the job market in September was good.  We like to follow payrolls excluding three sectors: government, education & health services, and leisure & hospitality, all of which are heavily influenced by government spending and regulation (including COVID lockdowns and re-openings).  This measure of “core payrolls” declined 9,000 in September.  The unemployment rate ticked up to 4.4%, but that was the result of more people willing to look for work, so it’s not a negative sign.  On the inflation front, average hourly earnings grew a modest 0.2% in September and are up only an annualized 3.6% in the past six months, which may give the Federal Reserve an additional reason to cut rates again at the meeting in December.  Finally, the Trump Administration continued to make progress reducing federal payrolls, which when we exclude the Post Office and Census workers are down 85,000 versus January, the largest eight-month drop on record going back to at least 1990.  In time, we think a smaller government should pay dividends in the form of faster economic growth.

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Implications: With the government finally reopened, economic data is beginning to flow again—and today brought August’s trade numbers. The U.S. trade deficit narrowed to $59.6 billion, driven almost entirely by a sharp pullback in imports, which fell $18.4 billion, while exports edged up a modest $0.2 billion. The President may see this as a win. After all, the core aim of Trump’s trade agenda has been straightforward: fewer imports and more domestic production. But whether that’s what we’re actually seeing is far less certain. The decline in trade volumes could signal a real shift in global supply chains—reshoring, decoupling, and rising U.S. output. Or it could be pointing to something less encouraging: softer demand both at home and abroad. At this point, the data don’t offer a clean answer. Employment growth has slowed, particularly in goods-producing industries. For a drop in imports to translate into a lasting economic win, it needs to be accompanied by a clear rebound in U.S. manufacturing and investment—and so far, that resurgence remains tentative. Meanwhile, the GDP math has flipped. Imports subtract from GDP, and their surge in Q1 weighed heavily on overall growth. Net exports alone shaved roughly five percentage points off the growth rate, leaving real GDP contracting at a 0.7% annualized pace. But as those front-loaded imports peaked in March and receded in Q2, trade became a tailwind, helping lift growth in the second quarter.  It now looks like it net exports will not have nearly as large an impact on GDP as it did in the first half of the year.  At the same time, 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. And in today’s report, the dollar value of U.S. petroleum exports once again exceeded imports, marking the 42nd consecutive month of America being a net exporter of petroleum products. In other recent news, construction spending rose 0.2% in August, as a large increase in homebuilding fully offset a decline in manufacturing projects.

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Back in 1980, a central feature of President Reagan’s campaign was a thirty percent across-the-board cut in income tax rates.  Once elected, he followed through with the 1981 tax cut, which closely resembled this campaign promise.

Those Reagan-era tax cuts were inspired by a combination of two factors.  First, the very similar “Kennedy” tax cuts proposed by President Kennedy in 1963 and then passed posthumously in 1964.  Interestingly, the conservative Senator Barry Goldwater and many other Republicans opposed this tax cut on the grounds that it would increase the budget deficit.

The second factor was the rise of supply-side economics, which argued that the stagflation of the 1970s needed to be addressed with one lever of policy focused on each problem: inflation needed to be tackled by tighter monetary policy; slow growth and high unemployment required cuts in marginal tax rates to increase the incentives to work, save, and invest.  The great economist Arthur Laffer, with his Laffer Curve, posited that tax cuts may actually increase tax receipts.  Why?  Because after a certain point, higher tax rates deterred so much economic activity that they resulted in less revenue.  By increasing economic growth, lower rates could increase revenues over time.

Both inflation and unemployment fell after implementing these policies and real GDP growth accelerated.  But Reagan boosted defense spending and locked-in inflation escalators boosted government spending in the early 1980s…resulting in larger deficits initially.  These deficits were then used as a cudgel to bash supply-side economic policies.

Reagan’s opponent in the 1980 primary, and eventually his Vice President, George H. W. Bush, had called his policies “voodoo economics.”  Others derided them as “trickle-down,” a pejorative meant to make it seem like lower income groups only benefited from these policies because the “rich got richer.” 

The accusation of “trickle down” has a lengthy history. Democratic presidential candidate William Jennings Bryan, in 1896, spoke of his opponents’ policies helping the rich in a way that would only “leak through” to help others.  In 1932, Will Rogers criticized President Hoover for “trickle down” policies in the Great Depression, even though Hoover imposed major tax hikes and increased spending (although not as much as President Roosevelt later did).  A speechwriter for Roosevelt and later Truman claimed “trickle down” policies were imposed by Republicans starting in 1921.

The odd part of all this is that those who expand the government are never accused of trickle-down economics.  Spending on the Green New Deal was touted as a way to “create jobs” via clean energy investment and at the same time, reduce income inequality by stopping global warming, which hurts lower income groups more all over the world.  In other words, subsidizing big investment by a few large clean energy investors trickles down to help everyone.

At the same time, the economic impact of COVID lockdowns was offset by a massive increase in the money supply, an expansion of the Federal Reserve’s balance sheet, and the monetization of a huge increase in government spending.  These policies were designed to maintain consumption.  The winners were large companies (like Amazon) at the expense of small ones.  It was also a way to boost asset values, and through a process called the “wealth effect,” would boost spending.

And it worked!  According to the Federal Reserve, the top 1% of households now own 28.3% of assets, a record high and much higher than the 20.3% that prevailed in mid-1989 after nearly a decade of supply-side policies.  Moreover, true supply-side policies of the 1980s brought inflation down rapidly, which helped living standards soar.  Policies of recent years have boosted inflation, which caused a double whammy on lower income groups.  This is where the entire debate about “affordability” came from and a key reason for rising inequality.

In other words, COVID policies have been a “demand-side” version of trickle-down economics fueled by government redistribution of wealth toward top income groups.

Clearly, policies which boost individual freedom, not government engineering, work best.  And as usual, the arguments of one political party are often designed to hide the fact that their policies are the very thing they claim to detest in the other.

Brian S. Wesbury – Chief Economist

Robert Stein, CFA – Deputy Chief Economist

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In this week’s “Three on Thursday,” we take a closer look at how U.S. households are managing their financial obligations in Q3 2025. Curious about the latest trends? Click the link below to get a clearer picture of where things stood in the third quarter.

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In a better world, politics would not be important to investors.  The government would have little influence over the economy, public policies would be reasonably stable, and investors could be confident it’d stay that way.  Unfortunately, we don’t live in that world.  Instead, investors need to read the tea leaves of election results, pay attention to lawsuits about some of those policies, and follow the day-to-day news on events like the recent federal government shutdown.  Last week saw important events in every one of those categories.

To start, last week’s election results were very good news for the Democrats and bad news for Republicans.  A year ago, VP Kamala Harris lost the national popular vote to President Trump by about one and a half percentage points, while still winning New Jersey and Virginia by about six percentage points.  That means those two states were about 7.5 points further to the left than the country as a whole.

So, in the statewide governors’ races you’d think that if New Jersey and Virginia were 7.5 points to the left of the national average last November, then maybe that’s where they are today.  In a “politically balanced” or “neutral” political environment the Democrats would win those races by 7.5 points, or maybe a little more than 7.5 because with a Republican in the White House, the Democrats could be expected to turnout to vote with greater than usual intensity, while Republican voters might be a little more complacent than usual. 

But the Democrats didn’t win these races by 7.5 points or a little more; instead, they won by almost 15 points in Virginia and almost 14 points in New Jersey.  Were these flukes?  Nope.  Democrats did well in statewide races in Georgia and Pennsylvania, and also won a ballot measure in California to let the state redraw congressional district lines to make it more favorable to the Democratic Party.

As a result, the odds of the Democrats taking back control of the US House after the midterm election cycle next year soared from 58% last Monday, the day before the election, to 70% by Wednesday, when the election results were in.  

Time will tell.  Some GOP-controlled states are also redrawing district lines and a Supreme Court reinterpretation of the Voting Rights Act could give others a freer hand to redraw even more.  And those battles will play some role in how many House seats the two parties win next year.  But in the meantime, the Democrats look like favorites to take back the House.  If they do, then starting in January 2027 every congressional bill that gets to the president’s desk is going to have to have bipartisan support to get there, because the Senate will likely remain in GOP control.

The next big political event last week was the Supreme Court hearing a case asking it to strike down many tariffs implemented by the Trump Administration, including the 10% across-the-board tariff and extra “country-specific” tariffs like the 10% on China and 25% on Canadian and Mexican products not covered by other free trade arrangements.

Based on our reading of the opinions from the Court of Appeals as well as the tone of the questions asked last week by the Justices, it looks like those tariffs will be struck down on the basis of being a too aggressive interpretation of the president’s authority to “regulate” trade with other countries.

However, we are skeptical the Supremes will order a refund of the tariffs already paid.  Even if it is possible to figure out which companies paid how much, some Justices are likely to shy away from ordering the Treasury Department to cut checks worth well north of $100 billion.  Meanwhile, the entities that cut tariff checks to the government are not necessarily the people or companies that absorbed the economic burden of the tariffs.  Imagine, for example, if a retail sales tax in a state is found unconstitutional.  Yes, the stores cut checks to the government and could receive a refund, but the stores were probably passing the cost along to consumers who wouldn’t get the refund.

We are also skeptical that striking down these Trump tariffs would mean a permanent reduction in tariffs.  Instead of declaring an “emergency,” Trump could impose tariffs based on “unfair trade practices,” or balance of payments imbalances, or on countries discriminating against US businesses.

Now, in the past 24 hours comes word the parties have reached a deal to re-open the government, at least through the end of January.  The Democrats will get a vote on extending the supposedly temporary enlarged Obamacare subsidies originally enacted during COVID.  But with a sixty-vote threshold still in place in the Senate, there’s no guarantee they’ll win.  In the meantime, federal workers will get their jobs back with back pay and it reverses layoffs made during the shutdown.  Meanwhile, President Trump wants to force a legal fight about his Constitutional authority to reduce spending unilaterally.

With the next deadline at the end of January, well past Christmas, another shutdown and spending battle is brewing early next year.  Investors will need to watch the next one closely to see if policymakers who want to control deficit spending are able to make progress.

Brian S. Wesbury – Chief Economist

Robert Stein, CFA – Deputy Chief Economist

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In this week’s “Three on Thursday,” we take a closer look at the current role of tariffs in U.S. economic policy. Now well into his second term, the president has broadened tariff measures across nearly all trading partners, turning customs duties into both a source of federal revenue and a strategic policy tool. To see how this new tariff era is taking shape for the time being, click the link below.

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Implications:  The sector responsible for two-thirds of US output once again demonstrated its strength, as the ISM Services Index beat even the most optimistic forecast of any Economics group polled by Bloomberg and rose to an eight-month high of 52.4 in October.  Despite continued weakness in its counterpart survey on the manufacturing sector, the service sector remains far more resilient, with activity expanding in ten out of the last twelve months.  Looking at the details, the pickup in the headline index came from a swift jump in the new orders index, where growth accelerated to the fastest pace in a year.  Meanwhile, the business activity index rebounded from contraction territory last month (albeit, barely) at 49.9 and rose to 54.3 in October.  Survey comments indicate a fractured growth picture, as some voice concerns about the impacts of additional tariffs and the federal government shutdown, while others indicate business as usual.  Notably, a survey comment from the Retail Trade industry wrote, “Business is very strong, no supply chain or logistical issues.”  Still, this bumpy path has kept service companies defensive in their hiring efforts.  Employment continued to contract in the service sector in October (but at slower pace compared to last month), with the category rising from 47.2 to 48.2.  That makes seven out of the last eight months where the employment index has been below 50, signaling contraction.  Service companies – once hamstrung with difficulty finding labor – have begun reducing their headcounts, with more industries (ten) reporting lower employment in October than higher (four).  Finally, the highest reading of any category was once again the prices index, which ticked up to 70.0 in October.  That is the highest level since late 2022 but still far from the worst we saw during the COVID supply-chain disruptions, when the index reached the low 80s.  Though inflation pressures remain, the M2 measure of the money supply has grown very slowly for three years, which means we are likely to see lower inflation and growth in the year ahead.  As for the economy, it’s important to remember that Purchasing Manager’s surveys like the ISM Services index and its counterpart on the manufacturing sector often capture sentiment mixed in with actual activity.  Uncertainty from trade policy and the lapse in government funding have been weighing on sentiment, but that could fade as more clarity emerges.  However, monetary policy has been tight enough to reduce inflation toward the Federal Reserve’s 2.0% target and is probably still modestly tight today.  And a monetary policy tight enough to reduce inflation may also be tight enough to slow the US service sector.  In other news this morning, ADP reported private payrolls rose 42,000 in October after declining 29,000 in September.

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Implications:  A rare update on the economy showed manufacturing activity slipping further in October, with the ISM Manufacturing index missing consensus expectations and falling to 48.7.  This makes eight consecutive months that the index has been below 50, continuing a pattern that stretched all of 2023 and 2024.  Though many believed the downturn was over when the index briefly rose above 50 in January and February, the subsequent eight months of weak readings indicates the sector continues to struggle for traction.  Looking at the details, just six of the eighteen major manufacturing categories reported growth in October, while double reported contraction.  The overall decline was driven by pullbacks in the production and inventories index, with production falling back into contraction at 48.2 and inventories contracting at the fastest pace this year at 45.8.  Meanwhile, demand remains subdued, with just four major manufacturing industries reporting growth in new orders versus nearly triple (eleven) reporting a decline.  Order books were weak heading into this year, but now, survey comments blame trade uncertainty for the weakness as many customer orders have been placed on pause until stability returns.  This has caused companies to look for ways to reduce overhead, most notably through their hiring efforts.  Though the employment index rose to 46.0, it remains firmly in contraction territory, with only three major manufacturing categories reporting an increase in employment in October versus thirteen reporting a decrease.  The one piece of good news is that inflation pressures continued easing in October, with the prices index declining for the fourth consecutive month.  The 58.0 reading is below the recent peak of 69.8 in April, and well below the levels during the post-COVID inflation surge.  Last Tuesday we learned the M2 measure of the money supply rose 0.5% in September and is up 4.5% from a year ago.  If we compare to the M2 peak during COVID, in April 2022, the money supply is up a total of just 2.1% in the past 41 months.  This slow money growth should help keep inflation on a downward trajectory.  On the housing front, the national Case-Shiller index rose 0.2% in August while the FHFA measure of home prices rose 0.4%, the first monthly increases for either index in at least four months.  Compared to a year ago, FHFA prices are up 2.3% while Case-Shiller prices are up 1.5%, both less than overall inflation. Finally, pending home sales, which are contracts on existing homes, were unchanged in September following a 4.2% jump in August, suggesting existing home sales (counted at closing) will be little changed in September.

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