Implications: Activity in the manufacturing sector surprised to the upside for the second month in a row in February, while the price index signaled that inflation remains stubbornly high.  Although the ISM Manufacturing Index slipped to 52.4, this marks the first time the ISM Manufacturing Index has been in expansion territory for consecutive months since it briefly rose above 50 last January and February. While we remain cautious given last year’s head-fake, the recent strength is a welcome development for an industry that has faced an army of headwinds in recent years.  Looking at the details, growth broadened in February, with twelve out of the eighteen major manufacturing categories reporting growth (versus nine in January), while five reported contraction, and one reported no change.  The major measures of activity were mixed, as the categories for new orders and production retraced from January’s rapid pace, but remain in solid expansion territory at 55.8 and 53.5, respectively.  Notably, outside of January, this is the highest new orders reading in nearly four years.  It’s important to remember that order books were already weak heading into last year, and to keep production going, manufacturers had to rely on their order backlogs. The order backlog index was in contraction territory for thirty-nine consecutive months before moving into expansion territory last month, and the pace accelerated in February, with the index rising to 56.6. Despite signs of improving demand, it was not enough to meaningfully change hiring efforts.  The employment index rose to 48.8 in February – the highest level in a year – but remains below 50, signaling contraction, now for the 29th consecutive month.  The bad news in the report was a renewed pickup in pricing pressures, with the prices index jumping to 70.5 in February from 59.0 in January. With the recent Supreme Court ruling against much of the Trump’s Administration tariffs, along with the rise in oil prices following the U.S. and Israel strike on Iran, we expect volatility to continue for this category in the months ahead.  In other news this morning, construction spending rose 0.3% in December, as increases in homebuilding and power projects fully offset declines across most other categories.

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As we all know, the US and Israeli militaries attacked Iran.  The old Ayatollah and his successor are dead, along with much of the rest of Iran’s political and military leadership.  How should investors respond?

First, in overnight trading oil prices were up over 8%.  US stock price indices are also down. And in a flight to safety, 10-year Treasury bond yields fell under 4%.  When the US invaded Iraq in March 2003, the stock market rose sharply and nearly doubled between then and the peak in 2007.

But that stock market was undervalued after the dot.com crash of 2000-2003.  Today, the market is over-valued.  History may rhyme, but it doesn’t repeat.  War is uncertain, and while the US and Israel are dominating, investors would be foolish to assume they know every twist and turn to come.  Even here at home, where threats exist.

So we would like to turn our attention to what seems like a seismic shift in the direction of threats to Western Civilization.  Not long ago, during COVID, Klaus Schwab and the World Economic Forum published a book titled “COVID-19: The Great Reset.”  Politicians around the world, including Boris Johnson, Angela Merkel, Joe Biden, Kamala Harris, and others talked about “Building Back Better,” which was a euphemism for The Great Reset.  The platform included Green Energy and the Paris Agreement, Open Borders, Global Taxes, International Cooperation, and Sustainable Development.  While a generalization…it seems clear the supporters of Build Back Better wanted even more government spending and more bureaucratic control.

Over recent decades, bureaucracies (the EU, UN, NATO, WHO, the US administrative state) have all increased control over free markets because they believe capitalism hurts the environment and creates inequality.  Second, China, Russia, Iran, and North Korea have actively attempted to undermine the US and its capitalist system.  And third, cartels and gangs have proliferated, some fielding armies.

In other words, there are three sets of institutions or groups trying to reset the world and put roadblocks in the way of capitalism.  They want a Great Reset that gives them more power.

But the US, in its 250th year, seems to be reaching back to its roots.  The US is saying “no” to bureaucrats and corruption in international organizations, and “no” to terrorism and cartels who are willing to use violence (like the mafia) to get their way.  

Back in 1908, we founded the Bureau of Investigation (BOI), the precursor to the FBI, to fight corruption in government and then shifted to fighting gangsters and the mafia.  Similarly, recent actions are designed to fight the enemies of freedom today.  If there is a common theme running though the actions of the US in the past year, it is fighting back against the institutions, governments, and entities which want to undermine capitalism.  That would be a really Great Reset.

Brian S. Wesbury – Chief Economist

Robert Stein, CFA – Deputy Chief Economist

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Implications: The key to producer prices is to watch the trend, not one-off volatile readings. Producer prices started 2026 by rising 0.5% in January, despite falling prices from the typically volatile food and energy categories.  But even with the outsized monthly reading, producer prices moderated on a year-ago basis and are up 2.9% versus January 2025.  A look at the details shows the jump in January itself was concentrated and unlikely to sustain in the months ahead. Over twenty percent of the increase came from a rise in margins for machinery and equipment wholesaling, which rose 14.4%. As a result, prices for the broader services category rose 0.8% in January and are up 3.4% in the past year.  Many likely assumed it would be goods prices that would be leading inflation higher, given the higher tariff rates implemented under President Trump, but goods prices declined 0.3% in January (this was before the Supreme Court ruling that moved tariff rates) and are up a modest 1.6% in the past year.  It must be noted the January goods reading was muted by the abovementioned declining prices for energy (-2.7%) and food (-1.5%).  “Core” producer prices – which excludes those typically volatile categories — rose 0.8% in January, tied for the largest month increase since mid-2022.  We don’t expect the wholesale margins that pushed January producer prices higher will continue in the months ahead.  Again, watch the trend, not one-off readings. Sustained movements in overall inflation are led by the money supply, which rose 0.3% in January, is up 4.3% in the past year (historically, M2 growth has averaged around 6% per year).  Volatility may continue month-to-month, but we expect this monetary tightness will keep inflation relatively subdued, leaving room for rate cuts to restart at some point later in 2026.  In other recent news, initial jobless claims rose 4,000 last week to 212,000, while continuing claims declined 31,000 to 1.833 million.  This is consistent with modest job growth in February.  On the housing front, the FHFA index rose 0.1% in December and is up 1.8% in the past year, while the national Case-Shiller index rose 0.4% in December and is up 1.3% from a year ago.  Expect only modest gains in home prices to continue given a deceleration in rents, which means potential homebuyers have less motivation to buy.  On the manufacturing front, the Richmond Fed index, a measure of mid-Atlantic factory activity, fell to -10 in February from -6 in January, while the Kansas City Fed Manufacturing Index rose to 5 in February from a reading of 0 in January. 

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On February 20, 2026, the Supreme Court ruled 6–3 that President Trump’s tariffs imposed under the International Emergency Economic Powers Act (IEEPA) were unlawful. Within hours, the President issued an Executive Order rescinding the IEEPA tariff orders, directed that collections cease as soon as practicable, and threatened a new 15% across-the-board tariff on all countries. Both actions took effect Tuesday, but the new Section 122 tariff was implemented at 10% instead of 15%. In this week’s “Three on Thursday,” we examine what this legal shift means for tariffs moving forward as well as possible refunds. Click the link below for more insight.

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The Trump Tariffs are dead, long live the Trump Tariffs!

As we expected, the Supreme Court struck down most of the new tariffs President Trump had imposed since taking office thirteen months ago.  While Congress gave the President “emergency” powers to regulate trade in a 1977 law, the Court, in a 6-3 ruling said that law does not expressly include tariffs.  As a result, many Trump tariffs exceeded the powers Congress delegated to the president.

The tariffs struck down include extra tariffs on China, Canada, and Mexico based on illegal immigration and drug trafficking, “liberation day” tariffs intended to address trade deficits, as well as additional duties on Brazil and India, based on the way the former country handled the prosecution of its former president and the latter’s handling of Russian oil.

However, other Trump tariffs remain in place.  These include those on steel and aluminum as well as tariffs on China that date back to the first Trump Administration.  In addition, there are other legal avenues for President Trump to use to impose tariffs.  Justice Kavanaugh went so far as to spell those out in his dissent.  And the president announced a new 10%+ tariff (over the weekend, he said he would raise this to 15%) on the rest of the world using those other legal avenues.

In other words, Trump’s tariffs are going to change and evolve but aren’t going away.  As a result, the reaction in markets on Friday (stocks up, bond yields down) is likely to reverse once the smoke clears.

Some are claiming the Court decision will mean lower inflation, but if tariffs remain, that argument falls apart.  More importantly, that argument is flawed economically.  Inflation is a monetary phenomenon.  Higher tariffs meant consumers had to spend more on tariffed goods, but that meant less money left over for other goods and services.  Inflation is caused by too much money supply chasing too few goods and money supply growth has been slow.

And lost in the noise is some good news for those who want a smaller, less intrusive government.  The court ruling may have been a bitter pill for the Trump Administration to swallow, but over time the reasoning used to strike down the tariffs will make it tougher to expand the power of the federal government.  For example, if a future president wanted to use “emergency” tariffs to punish countries that don’t limit carbon emissions or countries that strictly limit immigration, then those tariffs wouldn’t be legal, either.

Higher tariffs are also likely to outlast this presidency.  If a Republican is elected in 2028, it’s doubtful that new administration would make a major break from Trump on trade policy or lose the revenue generated by tariffs.

Another possibility is a Democrat wins the presidency in 2028, but the GOP maintains control of the U.S. Senate.  If so, it’s very unlikely that president would have enough Senate votes to raise income taxes or taxes on corporate profits.  In turn, that means keeping tariffs to help finance spending increases without a huge expansion in the budget deficit.  Yes, deficit spending has grown wildly in the past, like during the Global Financial Crisis and COVID – but that was when the interest cost of the debt was about 1.5% of GDP, not 3.0%+ like it is now.            

If we get a Democratic Sweep in 2028 – President, Senate, and House – then lower tariffs are possible.  But would you want to be the president who cuts tariffs on China only to have them invade Taiwan six or nine months later?  We think geopolitical issues will limit cuts in some tariffs in the years ahead.  

The big issue remaining to be decided is whether the tariffs struck down by the Court will be refunded.  The Supreme Court punted that issue back to the lower court.  For all we know, that lower court may decide a refund would be a windfall gain for some businesses because it was their customers who truly paid the extra cost and those customers will not get the refund money.  Or the court could decide refunds are due but it could take years for the refunds to actually happen.  

In the meantime, while the Trump tariffs seemingly died, they are not gone for good.  And while many may hate the tariffs for all kinds of philosophical and economic reasons, the economy continues to grow with relatively low inflation.

Brian S. Wesbury – Chief Economist

Robert Stein, CFA – Deputy Chief Economist

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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.

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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.

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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.

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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.

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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.

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