Implications:  New orders for durable goods declined 2.8% in July – following on the heels of a massive 9.4% drop in June – but the details are much better than the headline number would suggest.  The decline in new orders was entirely due to the very volatile category of commercial aircraft, where orders continue to come back down to earth following the massive Boeing order from Qatar Airways during President’s Trump’s tour through the Middle East.  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 July.  Orders rose across all major categories, led by electrical equipment (+2.0%), machinery (+1.8%), and primary metals (+1.5%), while fabricated metal products (+0.7%) and computers & electronic products (+0.6%) also grew at a healthy pace.  The most important number in today’s release, core shipments – a key input for business investment in the calculation of GDP – rose a robust 0.7% in July.  If unchanged in August and September, these orders would be up at a 4.4% annualized rate in Q3 versus the Q2 average.  While employment and inflation remain under the spotlight as the Federal Reserve looks very likely to restart the rate cut process at the meeting next month, we will also be paying close attention to how businesses – and consumers – are responding to the certainty now in place from the passage of the tax bill, which should enhance the competitiveness of US companies.  In housing news this morning, the national Case-Shiller index declined 0.3% in June but is up 1.9% in the past year, while the FHFA index declined 0.2% and is up 2.6% from a year ago.  We expect very modest home price gains in the year ahead.

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Implications:  New home sales posted a small decline in July but came in better than expected due to upward revisions for June, though the summer buying season continues to be underwhelming. Looking at the big picture, buyers purchased 652,000 homes at an annual rate and sales have fallen year-over-year for seven months in a row. Moreover, the July 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. However, there has recently been progress on this front. First, financing costs have been trending modestly lower, with the average 30-yr fixed mortgage rate now around 6.6%. Meanwhile, prices are declining for new builds. Median sales prices are down 12.3% from the peak in October 2022 and have fallen 5.9% in the past year.  The Census Bureau reports that from Q3 2022 to Q2 2025 (the most recent data available) the median square footage for new single-family homes built fell 6.8%. 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 290% 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. 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.

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Last Friday, Jerome Powell gave the Fed Chief’s annual speech at the Kansas City Fed’s 2025 meeting in Jackson Hole, WY.  He said the balance of economic risks “may warrant” a policy stance adjustment.  Stocks soared and the market immediately raised the odds on one 25 basis point cut in the federal funds rate on September 17th.

The Jackson Hole central banker confab always has a theme and this year’s was “Labor Markets in Transition.”  What is so interesting to us about this is that apparently, at present, the only tool the Fed thinks it has in its arsenal is short-term interest rates, specifically the federal funds rate.

If you listened to Jerome Powell’s speech (transcript here), that’s all he talked about.  Well, actually, he did talk some about tariffs, supply chains during the pandemic, immigration, and a few other issues far outside the Fed’s responsibility.  But the reason he talked about them is that they all may make the Fed want to change short-term rates.

What the Fed doesn’t talk about is the money supply or the size of its balance sheet.  At Jackson Hole, it didn’t respond to Senators who think paying private banks roughly $200 billion a year to hold reserves and losing $100 billion per year is reason for concern.  The Fed just ignores these questions.

Apparently, the Fed thinks changing short-term interest rates can impact, or influence, just about anything the economy throws its way.  We won’t argue that the federal funds rate is probably the most important financial market indicator in the world.  The question is whether it is really the single most important influence on economic activity.

The Fed held interest rates near zero for seven years after 2008 and the US did not experience inflation and real economic growth remained relatively slow.  It held interest rates near zero for two years during COVID and we ended up with 9% inflation and real growth remained slow.  So maybe short-term interest rates are not quite as economically impactful as the Fed thinks they are.  What’s interesting is that the money supply did not accelerate after 2008, but it soared during COVID.  If it were up to us, we would include the money supply in our analysis.  The Fed doesn’t.

And that brings us to the real announcement by Powell in his speech.  The Fed is changing its “framework” for managing monetary policy.  In 2020, Powell and the Fed decided that inflation should “average” 2% over time.  For some strange reason the fact that inflation had only been about 1.5% per year in the previous ten years bothered the Fed.

We would call keeping inflation below 2% a victory, but the Fed decided this low inflation rate was an impediment to growth.  So, to raise the “average rate” to 2% it could run inflation above that for some unknown time and by some unknown amount in future years to “makeup” for the lower inflation.  The result: the highest inflation rate in 40 years and more volatility in long-term interest rates.

Now, until it decides to change again, the new framework will target 2% inflation.  No more averaging.  At the same time the Fed decided it will not worry so much when the labor market runs hotter than full-employment.

All of this sounds like an excuse to cut rates. What we really want is an explanation for why the Fed decided to increase the size of its balance sheet from $800 billion to $6.6 trillion…over a 7-fold increase; why it allowed the money supply to nearly triple between 2008 and 2025; and why it thinks hundreds of billions of dollars of losses on banks’ books is OK today, but wasn’t in 2008.

The 2008 change in monetary policy was one of the biggest changes in US monetary policy in history and the Fed behaves as if it never happened.  By flooding the system with reserves, the Fed removed daily trading by market entities in the federal funds marketplace.  The Fed “administers” the rate.  We call it price fixing.  Reporters don’t ask about it.  Central banks around the world have now become money-losing hedge funds and act as if it isn’t happening.

Brian S. Wesbury – Chief Economist

Robert Stein, CFA – Deputy Chief Economist

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One of the most urgent challenges facing the U.S. economy is not whether we can produce enough energy, but whether our infrastructure can transmit that power to those who want it. While the U.S. is rich in energy resources—from natural gas and oil to renewables—the bottleneck lies in moving that power where it’s needed, when it’s needed. In this week’s “Three on Thursday,” we look at the supply-and-demand dynamics that will define the next phase of America’s energy story. Click the link below to find out more.

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Implications:  Existing home sales came in better than expected in July, rising 2.0% after hitting a nine-month low in June. Despite July’s positive headline, it’s hard to get excited about today’s report. The July sales pace of 4.010 million is 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 that could contribute to a rebound going forward. First, 30-year mortgage rates have been trending modestly lower since May and now sit around 6.7%.  Meanwhile, the median price of an existing home is essentially flat from a year ago. It looks like the inventory of existing homes rising 15.7% in the past year has helped put a lid on prices as more options become available for buyers.  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 4.6 in July, 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. One last positive to note is that aggregate wage growth (hourly earnings plus hours worked) has begun to consistently outpace median home prices 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 rebound in sales. In other news this morning, initial jobless claims rose 11,000 to 235,000 last week while continuing claims increased 30,000 to 1.972 million. These figures are consistent with continued job growth in August, but at a slower pace than last year. Finally on the manufacturing front, the Philadelphia Fed Manufacturing Index, a measure of factory sentiment in that region, fell unexpectedly to -0.3 in August from +15.9 in July.

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Implications:   Homebuilding activity surprised to the upside in July, but the details weren’t as strong as the headline.  First, the good news: housing starts rose 5.2% to the fastest pace in five months, beating even the most optimistic forecast of any Economics group surveyed by Bloomberg.  However, the 1.428 million annual rate is akin to the pace seen immediately before COVID more than five years ago.  Digging below the surface, it was the volatile multi-family category that once again drove the increase as starts rose 9.9% for the category, while single-family starts contributed with a more modest 2.8% rise.  Multi-family starts are up 24.1% in the past year and running at the fastest pace since mid-2023, suggesting that builders have been prioritizing these builds in what has been a relatively difficult interest rate environment.  Meanwhile, permits for new builds lag further behind, falling 2.8% in July to a 1.354 million annual rate, the slowest pace excluding the COVID shutdown months since 2019. One way homebuilders have been combatting sluggish activity is by focusing their efforts on completing projects.  New home completions rose 6.0% in July to a 1.415 million rate, only the second month in the last year where they have lagged starts or permits. Looking at the big picture, builders face a number of headwinds: high home prices and mortgage rates that are no longer being held artificially low, the largest completed single-family home inventory since 2009, restrictive government regulations, and relatively low unemployment, which makes it hard to find workers.  Now, builders must also contend with stricter immigration enforcement and the uncertainty of new tariffs and how they’ll affect building costs. This weighs heavily on the NAHB Index (a measure of homebuilder sentiment) which dropped to 32 in July, the lowest level since the end of 2022.  Keep in mind a reading below 50 signals a greater number of builders view conditions as poor versus good, now the sixteenth consecutive month that has been the case.  Meanwhile, the total number of homes under construction continues to fall, down 12.4% in the last year.  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 this time really is different.  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 supply is lifting home prices.  Prices are moderating in some high-flying areas, but national average home prices will likely continue higher.

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Recently, due to deals President Trump is making, some are saying the United States has embarked on a version of Chinese-style “state capitalism” – directly entangling markets and government.  No one is claiming that the US is as involved as the Communist Party dictatorship in China or authoritarian Russia, but certainly more entangled than a normal US free market approach would permit.

There are plenty of examples to go around, like the Trump Administration putting pressure on Intel to replace its CEO, wanting Goldman Sachs to fire an economist, demanding 15% of revenue from AI chip sales to China, creating a government-owned Golden Share in Nippon Steel’s purchase of US Steel, and pursuing pledges of hundreds of billions of investment from our trading partners to buy-down tariff rates.

On top of all this, the US is developing a system of tariffs that relies on the discretion of the president (and his team), varying from country to country, and in many cases product to product.

On the surface, the argument that the US is moving toward “state-run capitalism” seems to have a lot of evidence in its favor.  What the argument ignores is that this started long ago.

Starting back in the 1930s, the government paid farmers either not to farm, or farm certain crops.  In the 1970s, the US instituted price controls and differentiated between industries and even individual companies within industries.  The US also capped oil prices, restricted branching by Savings and Loans and would not let banks pay interest on checking accounts.

For decades, by backing Government Sponsored Enterprises (GSEs), like Fannie Mae and Freddie Mac, government held mortgage rates artificially low which distorted the housing market.  This bid up the price people were/are willing to pay for the existing stock of homes, while many state and local governments make it difficult to build new housing.  The same thing goes for the takeover of student loans by the federal government and the push to forgive those loans.  Anyone who thinks state capitalism is new doesn’t know history.

There are plenty of other long-standing interferences in the market in addition to these, like ethanol subsidies and gas mileage requirements (which, contrary to the narrative about Trump were recently watered down by the Big Beautiful Bill).  The Biden Administration allocated green energy subsidies to favored firms under the Inflation Reduction Act, the CHIPS Act favored semiconductor production in the US, and the Nippon-US Steel takeover was originally blocked for political reasons.  Environmentalists forced manufacturers to change lightbulbs, stoves, dishwashers, toilets, washing machines, and dryers.

So, forgive us if we yawn at the current gnashing of teeth over this issue in 2025.  Are we supportive of it?  No.  But is it new?  Absolutely not.  We’ll breathe our last breath standing up for free markets against political meddling.  We are dismayed that Republicans, who are historically associated with supporting free markets, are willing to support this, instead.  No wonder younger Americans who don’t know economic history well are often supportive of communism and socialism.

And while we fully understand this interference in markets began long ago, it accelerated in a huge way during the Financial Panic of 2008-09, when President George W. Bush bizarrely announced that he had to violate free market principles in order to save free markets.

Back in 2008, mark-to-market accounting procedures turned a manageable loss of housing value into a once-in-a-century financial panic.  But instead of adjusting those accounting practices, policymakers set up TARP to bailout Big Banks, designed an auto bankruptcy that bailed out Big Labor, and launched multiple rounds of Quantitative Easing.

No wonder many people who might otherwise vote to support free markets became more receptive to the idea that the economic system was “rigged” in favor of certain groups.  And, in turn, if politicians are going to rig the economic system in favor of those groups, why not their preferred special interests, as well?

The bottom line is that it would take a major change in political attitudes to undo the massive harm inflicted by the policy reaction to the 2008-09 crisis.  We are hopeful this change in attitude arrives eventually, but don’t expect it anytime soon.  The current leadership expects a surge in potential long-term economic growth from its policies, but the more the government entangles itself in the market, the less likely that is to happen.

Brian S. Wesbury – Chief Economist

Robert Stein, CFA – Deputy Chief Economist

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Implications:  Industrial production took a breather in July, with activity falling for the first time in four months as producers continue to acclimate to shifts in US trade policy. Overall production declined by 0.1% in July with nearly every major category edging lower, though data from prior months were revised upward. Looking at the manufacturing sector, both auto production and non-auto production (which we think of as a “core” version of industrial production) posted declines of 0.4% and 0.1%, respectively. Looking deeper, there were a couple of bright spots in the “core” measure.  Production in high-tech equipment rose 1.4% in July, likely the result of investment in AI as well as the reshoring of semiconductor production.  High-tech manufacturing is up 14.0% in the past year, the fastest pace of any major category.  The manufacturing of business equipment has also accelerated lately, rising 0.5% in July, and up at a 11.1% annualized rate in the past six months.  Looking outside of manufacturing, the mining sector was also a source of weakness in July, with activity declining 0.4%.  A slower pace of oil and gas production as well as the drilling of new wells more than offset an increase in metal and mineral extraction. Look for an upward trend in activity in this sector in 2025 as the Trump Administration takes a more aggressive stance with permitting.  Lastly, utilities output (which is volatile and largely dependent on weather) posted a decline of 0.2% in July. In other manufacturing related news this morning, the Empire State Index – a measure of manufacturing sentiment in the New York region – rose unexpectedly to 11.9 in August from 5.5 in July.

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Implications:  Consumers started the second half of the year on a good note, with retail sales rising for the second month in a row.  The 0.5% gain in July slightly lagged the consensus expected +0.6%, but factoring in upward revisions to previous months, retail sales rose a solid 0.9%.  Looking at the big picture, monthly retail sales figures have been whip-sawing since earlier this year as consumers front-loaded purchases to avoid potential tariffs.  Given that the retail sales report largely reflects purchases of goods (which are import-heavy), we expect ongoing trade negotiations to keep volatility high going forward.  Looking at the details of the report, July’s advance was broad-based with nine out of thirteen major sales categories rising.  The largest increase, by far, was in the volatile auto sector, which posted the biggest gain for the category (+1.6%) since March and is now up 4.7% in the past year.  After stripping out autos along with the other typically volatile categories for building materials and gas stations, core retail sales rose 0.3%.  These sales are up 4.9% in the past year – above the 3.9% increase for overall sales.  Keep in mind, however, that a monetary policy tight enough to bring inflation down is also tight enough to bring growth down.  One category we will be watching closely for this is at restaurants & bars – the only glimpse we get at services in the report, which make up the bulk of consumer spending. That category fell 0.4% in July, although still up at 5.5% annual rate so far this year.   While this report appears to differ from some other signs of a slowing economy, we remain cautious given the potential delayed effects of tighter monetary policy.  In other news this morning, import prices increased 0.4% in July while export prices rose 0.1%.  In the past year, import prices are down 0.2% while export prices are up 2.2%.

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In this week’s “Three on Thursday,” we explore the current state of indebtedness and financial health of U.S. households in the second quarter of 2025. Curious about the latest trends? Click the link below to get a clearer picture of where things stood in the second quarter.

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