In this week’s edition of “Three on Thursday,” we examine the state of student loan debt in America—a financial and political flashpoint. Student debt now makes up 9% of total household liabilities, the highest share on record going back to 2003. This mounting burden reflects the skyrocketing cost of higher education—and it’s weighing heavily on millions. According to figures released last month by the Department of Education, only 38% of federal borrowers are currently in repayment and up to date, signaling a wave of financial stress ahead. 

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Implications:  Industrial production took a breather in April, likely the result of uncertainty surrounding “Liberation Day” tariffs and trade policy. Yes, overall industrial production was unchanged in April. However, the headline number was propped up by a 3.3% jump in utilities output which is volatile and dependent on weather. Looking at the details, the manufacturing sector was the biggest source of weakness, falling 0.4% to post the first decline in six months.  Auto production fell 1.9% in April on the heels of a 1.3% gain in March.  Given the global nature of auto industry supply chains, we expect ongoing trade negotiations to keep volatility in this sector high going forward.  Meanwhile, non-auto manufacturing (which we think of as a “core” version of industrial production) fell 0.4% in April, the first decline in five months. Despite the overall weakness in manufacturing in April, there were some bright spots in this “core” measure.  Production in high-tech equipment rose 1.5% in April, likely the result of investment in AI as well as the reshoring of semiconductor production.  High-tech manufacturing is up 8.6% in the past year, the fastest pace of any major category.  The manufacturing of business equipment has also accelerated lately and is up at a 20.3% annualized rate in the past six months. And this hasn’t just been driven by the high-tech equipment mentioned above. Transit and industrial equipment production have been the biggest drivers, pointing towards a broader reindustrialization effort in the US. Finally, the mining sector declined 0.3% in April.  A slower pace of metal and mineral extraction and drilling for new wells more than offset a gain in gas and oil extraction for the month. Gas and oil production are up 1.0% in past year. Look for an upward trend in activity in this sector in 2025 as the Trump Administration takes a more aggressive stance with permitting.  In other recent news this morning, the Empire State Index, which measures manufacturing sentiment in the New York region, declined to -9.2 in May from -8.1 in April.  Finally, the Philadelphia Fed Manufacturing Index, a measure of factory sentiment in that region, rebounded to a still weak reading of -4.0 in May from -26.4 in April.

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Implications:  Retail sales rose slightly in April after a surge in March and now sit at an all-time high.  Despite the overall increase, a majority of sales categories (seven) declined in April, with several import-heavy categories pulling back, such as autos, department stores, sporting goods stores, and miscellaneous retailers (think office and pet supply).  We like to follow “core” sales, which excludes the often-volatile categories for autos, building materials, and gas.  That measure ticked up 0.1% in April and was up 0.3% including revisions to previous months.  Core sales are up 5.5% in the past year but have been slowing in 2025: up at a 3.7% annual rate in the first quarter, which includes the March bump from tariff front-running.  The good news is that sales at restaurant & bars, which had been dragging lately, posted a strong gain in April.  The 1.2% increase comes on the heels of an upwardly revised 3.0% gain in March, suggesting that consumers have shifted some of their spending to services while the dust settles around tariffs.  Looking at the big picture, as a whole retail sales are up 5.2% on a year-to-year basis and sit at an all-time high.  However, “real” inflation-adjusted retail sales are up 2.8% in the past year and are still down from the peak in early 2021.  This highlights the ugly ramifications of inflation: consumers are paying higher prices today but taking home fewer goods than they were four years ago.  Going forward, we expect retail sales to remain choppy as consumers respond to the global trade reordering currently underway.  In other recent news, initial jobless claims were unchanged last week at 229,000, while continuing claims rose 9,000 to 1.881 million.  These figures are consistent with continued job growth in May, but at a slower pace than last year.

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Implications:  While near constant conversations about rising inflation threats from tariffs echo across the media, producer prices dropped in April.  The typically volatile food and energy categories declined 0.4% and 1.0%, respectively, but services were the major driver pushing prices lower.  Service prices declined 0.7% in April as final demand trade services (think margins received by wholesalers) fell 1.6%, and final demand transportation and warehousing services declined 0.4%.  Goods prices were unchanged in April as rising costs for machinery and equipment – up 1.1% in April – were offset by the above-mentioned declines in costs for food and energy.  Put it all together, and producer prices fell 0.5% in April but are still up 2.4% versus a year ago, while “core” producer prices – which exclude the often-volatile food and energy categories – are up 3.1% in the past year, an acceleration from the 2.5% reading for the twelve months ending April 2024.  The months ahead could very well remain volatile for both the markets and the economic data.  Companies have been altering purchasing plans as they navigate the ongoing changes to the tariff environment, and the data we have to-date reflects not just the initial effects of applied tariffs, but also notable price movements from companies preparing for what they believed may come. None of this is making the Federal Reserve’s job any easier.  Monetary policy operates with a lag, and the Fed will be closely watching to see how the rate cuts of late last year translate through the system as they determine if, and when, the next move in rates is appropriate.

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Implications:   Despite higher tariffs in April, inflation came in below expectations and the twelve-month reading dropped to the lowest level since the inflation surge began back in early 2021.  Looking at the headline, consumer prices rose 0.2% in April versus a consensus expected +0.3%, the third month in a row below consensus expectations, and comes on the heels of the first outright monthly decline since the COVID lockdowns.  Cooler inflation readings in recent months have in turn led to a swift drop in the year-ago comparison, from 3.0% in January to 2.3% in April.  Looking at the details, energy prices rose 0.7% in April with higher prices for natural gas and electricity offsetting a decline in gasoline prices.  Food prices declined 0.1%, as prices at grocery stores dropped the most since 2020, including the biggest drop for egg prices since 1984.  “Core” prices, which strip out food and energy, rose 0.2% in April versus a consensus expected +0.3%, with the twelve-month reading staying at 2.8%, the second month in a row below 3.0% since the inflation surge began in 2021.  The main driver of core inflation has been housing rents, which continue to outpace most categories (+0.4% in April), though not as much as in years prior.  It appears that companies are in no rush to pass along new tariffs to consumers, as apparel prices (-0.2%) and used car prices (-0.5%) both fell while prices for new cars were flat.  We also like to follow “Supercore” inflation – a subset category of prices that excludes food, energy, other goods, and housing rents.  Fed Chair Jerome Powell said back in 2022 that they follow this category closely, though never seems to mention it anymore, perhaps because of the lack of progress it’s had since their tightening cycle began.  However, it appears the tide has finally turned for the category, with supercore prices up at a 0.7% annualized pace in the last three months, while the year-ago comparison has fallen from 4.0% in January to 2.7% in April.  Notable decliners this month within the supercore category were prices for airline fare (-2.8%), and hotels (-0.2%).  Although inflation is still above the Fed’s 2.0% target, given the lags in monetary policy and slow growth in the M2 measure of the money supply, it is time for the Fed to consider reducing short-term rates slightly in the months ahead.  In other news last week, nonfarm productivity (output per hour) declined at a consensus expected 0.8% in the first quarter of 2025, as output fell while hours rose.  In the past year, productivity is up 1.4%, the smallest year-to-year change since early 2023. On the labor front, initial jobless claims fell 13,000 to 228,000, while continuing claims fell 29,000 to 1.879 million.  These figures are consistent with continued job growth in May, but at a slower pace than last year.

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Back on January 10, 2025, it cost $1.024 to buy one Euro.  Last Friday, the $/Euro exchange rate was $1.125 – a drop in the value of the dollar of about 10%.  Similar moves in the value of the US dollar versus the British pound, Japanese yen, and Canadian dollar also occurred.

Many analysts have jumped on this drop in the dollar to attack President Trump’s tariff policies…basically saying that if we keep heading down this road foreigners will pull back from investing in the US, the dollar will fall, overseas investments will outperform, and the US will undermine its global exceptionalism.

As a quick aside, while panic-stricken, politically-motivated attacks are nothing new, the fear generated by “end-of-the-world-as-we-know-it” forecasts since 2008 have reached a frenzy.  Investors would be better served by staying level-headed.

First of all, think of how many times you have read a headline that “billionaires are selling all their stocks,” or “the dollar is dead,” or “a crash, or depression, is coming.”  Especially in the past seventeen years since 2008.

And none of these have happened.  So, please stay level- headed.  Yes, the dollar has moved sharply lower in the past four months or so, but if we look at five- or ten-year timeframes it is right in the middle of its trading range.   

Yes, European stocks have outperformed US stocks this year, but European stocks are still trailing by a significant amount over the past decade or more.

So, what explains the movement in the dollar?  Here is a theory that gets too little attention.

Everyone knows that there was a huge surge in the US trade deficit as importers were front-running tariffs.  So, let’s think about what this means.  When people sell goods to the US, they get dollars.  In fact, there is a school of economic thought that says the world must run trade deficits with the US because the dollar is the world’s reserve currency and the world needs dollars to both trade and back their own sovereign currencies with one of the most trusted assets in the world.

Well, if this is true, and we believe it is, then how many dollars does the world really need?  Between 2010 and 2020, the trade deficit averaged about $40 billion per month.  From 2020 to 2024, the trade deficit averaged about $70 billion per month, but this was probably at least partly COVID induced…the US opened up faster than other countries.

Then in December, the trade deficit hit $98 billion, and then $131 billion in January, $123 billion in February, and $140 billion in March.  If we compare this to the $70B per month average from 2024, in just 4 months of 2025, the US has sent $212 billion extra dollars overseas.  $212 billion!!!!

Assuming that the demand for use of the dollar in international trade did not change one bit, that $212 billion of extra dollar supply in foreign hands would certainly knock its value down on foreign exchange markets.  In other words, no wonder the dollar fell this year.  We flooded the world with dollars by massively increasing our trade deficit.

Well, we believe the front-running comes to an end soon.  Our bet is that this will lead to a stronger dollar as supply and demand come back into balance.  The dollar is not dead or dying.

Brian S. Wesbury – Chief Economist

Robert Stein, CFA – Deputy Chief Economist

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Rare earth minerals are the unsung heroes of modern technology. From smartphones and wind turbines to electric vehicles and advanced defense systems, these 17 elements play a critical role in the 21st-century economy. In this week’s Three on Thursday, we dig into the numbers behind global rare earth production, U.S. dependency, and what it would take to break free from China’s dominance. 

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The Federal Reserve held rates steady today, while emphasizing that elevated uncertainty has clouded the path forward.  If, when, and how much tariff policy will change in the months to come will play a large part in dictating the next move for the Fed. But until greater clarity arrives, the Fed is happy to watch and wait.

Starting with today’s FOMC statement, there were a few changes worthy of note.  In the very first sentence, the Fed added text that “swings in net exports have affected the data,” which made sense given how the first quarter GDP declined, but all due to a temporary surge in imports. Additional changes to the text noted rising uncertainty in the economic outlook, with the Fed judging risks are higher for both unemployment and inflation – the two parts of the Fed’s mandate.   

We admit this is an incredibly difficult time to forecast, with soft sentiment data moving in negative direction while some hard data on real activity continues to progress.  The remnants of COVID-era spending measures are still echoing through the system, and how the economy will progress in the short term if true progress is made in cutting deficit spending and signing new trade deals is still to be seen. The era of easy everything is over, and while that may not be a welcome transition for many, it’s a necessary transition. Kudos to Chair Powell for stating during the press conference that US debt has been on an unsustainable path. But just how much discomfort the Fed is willing to endure during a period of transition is yet to be seen.

For the time being the Fed is confident that monetary policy is sufficiently restrictive to continue pushing inflation lower, while giving them leeway to wait for further data to allow a cleaner assessment of how the economy, inflation, and employment are impacted by policy out of Washington.  In Powell’s words, “there is no cost to waiting.” And while pressed time and again by reporters to comment on what should be done on the tariff and tax front, Powell – to his credit – simply stated that those are not Fed decisions to make and that they stand ready to act and react to the environment in front of them.  We only wish the Fed would have taken the same hands-off approach during COVID.

Much could happen between now and the next Fed announcement scheduled for June 18.  At the very least, the next meeting will bring updated economic and rate projections from Fed members (the dot plots), and we will have at least a month of full data looking at the early impacts any trade disruptions have brought. Throughout this period of increased uncertainty, we are working harder than ever to dive into the data and identify the trends that we believe are critical to navigating the current environment. From the Monday Morning Outlook, Three on Thursday, Data Watches, and Wesbury 101 videos, our goal is to help bring you clarity on the numbers that matter most.

Brian S. Wesbury – Chief Economist

Robert Stein, CFA – Deputy Chief Economist

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Implications: The U.S. trade deficit widened to a record $140.5 billion in March, as exports edged up slightly while imports surged by $17.8 billion. Like January, the jump in imports was driven by businesses rushing to front-run President Trump’s new tariffs. Pharmaceuticals led the way, soaring $20.9 billion in a single month. Because imports subtract from GDP in national accounting, this surge became a major drag on growth. Net trade alone shaved roughly five percentage points off Q1’s growth rate, pulling real GDP down at a 0.3% annualized pace. With tariff pre-buying likely peaking in March, imports should slow and become a positive for real GDP in Q2. In fact, early signs of a sharp import slowdown are already emerging. Vizion, a global container tracking firm, reports that twenty-foot equivalent unit (TEU) bookings from China to the U.S. are down over 40% year-over-year for the weeks of April 14 and April 21, and down 27% for the week of April 28. Overall, U.S. trade volume (exports + imports) is up 18.1% from a year ago—exports are up 6.7%, but imports have climbed 27.1%. Meanwhile, the landscape of global trade continues to shift. China, once the top exporter to the U.S., has fallen to third place behind Mexico and Canada. Also in today’s report, the dollar value of US petroleum exports exceeded imports once again. This marks the 34th consecutive month of the US being a net exporter of petroleum products.

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Implications:  No sign of a recession in April for the US service sector, as the ISM Services index beat consensus expectations and rose to 51.6, signaling continued expansion in the part that drives two-thirds of the US economy.  Looking at the details, April’s change in the indexes were a reversal of the movement in March, with most major measures of activity moving higher.  The index for new orders climbed to 52.3, with respondent comments noting a rising number of companies looking to increase sourcing and manufacturing in the US.  Meanwhile, business activity continued to expand in April but at a slower pace than March, with the index declining to 53.7.  Despite orders and business activity increasing, service companies have taken a cautious stance with their hiring efforts.  The employment index remained in contraction territory for the second month in a row, with an equal number of industries (eight) reporting higher employment versus lower employment in April.  Respondent comments reveal that impacts from cuts on federal government spending and grants are contributing to the hiring freeze among some service companies.  Finally, the highest reading of any category was once again the prices index which rose to 65.1 in April, with seventeen out of eighteen major industries reporting paying higher prices and just one reporting a decline (Arts, Entertainment & Recreation).  The prices index sits at the highest level since the beginning of 2023, but far from the worst during the years following the onset of COVID.  The Federal Reserve is unlikely to move at their meetings this week as it continues to watch how the economy responds to actions out of DC, but we believe the Fed is eyeing further rate cuts in the later part of 2025.   As for the economy, it’s true that tariffs and government spending cuts are impacting, but they have not induced a recession.  The service sector remains a lifeline for growth – for now.

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