Implications: Industrial production continued to grow at a slower pace in June, posting a modest 0.1% gain.  Looking at the details, the largest positive contributions came from mining and utilities, which both rose 0.4%. Gains in mining output were driven by both oil and gas extraction and drilling activity, which more than offset a decline in other mineral extraction. Notably, mining output is up at a rapid 12.1% annualized rate in the last three months, an encouraging sign that US energy companies may finally be ramping up output as supply disruptions continue in the Middle East. Meanwhile, utilities output (which is volatile and largely dependent on weather from month to month) has been on an upward trend since 2023, following nearly twenty years of stagnation, as power hungry data centers have boosted demand for US power generation. Unfortunately, the biggest source of weakness in June came from the manufacturing sector, which stalled for the first time this year despite a 0.6% increase in the volatile auto sector.  Manufacturing excluding autos (which we think of as a “core” version of industrial production) declined 0.1% in June, even though the typical bright spots in the “core” measure were present.  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 0.4% in June. High-tech manufacturing is up 11.1% in the past year (the fastest annual rate of any series) and up at an even faster 15.5% annualized rate in the past three months. Meanwhile, manufacturing of business equipment was up 5.5% in the past year, outpacing the 1.1% gain in overall industrial production and signaling a broader reindustrialization. In other news this morning, import prices increased 0.3% in June while export prices fell 0.6%.  In the past year, import prices are up 7.1%, while export prices have risen 10.2%.

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Implications: Great headline, lousy details. Homebuilding surprised to the upside in June and beat even the most optimistic forecast of any Economics team polled by Bloomberg, rising to a 1.427 million annual rate.  However, the 19.0% monthly gain was entirely due to the multi-unit category where activity can move in big swings. That was the case in June as multi-unit construction rebounded 76% after plunging 40% in May. By contrast, single-family starts edged 0.2% lower and continue to spin their wheels, down 3.2% in the past twelve months.  Looking ahead doesn’t make the picture any rosier.  Permits for new builds lagged expectations and declined 3.0% in June to a 1.367 million annual rate, a three-month low.  This includes a 2.4% decline for single-family permits to their lowest level in almost a year.  Homebuilders have clearly faced a challenging environment in recent years.  Affordability remains the key issue, with 30-year mortgage rates reversing a recent decline and climbing back roughly 50 bps to 6.6% since the onset of the war in Iran, roughly double the levels that prevailed through much of 2021.  High home prices, restrictive local building regulations, tighter immigration enforcement making it difficult to find or replace workers, and tariffs are also contributing. Given these headwinds, it is no surprise to see the NAHB index (a measure of homebuilding sentiment) dropping to 34 in July from 36 in June, where a reading below 50 signals that a greater number of builders view conditions as poor versus good (now the 27th consecutive month that has been the case.)  In other housing news this morning, pending home sales, which are contracts on existing homes, declined 5.4% in June, following a 3.5% increase in May, suggesting a slight decline in existing home sales (counted at closing) in June.

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In today’s “Three on Thursday,” we take a closer look at the rapidly expanding world of hyperscalers—the technology giants that own and operate vast networks of cloud-computing infrastructure and data centers. To meet surging demand for artificial intelligence (AI), hyperscalers are investing hundreds of billions of dollars in data centers, advanced semiconductors, and supporting energy infrastructure. For more insight, click the link below.

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Implications:  Consumer spending closed out the first half of 2026 on solid footing as retail sales matched consensus expectations in June and the underlying details of the report were strong.  Sales rose a consensus-expected 0.2% in June while upward revisions to previous months pushed the overall gain to +0.6%.  This happened despite a 5.3% drop at gasoline stations, which was driven by lower prices at the pump rather than weakening underlying demand.  The monthly overall gain was broad-based with seven out of the thirteen major sales categories rising.  Auto sales helped lead the way higher with a 1.9% increase for the month following a 1.1% gain in May.  We like to follow “core” sales, which strip out the volatile categories for autos, building materials, and gas stations and is important for estimating GDP.  This measure rose 0.4% in June and was running at a 9.1% annualized growth rate in the second quarter versus the first quarter average – the fastest quarterly growth rate in three years. Sales at nonstore retailers (think internet and mail-order) have been the standout within the core grouping, up 1.9% in the month and rising at an 18.2% annualized rate in the second quarter.  Meanwhile, sales at restaurants & bars (the only glimpse we get at services in this report) moved 0.1% higher in June, while May's figure was revised sharply higher, from an initially reported 0.1% decline to a 1.2% increase. It’s important to remember that none of these figures are adjusted for inflation.  Given the decline in consumer prices in June, overall sales rose 0.6% for the month in “real” terms.  However, this favorable inflation adjustment is the exception rather than the rule. Nominal retail sales have risen 6.7% in the past year, but factoring in inflation, “real” inflation-adjusted sales are up 3.1% in the past twelve months. The good news is that real retail sales have finally surpassed their peak from more than four years ago back in April 2022.  In other news this morning, initial jobless claims declined 8,000 last week to 208,000; continuing claims fell 16,000 to 1.805 million. These figures suggest continued payroll growth in July.  In manufacturing news, the Philadelphia Fed Manufacturing Index, a measure of factory sentiment in that region, surged to a nearly five-year high of +41.4 in July from +10.3 in June.

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Implications: Following in the footsteps of yesterday's CPI report, the Producer Price Index surprised to the downside in June as lower energy prices after the temporary peace agreement between the U.S. and Iran pushed producer costs lower.  The 0.3% headline decline in June was well below the consensus expectation of no change and was led by a 1.4% drop in goods prices.  Within goods, nearly two-thirds of the decline can be traced to a 12.0% drop for gasoline prices.  Food prices (-0.6%) and other energy-related categories such as diesel fuel, jet fuel, and crude petroleum also fell.  On the services side, prices rose 0.2% after declining 0.1% in May.  Half of the June increase for services can be traced to margins received for fuels and lubricants retailing, which jumped 13.0%, suggesting retailers were slow to pass lower wholesale fuel costs on to consumers.  Further back in the supply chain, prices for unprocessed and processed intermediate goods fell 1.2% and 4.1% respectively, largely resulting from lower prices for energy processing.  Excluding food and energy, "core" producer prices increased 0.2% in June, while the twelve-month change eased to 4.7%, though it remains well above the 2.7% increase for the twelve months ending in June 2025. Overall producer prices are up 5.5% in the past year, more than double the 2.4% change from the twelve months ending in June 2025.  While this report may be a welcome sign for the Federal Reserve, inflation remains well above their official 2.0% target no matter which way you cut it.  Meanwhile, the peace agreement between the U.S. and Iran appears to be falling apart, meaning energy prices could remain volatile in the near term. However, sustained movements in overall inflation are led by the money supply, which is up 5.6% in the past year versus the 6% trend prior to COVID when inflation remained low. We expect this monetary tightness will eventually bring inflation down once the conflict in the Middle East ends. In other news this morning, the Empire State Index – a measure of factory sentiment in the New York region – rose to +15.6 in July from +5.7 in June.

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Implications:  Today’s CPI report makes it less likely the Fed hikes short-term rates by the end of the September meeting.  Consumer prices declined in June as energy prices moved sharply lower following a temporary peace agreement between the U.S. and Iran and a reopening of the Strait of Hormuz.  The 0.4% monthly decline was larger than the forecast from any economics groups surveyed by Bloomberg and marked the biggest drop since the onset of COVID.  Energy prices were the largest contributor to the decline, falling 5.7% for the month, driven by a 9.7% drop in gasoline prices. The best news is that lower inflation pressure was not confined to the energy sector. "Core" CPI, which excludes food and energy, was unchanged in June, below the consensus expectation of a 0.2% increase.  Housing rents (both those for actual tenants and the imputed rental value of owner-occupied homes), which make up the largest components of the index, rose a modest 0.2%.  Meanwhile, that was offset by declines across a number of categories, including hotels (-2.8%), motor vehicle insurance (-2.0%), apparel (-0.6%), used vehicles (-0.2%), and medical care (-0.1%). Meanwhile, "Supercore" prices – a subset measure created by the Federal Reserve that excludes food, energy, other goods, and housing rents – fell 0.2% in June. While overall consumer prices are up 3.5% over the past year compared with 2.7% for the twelve months ending June 2025, much of that acceleration reflects the spike in energy prices following the Iran War.  On the other hand, core prices have increased 2.6% over the past year, down from 2.9% for the twelve months ending June 2025. Still, inflation remains above the Fed’s 2.0% target no matter how you cut it.  The best news in today's report was that wages gained ground in the battle against inflation, as "real," inflation-adjusted hourly earnings rose 0.8%, the biggest monthly increase since 2020.  However, real earnings have shown only marginal improvement over the last year, up just 0.1%.  While this report should ease some of the immediate pressure on the Federal Reserve to raise interest rates, the peace agreement between the U.S. and Iran appears to be falling apart, meaning inflation could remain volatile in the near term.  We, however, will be focused on the M2 measure of the money supply, which we believe is the most reliable tool for forecasting sustained inflation and suggests that once the Iran War is resolved, inflation may drop faster than most investors expect.

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As we move toward the mid-term elections, many are making the argument that “democracy is at risk.”  We get politicians making this argument, but when supposedly sober political and economic analysts start to make it, we do get worried.  

For example, the Chief Economics Commentator of the Wall Street Journal recently argued that the Trump Administration, sometimes aided and abetted by the Supreme Court, is a major historic break with much that has made American great going all the way back to the Founders.  Centralizing more economic authority in the executive branch, some argue, puts our country’s long-term prosperity at risk.  Apparently, a recent ruling that the president can remove the leadership of so-called “independent agencies,” like those at the Federal Trade Commission is what pushed the WSJ Commentator over the edge.

We don’t think this concern should be casually dismissed.  Although we are not legal experts on the Federal Reserve, we think monetary policy operates better across time if the president can’t easily remove Board members.  The Constitution gives Congress the power to tax and spend, so reining in the use of tariffs has made it easier for companies to make decisions on where to invest.  We also don’t like the government taking equity stakes in private companies.

But the argument that just now, in 2026, executive power has become a unique threat to the Institutions of America and a threat to long-term economic growth is a reach. 

In the 1930s, the US government underwent a massive transformation in its size and scope.  Federal spending was about 3.5% of GDP before the Great Depression; it then roughly tripled to over 10% of GDP even before World War II.  Then, in the 1960s, spending almost doubled again, rising from 10% of GDP to 19%.

These two periods led to a proliferation of “alphabet agencies” like the SEC, FHA, SSA, NLRB, FDIC, and then Medicaid and Medicare.  Then, in 2008, during the Great Financial Crisis, bond holders in auto companies were undermined and large financial institutions were taken over by the Federal Government.  Oddly, those criticizing centralization of decision-making under Trump don’t look back to see those past transformations as a problem.  The Federal Government has been centralizing power for decades.

Nor do they like that a couple of years ago Trump’s appointments to the Supreme Court ruled on Chevron, which helped put an end to the practice going back several decades that let unelected federal government bureaucrats effectively enact laws by calling them “regulations,” even when Congress hadn’t explicitly authorized or approved those regulations.

All this fretting over what the Founders wanted should have started a long time ago.  So, the arguments today seem more political than historical or factual.  In fact, in the past twelve months federal spending is barely higher than it was in the last twelve months of the Biden Administration, in spite of inflation, aging demographics, higher health care costs, more interest on the national debt, and higher military spending.  Relative to GDP, the federal government has been getting smaller.  That’s the opposite of putting democracy and the economy at risk.  In fact, it leaves more resources in private hands, not the government’s.

Brian S. Wesbury – Chief Economist

Robert Stein, CFA – Deputy Chief Economist

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With the first half (1H) of 2026 coming to a close last week, this week’s edition of “Three on Thursday” looks at the S&P 500 Index over that period. In the second quarter alone, the S&P 500 Index total return grew 15.2% leaving the overall Index up 10.2% for the first half of the year. Market breadth continues to improve. To get the full picture of the events that unfolded in the first half, click the link below.

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Implications: Existing home sales continued to struggle in June, marking a disappointing start to the summer selling season.  Looking at the big picture, sales have been stuck around a 4.000 million pace for three years now, about the same pace as in the aftermath of the Great Financial Crisis, and well below the roughly 5.250 million annual pace pre-COVID (let alone the 6.500 million pace during COVID).  The main issue remains affordability which has taken a turn for the worse in the aftermath of the conflict with Iran, with higher energy costs having an upward impact on short-term inflation.  This has taken rate cuts from the Fed off the table and 30-year mortgage rates have moved roughly 50 basis points higher since February, now sitting around 6.6%.  Nonetheless, there is some good news for buyers. Since the COVID pandemic, many existing homeowners have been reluctant to sell due to a “mortgage lock-in” phenomenon, after buying or refinancing at much lower rates before 2022.  This meant that potential buyers had to deal with limited options.  However, the existing home inventory (the number of homes listed for sale) has been improving recently and now sits near the highest level since the pandemic (though still well below pre-COVID levels). The months’ supply of homes (how long it would take to sell existing inventory at the current very slow sales pace) rose to 4.6 in June, approaching the benchmark of 5.0 that the National Association of Realtors uses to denote a normal market.  Finally, though the median price of an existing home hit a record high in today’s report, it is up only 1.8% versus a year ago. This suggests that overall inflation data are likely exaggerating price pressures because of the war in Iran.  Aggregate wage growth (hourly earnings plus hours worked) has been consistently outpacing median home price gains since early-2025, which improves affordability. While many cross currents remain, the fundamentals for a modest improvement in home sales are starting to emerge. In other recent news, initial jobless claims fell 2,000 last week to a still-low 215,000; continuing claims increased 8,000 to 1.814 million.

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Implications: After a few months of relative stability, the trade deficit widened sharply to $77.6 billion in May. The increase in the deficit for the month was due to both a rise in imports, which increased $12.5 billion, as well as a large decline in exports, which fell $10.5 billion.  A good chunk of the decline in exports came from nonmonetary gold – a category not included in GDP calculations – which should soften the impact a little to net exports on Q2 GDP. Imports on the other hand saw a broad-based increase, led by pharmaceuticals. 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 $2.0 billion in May and is up 13.0% from a year ago.  Over the past year, exports have risen 12.6% while imports are up 13.3%.  Meanwhile, the landscape of global trade continues to evolve. China, once the dominant exporter to the U.S., has slipped to fourth place behind Mexico, Canada, and now Taiwan, with exports to the U.S. down 29.9% in the first five months of 2026 compared to the same period last year.  Accelerated demand for high tech equipment to fuel the massive AI investment stands out in the data with imports from Taiwan up 78.5% over the same period moving them a full 5 places higher from 8th to 3rd. Also in today’s report, the dollar value of U.S. petroleum exports once again exceeded imports, marking the 51st consecutive month of America being a net exporter of petroleum products.  Keep in mind petroleum products include refined products like gasoline, diesel, and propane – all of which the U.S. exports in large volumes. When looking at crude oil alone however, the U.S. remains a net importer (although not as much as in prior decades), largely due to domestic refinement capabilities.

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