Implications: Existing home sales closed out 2025 on a healthy note, rising for a fourth consecutive month and hitting the fastest pace since 2023. That said, the current sales rate of 4.350 million remains near the low since 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 good news is that affordability has been improving in several notable ways. First, 30-year mortgage rates have been trending lower since May and now sit around 6.2%, near the lowest rate since 2022. Buyers also have reasons for further optimism on financing costs. The Federal Reserve is continuing to cut rates, the Trump Administration will soon appoint 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, the median price of an existing home is up only 0.4% versus a year ago. Aggregate wage growth (hourly earnings plus hours worked) has also begun to consistently outpace median home price gains over the past year for the first time since 2023, which improves affordability. The biggest headwind continues to be inventories, where growth continues although at a slower pace than earlier this year. This has led to the months’ supply of homes (how long it would take to sell existing inventory at the current very slow sales pace) falling to 3.3 in December, well below the benchmark of 5.0 that the National Association of Realtors uses to denote a normal market.  Many existing homeowners also remain reluctant to sell due to a “mortgage lock-in” phenomenon, after buying or refinancing at much lower rates before 2022.  This means potential buyers will have to continue to deal with limited options.  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. Despite these cross currents, underlying fundamentals have improved recently, which should contribute to a modest upward trend in sales in 2026.

Click here for a PDF version

Implications:  Retail sales for November generated a strong headline, but softer details. Overall retail sales rose 0.6% for the month, but previous activity was revised lower, dropping the monthly gain to a 0.4% increase when factoring in revisions.  Sales are up 3.3% from a year ago but have slowed recently, up at a 2.3% annualized rate in the last three months.  While the gain in November was broad-based with ten out of the thirteen major categories rising, it was largely the result of a 1.0% rebound in the volatile autos category after an expiring tax credit for EVs temporarily held down the category in October.  Meanwhile, the 1.4% gain at gas stations was the second biggest contributor to the headline increase, which can also swing from month to month.  “Core” sales, which strip out the volatile categories for autos, building materials, and gas stations, increased by 0.4% in November, but was up 0.2% after factoring in revisions.  The core number is crucial for estimating GDP, because when it calculates GDP the government uses other sources for autos, building materials, and gas, not the retail report.  If unchanged in December, these sales will be up at a 3.7% annual rate in Q4 versus the Q3 average.  The good news is that sales at restaurants & bars – the only glimpse we get at services in the report, which make up the bulk of consumer spending – rose 0.6% in November while previous months’ activity were revised higher.  These sales are up at a 5.7% annualized rate through the first eleven months of the year versus a 2.8% annualized increase for overall sales.  We will continue to watch this category closely in the months ahead.  Finally, it’s important to remember the impact inflation has on retail sales.  Overall sales are up 3.3% on a year to year basis, but “real” inflation-adjusted sales are up just 0.6% in the past year and still down from the peak in early 2022.

Click here for a PDF version

Implications:  Producer prices rose 0.2% in November, matching consensus expectations, but the rise was heavily influenced by energy prices which spiked 4.6% in November (the largest monthly increase in more than two years).  Excluding energy and food - another typically volatile category - shows “core” producer prices were unchanged in November but remain up 3.0% versus a year ago.  Yes, that’s above the 2% level targeted by the Fed, but it represents an improvement from the 3.4% reading for the twelve months ending November 2024.  Inflation readings have been muddied by the government shutdowns that stopped the normal flow of data gathering, but what has remained clear is that many of the Fed’s concerns for 2025 – most notably a resurgence of inflation pressures due to tariffs implemented earlier in the year – haven’t materialized.  This isn’t the first time that Fed forecasts have missed the mark, and until they improve their models, we don’t expect the accuracy of their forecasts to improve.   The Fed remains concerned that tariffs will push overall prices higher at some point, but the data have not fully cooperated.  It’s true that goods prices – which are most exposed to higher import costs – are up at a notable 5.1% annual rate over the past six months, but that rise has been largely offset by a moderation in services prices, up at a 2.6% rate over the same period.  For comparison, services prices were up at a 3.8% annualized rate over the same period last year.  Put simply, tariffs can raise prices for tariffed items, but they leave less money for consumers left over for other goods and services. Sustained movements in overall inflation are led by the money supply, which is up only 2.6% since April 2022.  Volatility may continue month-to-month, but we expect this monetary tightness will keep inflation relatively subdued, leaving room for rate cuts to continue at some point in 2026.  

Click here for a PDF version

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. Buyers purchased 737,000 new homes at an annual rate in October, and sales are up 18.7% in the past year. While the October pace remains below the highs of the pandemic, sales are at roughly the fastest pace since 2023 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 is reason to expect this progress to continue. 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. The Federal Reserve is continuing to cut rates, the Trump Administration will soon appoint 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 the past several years. Median sales prices are down 14.8% 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 on 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 finally be giving home sales a boost.

Click here for a PDF version

Implications:  Headline inflation came in as expected in December, with the Consumer Price index rising 0.3%.  “Core” inflation, which strips out food and energy, came in lower than expected, rising 0.2% in December.   At the beginning of 2025, we told investors to look past tariffs and instead focus on the M2 measure of the money supply for understanding where inflation will go.  Tariffs can raise prices for tariffed items, but they leave less money for consumers to spend on non-imported, non-tariffed goods and services. They shuffle the deckchairs on the inflation ship, not how high or low the ship sits in the water.  That’s up to the money supply – and given the slow growth over the last 3+ years – we expected inflation to continue trending lower in 2025.  Despite many other analysts warning of a surge in 2025, the CPI finished up 2.7% in 2025 (December over December) versus 2.9% in 2024.  Core prices rose 2.6% in 2025 versus 3.2% in 2024.  Looking at the details, housing rents (those for actual tenants as well as the imputed rental value of owner-occupied homes) have been the main driver of core inflation over the last few years, but that tide has turned: rents rose 0.3% in December but are up at a 2.2% annualized rate over the last three months, which lags both headline and core inflation.  Meanwhile, airline prices continue to move in large swings, rising 5.2% in December after falling a combined 6.6% in October/November.  Other notable movers were the recreation index (which includes prices for recreational goods and services such as sporting events) rising 1.2% in December, the largest monthly increase ever recorded for that category going back to 1993. Meanwhile, the communication index fell 1.9% in December, while used car prices dropped 1.1%, and new vehicles prices were unchanged.  In spite of the downward trend in inflation, the Federal Reserve is unlikely to cut short-term rates again in January unless it sees a slowdown in economic growth or greater weakness in the labor market.  However, Chairman Powell’s term ends in May, and regardless of who he is replaced by, there could be a substantive shift in the tone coming from the Fed with the changing of the guard. We, however, will be keeping our eyes on the M2 money supply, which remains our North Star on inflation. 

Click here for a PDF version

We have never seen economic data as murky as they are today.  The jobs data are very soft, and yet the Atlanta Fed’s GDPNow model (which slowly incorporates data as they’re released) says fourth quarter real GDP growth will be 5.1%.

At face value, this suggests productivity growth is rising and, last week, third quarter productivity growth was reported as very strong.  But can we take any of this at face value?  GDP data have been hugely influenced by international trade, which has been extremely volatile given US tariff policy.

To wit, the trade deficit narrowed sharply and unexpectedly to $29.4 billion in October, the smallest for any month since 2009.  This smaller trade deficit is adding about two percentage points to real GDP growth in the fourth quarter.  Without trade, real GDP is running at about 3% in Q4.  And “Core GDP,” which excludes government purchases, inventories, and international trade, is heading for 2.5% growth.

In the meantime, the labor market looks tepid at best.  Payrolls declined 22,000 per month in the fourth quarter.  Much of that was due to a drop in federal employment, with many workers taking buyouts, but private-sector payrolls have barely grown.

In fact, total nonfarm payrolls excluding government and a category called “healthcare and social assistance” (which includes people paid by government to provide in-home services) are down 58,400 over the past six months.  In the second half of 2025, manufacturing jobs were down 44,000, while retail jobs were down 31,300.

In other words, we have real GDP growing at a solid pace, even faster than in 2024, but nonfarm payroll data says recession.

How can this possibly be explained?  One narrative says AI, robotics, and other new technologies are so amazing that we can produce more with fewer people.  We have no doubt that the adoption of these new processes will raise productivity over time, but there is not an avalanche of anecdotal evidence to back this claim up today.  Yes, data center spending is exploding, but other than that, business investment is relatively weak.

Another says that deregulation, cutting government support of solar and wind projects, and the fact the tax environment has improved are causing a Reagan-style acceleration of economic activity.  But the main strength in GDP is consumption and AI spending, not other construction or exports.

While we are not big fans of the wealth effect (especially its use in managing monetary policy), it certainly appears that consumption is being driven higher by baby boomers and others who have saved and are experiencing an appreciation in asset values.  But if the stock market (which certainly appears over-valued) stumbles, this spending could disappear quickly.

The bottom line is that the data are mixed and trying to draw definitive conclusions from it is virtually impossible.  This fog should lead everyone to maintain a cautious investment stance.  What does that mean?  Be careful concentrating too much in high priced sectors of the market.  Broaden out.  When driving in fog, drive more defensively.

Brian S. Wesbury – Chief Economist

Robert Stein, CFA – Deputy Chief Economist

Click here for a PDF version

Implications:  Homebuilding was disappointing in October, with starts declining 4.6% to a 1.246 million annual rate, the lowest level since 2019 and well short of even the most pessimistic forecast for any Economics group surveyed by Bloomberg.  Looking at the big picture, homebuilders face a huge set of headwinds – 1) the largest completed single-family home inventory since 2009 2) high home prices 3) restrictive local building regulations 4) stricter immigration enforcement making it difficult to find or replace workers, and 5) the uncertainty of tariffs and how they’ll affect building costs.  All of this has translated into building rates reminiscent of 2020—no growth in over five years.  Digging into the details of the report, the drop in October was entirely due to the volatile multi-unit category (which had helped lift overall construction in recent months) retreating 22.0% to the lowest level since January.  Meanwhile, single-family starts rose 5.4% but remain 7.8% lower than a year ago. Building permits weren’t strong either, down 0.2% in October and 1.1% from a year ago, led by a 9.4% decline in single-family permits since October 2024.  The one bright spot was in multi-unit permits which ticked up 0.2% in October and are up 16.3% from a year ago.  One way homebuilders had been combatting sluggish activity is by focusing their efforts on completing projects.  New home completions were red hot in 2024 but have trended lower in 2025.  Completions rose 1.1% in October but are down 15.3% in the past year.  Despite the downward trend, they have still outpaced starts and permits in nine out of the last twelve months.  With strong completion activity and tepid growth in starts, the total number of homes under construction has fallen 10.1% in the last twelve months.  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 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 construction since the last housing bust should keep national average home prices elevated. The encouraging news is that affordability has shown some signs of improvement.  In October, the average 30-year fixed mortgage rate fell to 6.3%, the lowest level since September 2022. Looking ahead, we anticipate mortgage rates will continue to gradually decline as the Federal Reserve makes modest cuts to short-term interest rates.

Click here for a PDF version

Implications:  A mediocre report on the direction of the job market for the last month of 2025, not great, not horrible.  Nonfarm payrolls rose 50,000 for the month of December itself but revisions for October and November, combined, subtracted 76,000.  In other words, payrolls in December are now 26,000 below what the prior report showed for November.  Taking stock of all of 2025, payrolls were up 49,000 per month and 61,000 for the private sector.  Notably, federal government jobs (ex-Post Office) declined 268,000 in 2025, the most on record for any year going back to at least 1990.  Over time, we think shrinking federal jobs will boost private sector growth.  We also 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 51,000 in December and 164,000 in 2025.  On net, leisure & hospitality as well as private education and health accounted for all private sector payroll growth in 2025.  The best news in today’s report was that civilian employment, an alternative measure of jobs that includes small-business start-ups, increased 232,000 in December and rose 2.4 million in 2025.  The gain in December as well as a small decline in the labor force (people either working or looking for work) helped push the unemployment rate down a tick to 4.4%.  The worst two data points in the report were on hours worked and the duration of unemployment.  Total private-sector hours worked declined 0.3% in December, although they still rose 0.6% in 2025, similar to the gain in 2024.  Meanwhile, the median number of weeks an unemployed person remains unemployed, rose sharply to 11.4 weeks in December.  It’s possible that this is just statistical noise, but it’s also possible that the growing introduction of AI into workplaces is making it tougher for some unemployed workers to find jobs, as their skills might not be up-to-date.  We will be watching this series closely in the months ahead.  On the inflation front, average hourly earnings grew a moderate 0.3% in December and are up an annualized 3.9% in the past six months.  The Federal Reserve probably wants to see at least a slightly lower figure on wage growth before cutting short-term interest rates again.

Click here for a PDF version

In this week’s edition of Three on Thursday, we take a closer look at the S&P 500 Index in 2025. After surging 26.3% in 2023 and 25.0% in 2024, the S&P 500 Index followed up with a total return of 17.9% in 2025—capping three consecutive years of exceptional performance. For a fuller picture of the events that unfolded in 2025, click the link below.

Click here to view the report

Implications: The U.S. trade deficit narrowed sharply and unexpectedly to $29.4 billion in October, the smallest for any month since 2009. The decline in the deficit was due to an increase in exports, which rose $7.8 billion, on top of a large decline in imports, which fell $11.0 billion. The President may see this as a big 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. For instance, for October, all of the gains in exports came from nonmonetary gold and other precious metals, while all of the decline in imports can be attributed to pharmaceuticals. The fact that these narrow and often volatile categories were responsible for the drop in the deficit suggests the trade deficit should bounce back higher for November. We like to focus on the total volume of trade, imports plus exports, as it shows the extent of business and consumer interaction across the US border. That measure shows mixed results, down by $3.2 billion in October, up 3.3% in the past year, but down 10.0% from the peak hit just earlier last year in March 2025.  The decline in trade volumes versus earlier last year could signal a real shift in global supply chains — reshoring, decoupling, and rising U.S. output, exactly what the President wants to see. 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 related to the trade deficit suggests the decline in October means more of what we purchased overall was made domestically, meaning faster real GDP growth.  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 with exports to the US down 26.7% year-to-date through October versus the same period 2024. And in today’s report, the dollar value of U.S. petroleum exports once again exceeded imports, marking the 44th consecutive month of America being a net exporter of petroleum products. Petroleum exports were about 40% higher than petroleum imports in October, a new record high. In other news today, nonfarm productivity (output per hour) increased at a 4.9% annual rate in the third quarter of 2025 as both output and hours rose, but output rose at a much faster pace. In the past year, productivity is up 2.2%, a pickup from the long-term trend of 1.5%.  On the labor front, initial jobless claims rose 8,000 last week to 208,000 while continuing claims rose 56,000 to 1.914 million. These figures suggest job growth continues.

Click here for a PDF version