Implications: Solid labor market, but not without some blemishes.  Nonfarm payrolls rose 115,000 in April and 99,000 including downward revisions for prior months – either way beating the consensus expected 65,000.  Meanwhile, the unemployment rate remained at a relatively low 4.3%.  The job gains in April itself were led by health care & social assistance, transportation & warehousing, and retail.  Total hours worked in the private sector rose 0.3%.  We like to follow payrolls excluding government and health care & education (which are often driven by government policies), which rose 77,000 in April.  Notably, federal payrolls were down 9,000 in April.  Compared to January 2025, federal payrolls excluding the Post Office and Census are down 337,000, or 14%.  Leaving out the end of the Census every decade, the decline in federal payrolls in the past fifteen months has been the steepest since the wind-down from World War II. Over time, we think a smaller federal government will help boost growth in the private sector.  However, not all the details were as robust as the headlines.  For example, although they rose in April, payrolls excluding government and health care & education are down 107,000 from a year ago.  Civilian employment, an alternative measure of jobs that includes small-business start-ups, dropped 226,000 in April.  That series can be volatile month-to-month but is worth watching.  Yes, the unemployment rate was steady, but that was due to a 92,000 decline in the labor force (people working or looking for work), which ticked the participation rate down to 61.8%, the lowest since 2021.  Average hourly earnings rose a tepid 0.2% in April, which is very likely below the pace of inflation for the month.  Put it all together and we expect continued jobs gains in the months ahead but at a noticeably slower pace than the headline 115,000 for April.  In other recent news, initial jobless claims rose 10,000 last week to a still-low 200,000; continuing claims declined 10,000 to 1.766 million, also low.  Construction increased 0.6% in March after a 0.2% dip in February, with the net gain for those two months led by single-family home building.  Productivity (output per hour) increased at a 0.8% annual rate in Q1 and is up 2.9% from a year ago, a good sign versus the long-term trend of about 1.5%.  Unit labor costs increased at a 2.3% rate in Q1 but are up a mild 1.2% in the past year.  

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In Fiscal Year 2025, a staggering 69% of federal spending was allocated to payments to individuals, near the highest share ever recorded. In this week’s “Three on Thursday” we look at the composition and evolution of federal spending over history, and how the Federal Government has become not much more than the world’s largest money transferring machine. For deeper insights, click the link below.

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Implications: We got another double dose of data on new home sales this morning, and it looks like activity has bounced back sharply since January when severe winter weather caused the largest monthly decline since 2013. Sales rose 8.9% and 7.4% in February and March, respectively, and now sit at a 682,000 annual rate.  However, the overall trend in sales remains around pre-pandemic levels, which has been a ceiling of sorts for activity the past couple of years.  Unfortunately, the Iran War and its expected impact on energy prices and inflation have introduced new challenges. First, financing costs have recently spiked in response, with the average 30-yr fixed mortgage rate up roughly 30 basis points since the start of the conflict.  Second, despite a new Chairman at the Federal Reserve, further rate cuts are likely on hold for the time being. But while buyers are unlikely to get much help from interest rates, the good news is that prices have been trending lower for new builds in the past several years. Median sales prices are down 16% from the peak in October 2022.  The Census Bureau reports that from Q3 2022 to Q4 2025 (the most recent data available) the median square footage for new single-family homes built fell 9.7%. 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. While financing costs remain a headwind, less expensive options and an abundance of inventories may give home sales a modest boost in 2026.

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Implications:  Activity in the service sector expanded once again in April, although at a slightly slower pace than in recent months, as the ISM Services Index declined to 53.6 from 54.0. The slowdown was largely due to a retreat in new orders as elevated input prices stemming from the conflict in Iran have encouraged service companies to suspend purchases until stability returns.  Looking at the details, growth broadened in April with fourteen out of the eighteen major service industries reporting growth (compared to thirteen in March), while three reported contraction and one remained unchanged. The major measures of activity were mostly higher. The business activity index rose to 55.9 from 53.9, while the new orders index retreated to 53.5 after climbing to its highest level in more than three years in March.  That said, both the business activity index and the new orders index have shown expansion in at least eleven out of the last twelve months. Although growth continues at a solid pace, survey comments reveal caution surrounding higher input costs being passed through to service companies.  As a result, companies which began to increase hiring efforts at the start of the year have since brought hiring efforts to a standstill. After starting the year in expansion, the employment index fell to 45.2 in March, but rose in April to 48.0 – still contractionary, but at a more modest pace.  Unfortunately, the highest reading of any index was once again the prices index, which remained at 70.7 in April, matching the highest level since October 2022. Though the index remains elevated, it is still well below the worst we saw during the COVID supply-chain disruptions, when the index reached the low 80s. While the ongoing war in Iran is expected to affect input prices in the short-term, we will continue to monitor the M2 money supply – which has grown slowly over the last 3+ years – for whether these signals turn into long-term inflationary pressure.

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Implications: The trade deficit widened slightly to $60.3 billion in March, continuing its break of volatility that dominated trade reports for much of last year.  Despite the small movement in the deficit, there was plenty of activity behind the scenes: exports rose by $6.2 billion, led by crude oil and other petroleum products, as domestic producers moved to fill the void left by the war-driven closure of oil flows through the Strait of Hormuz.  The increase in exports was more than offset by a $8.7 billion increase in imports, led by autos and computer accessories. We like to focus on total volume of trade, exports plus imports, as it shows the extent of business and consumer interaction across the border. That measure increased by $14.9 billion in March but remains roughly flat from a year ago.  While total trade volumes have seen little change over the past year, the mix has improved for domestic producers, with exports rising 13.3% and imports falling 9.0% over the past year.  Meanwhile, the landscape of global trade continues to evolve. China, once the dominant exporter to the U.S., has slipped to a fourth place behind Mexico, Canada, and now Taiwan, with exports to the U.S. down 40.7% in the first three 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 97.9% over the same period.  Also in today’s report, the dollar value of U.S. petroleum exports once again exceeded imports, with the U.S. posting its largest petroleum surplus on record in March, marking the 49th 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.  In other recent news, cars and light trucks were sold at a 15.9 million annual rate in April, down 1.5% from March and 7.1% below the level from a year ago.

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Kevin Warsh wants to make some big shifts in monetary policy at the Fed.  Unfortunately, unless and until soon-to-be former Chairman Jerome Powell steps down from his regular seat on the Federal Reserve Board, Warsh will be Chairman in Name Only.

One new policy Warsh wants is to shorten up the maturity structure of the Fed’s assets, getting it out of the business of holding longer-term securities.  Another is to shift away from holding mortgage-backed securities and focus on Treasury securities only.

Even more important, Warsh wants the Fed to unwind Quantitative Easing, a policy he originally supported back in 2008-09 in the midst of the so-called Global Financial Crisis, but apparently later came to oppose – or at least oppose to the extent the Fed has made it a permanent feature of monetary policy rather than a temporary measure.

To successfully unwind QE it’s likely the Fed would also have to end the policy of paying banks interest on reserves, which means a Warsh chairmanship holds out the hope of eventually taking us back to a monetary regime where policy is implemented through scarce reserves rather than abundant reserves.  

The problem is that even though Warsh will become Chairman soon, Powell has announced he will keep his board seat for at least the time being.  Reports suggest he is only doing so temporarily but will depart that seat – which would open-up another position for President Trump to fill – as soon as the Administration commits with “finality and transparency” to ending the Justice Department’s investigation of the Fed. 

But as long as Powell stays it will be tough for Warsh to shift policy at the Fed, either the long-term policies we outlined above or even shifts to short-term interest rates.  The Fed bank presidents would still be the old Powell-approved presidents and likely with him on policy, not with Warsh.  And the Powell faction at the Fed would still have four votes on the Board versus only three for Warsh.

Which brings us to another reason Powell may end up trying to stick around longer, maybe even all the way until January 31, 2028, when his term as a board member fully runs out.  If Powell leaves before then and Trump replaces him on the board, the Trump-appointed board majority could then threaten to fire Fed bank presidents who oppose them.  Yes, the courts have made it tough for Trump himself to fire board member Lisa Cook, but the courts would have a tougher time protecting bank presidents from a board majority.

In the meantime, Warsh, as official chairman, could try to speed Powell’s departure by making his life at the Fed uncomfortable: maybe take away his parking space and staff plus put his office in the basement.  But the decision to leave would still be Powell’s until January 2028.   

Based on Powell’s statements about trying to protect Fed “independence” from politics, preventing Trump from getting a board majority may be an ulterior motive for Powell to stay, which means the policy shifts supported by Warsh could be on the back burner for some time to come.

Brian S. Wesbury – Chief Economist

Robert Stein, CFA – Deputy Chief Economist

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Implications: Activity in the manufacturing sector continued to expand in April, matching the pace from the previous month at 52.7, which is the fastest since 2022. The expansion comes in spite of numerous headwinds facing the industry, such as elevated prices and longer supplier delivery times due to the closure of the Strait of Hormuz. While we were cautious the improved performance to start 2026 would be a “head-fake” similar to what we had in 2025, this is now the fourth straight month of expansion in manufacturing, signaling solid underlying growth in the sector. Looking at the details, growth remained broad in April, with thirteen out of the eighteen major manufacturing categories reporting expansion, while three reported contraction, and two reported no change.  The major measures of activity were mixed: the index for new orders rose to 54.1 from 53.5, while the production index declined to 53.4 from 55.1, but both remain in solid expansion territory, signaling growth.  It’s important to remember that order books have been very weak since 2023, and manufacturers had to rely on their order backlogs to keep production going.  The great news is that backlogs started growing again 2026, with the index sitting at 51.4 in April – now the fourth consecutive month in expansion territory – when before it had contracted for 39 straight months going back to September 2022.  Despite the meaningful improvement in demand, it has not been enough to spark increased hiring efforts in the industry. The employment index fell once again to 46.4 in April, now the 31st consecutive month of contraction. Even worse was the acceleration of pricing pressures, with the prices index jumping up to 84.6 – significantly higher than the 59.0 registered in January, and nearing the peak following the post-COVID inflation surge, where the index reached the low 90s. With the ongoing conflict in Iran and the February Supreme Court ruling against many of the Trump Administration’s tariffs, followed by their replacement by other tariffs, we expect volatility to continue in this category in the months ahead.

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Even though the United States is often described as “energy independent” and remains a net exporter of petroleum products, that hasn’t shielded American consumers from rising gasoline prices amid the conflict with Iran. In today’s “Three on Thursday,” we take a deeper look at the reasons behind this. For more insight on this topic, click the link below.

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Implications: Outsized growth in income and spending was tempered in March by the largest monthly rise in inflation since 2022.  The 0.6% jump in income was at the very high end of consensus estimates, but unfortunately the details aren’t quite as strong as the headline suggests.  The gains were led by farm proprietors’ income due to one-time bridge payments from the Farmers Bridge Assistance Program.  Beyond those payments, private sector wages and salaries rose a healthy 0.5% in March while government transfer payments increased a more modest 0.1%.  Our view is that, over time, less government spending will help boost the private sector.  In that regard the March data are welcome news, but transfer payments remain up 4.9% in the past year outpacing the 4.5% growth in wages and salaries, showing more work needs to be done.  On the spending side, personal consumption rose 0.9% in March, led by gasoline and other energy goods.  Collectively, goods spending (which includes these energy costs) jumped 2.0% in March while spending on services increased 0.4%.  In the past year, spending on services is up 6.3%, compared to a 4.5% increase for goods.  With spending outpacing income growth in March, the personal saving rate fell to the lowest level since late 2022 at 3.6%.  Clearly the conflict in Iran is impacting prices, with oil being the most visible example.  PCE prices – the Fed’s preferred inflation metric – jumped 0.7% in March, while the year-ago reading rose to 3.5%, a level last seen in early 2023.  “Core” prices, which strip out the volatile food and energy categories, rose 0.3% in March, with the year-ago comparison rising to 3.2%, a notable uptick from the 2.7% pace for the twelve-months ending in March 2025.  The Fed will be watching this data closely as they transition Fed Chairs while simultaneously trying to determine how monetary policy – which operates with a lag – should respond as we progress deeper into 2026.  Accounting for inflation, real consumption rose 0.2% in March after a comfortable 0.3% increase in February and a flat reading in January. Expect plenty of volatility in the inflation (and spending) readings in the months ahead as the ongoing geopolitical events in Iran impact the data.  In other news this morning, initial jobless claims fell 26,000 last week to 189,000, while continuing claims fell 23,000 to 1.785 million, suggesting jobs growth continues at a modest pace.

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Implications: The US economy is not in recession, but it is not in a boom either. Real GDP grew at a 2.0% annual rate in the first quarter of 2026, slightly below the consensus expected +2.3%, matching the average annualized pace of growth since the peak back in late 2007, right before the Financial Panic and so-called Great Recession.  First, the good news: growth in Q1 was driven by a surge in business investment as companies continue to spend on the Artificial Intelligence buildout. This category – covering investment in equipment, commercial construction, and intellectual property – rose at a 10.4% rate, the fastest pace in nearly three years.  Real consumer spending also contributed, growing at a 1.6% rate, exactly as we expected.  The bad news is that government purchases rose at a 4.4% rate in the first quarter, a rebound from contraction in the first quarter when the federal government shutdown artificially held down purchases.  Excluding government at all levels (federal, state, and local), real GDP growth would have been around 1.5% in Q1, which is the epitome of mediocre growth.  Meanwhile, trade continues to move in volatile swings, with net exports subtracting 1.3 percentage points from growth. 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 2.5% annual rate in the first quarter, matching its change versus a year ago.  In other words, we don’t think first quarter GDP signals some sort of change in the trend for growth, partly because without AI spending GDP was much weaker.  The most worrisome part of the report was that GDP prices rose at a 3.6% rate in Q1 and are up 3.3% from a year ago.  Nominal GDP rose at a 5.6% rate in the first quarter and is up 6.0% versus a year ago, both figures well higher than the current 3.625% target on short-term rates.  With the full impact of higher energy prices from the outbreak of war in Iran still making its way into the data, don’t expect rate cuts anytime soon.

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