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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Implications:  Service activity remained in expansion in June, although at a slower pace than the prior month, with the ISM Services Index declining to 54.0 from 54.5 in May. However, the details are more promising than the headline suggests. The drop comes in spite of increased hiring efforts and some signs of improvement on the inflation front. Looking at the details, overall growth was broad in June, with fourteen out of the eighteen major service industries reporting expansion, while four reported contraction. And while the major measures of activity were mostly lower in June, each stands above 50.0, signaling expansion. The business activity index fell to 55.4 from 57.7 while the new orders index declined to 55.1 from 57.3.  Both forward-looking indices have shown expansion in each of the last twelve months. As caution surrounding supply chain issues from the Middle East continue to ease, confidence in the near-term economic outlook has returned. As a result, service companies have started to increase their hiring efforts again, with the employment index reaching 51.2, the first time in expansion territory since February. One month does not make a trend, but the reading above 50 is a welcome sign for a services industry which has struggled with consistency in hiring since 2023.  Unfortunately, the highest reading of any index was once again the prices index, which moderated to 67.7 in June, a significant fall from the 45-month high of 71.3 set in May. Though the index remains elevated, it is well below the worst we saw during the COVID supply-chain disruptions, when the index reached the low 80s. While the ongoing conflict 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 – to determine whether these signals are likely to turn into longer-term inflationary pressure.

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In 1852, Karl Marx said "Men make their own history, but they do not make it as they please; they do not make it under circumstances chosen by themselves, but under circumstances directly encountered and transmitted from the past."

He obviously knew about the Magna Carta (1215) and the English Parliament’s Bill of Rights (1689), which created a separation of powers between the King and elected representatives. What he didn’t pay much attention to was how the United States broke with history and improved upon these documents with the Declaration of Independence and Constitution so well thought out that it has only been amended twenty-seven times in 235 years.  Men and women can make their own history here.  Karl Marx was wrong.  No one puts it better than Ronald Reagan; the excerpt below comes directly from his Commencement Address at the University of Notre Dame back on May 17, 1981.

"This Nation was born when a band of men, the Founding Fathers, a group so unique we've never seen their like since, rose to such selfless heights. Lawyers, tradesmen, merchants, farmers – fifty-six men achieved security and standing in life but valued freedom more. They pledged their lives, their fortunes, and their sacred honor. Sixteen of them gave their lives. Most gave their fortunes. All preserved their sacred honor.”

“They gave us more than a nation. They brought to all mankind for the first time the concept that man was born free, that each of us has inalienable rights, ours by the grace of God, and that government was created by us for our convenience, having only the powers that we choose to give it. This is the heritage that you're about to claim as you come out to join the society made up of those who have preceded you by a few years, or some of us by a great many.”

“This experiment in man's relation to man is a few years into its third century. Saying that may make it sound quite old. But let's look at it from another viewpoint or perspective. A few years ago, someone figured out that if you could condense the entire history of life on Earth into a motion picture that would run for 24 hours a day, 365 days – maybe on leap years we could have an intermission – this idea that is the United States wouldn't appear on the screen until 3.5 seconds before midnight on December 31st. And in those 3.5 seconds not only would a new concept of society come into being, a golden hope for all mankind, but more than half the activity, economic activity in world history, would take place on this continent. Free to express their genius, individual Americans, men and women, in 3.5 seconds, would perform such miracles of invention, construction, and production as the world had never seen.”

America has proven that men and women not only can make their own history, but they can make it as they please, with circumstances chosen by themselves. Happy 4th of July to you all.  Let’s take time this week to step back and realize just how fortunate we are to live in a time and place where the fire of invention still burns hot, course corrections (however messy they may be) still take place, and the future remains bright.  May we continue to honor the legacy of those who came before us by striving to uphold the principles that have made this country a beacon of hope and freedom for the world.

(We first published a version of this same Monday Morning Outlook in celebration of July 4th, 2023.)

Brian S. Wesbury – Chief Economist

Robert Stein, CFA – Deputy Chief Economist

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This week’s “Three on Thursday” takes a closer look at gasoline prices in the United States. The U.S. consumes more than 130 billion gallons of gasoline annually, more than any other nation, making fuel prices an important issue for consumers and the broader economy. To find out more, click the link below.

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In 1852, Karl Marx said "Men make their own history, but they do not make it as they please; they do not make it under circumstances chosen by themselves, but under circumstances directly encountered and transmitted from the past."

He obviously knew about the Magna Carta (1215) and the English Parliament’s Bill of Rights (1689), which created a separation of powers between the King and elected representatives. What he didn’t pay much attention to was how the United States broke with history and improved upon these documents with the Declaration of Independence and Constitution so well thought out that it has only been amended twenty-seven times in 235 years.  Men and women can make their own history here.  Karl Marx was wrong.  No one puts it better than Ronald Reagan; the excerpt below comes directly from his Commencement Address at the University of Notre Dame back on May 17, 1981.

"This Nation was born when a band of men, the Founding Fathers, a group so unique we've never seen their like since, rose to such selfless heights. Lawyers, tradesmen, merchants, farmers – fifty-six men achieved security and standing in life but valued freedom more. They pledged their lives, their fortunes, and their sacred honor. Sixteen of them gave their lives. Most gave their fortunes. All preserved their sacred honor.”

“They gave us more than a nation. They brought to all mankind for the first time the concept that man was born free, that each of us has inalienable rights, ours by the grace of God, and that government was created by us for our convenience, having only the powers that we choose to give it. This is the heritage that you're about to claim as you come out to join the society made up of those who have preceded you by a few years, or some of us by a great many.”

“This experiment in man's relation to man is a few years into its third century. Saying that may make it sound quite old. But let's look at it from another viewpoint or perspective. A few years ago, someone figured out that if you could condense the entire history of life on Earth into a motion picture that would run for 24 hours a day, 365 days – maybe on leap years we could have an intermission – this idea that is the United States wouldn't appear on the screen until 3.5 seconds before midnight on December 31st. And in those 3.5 seconds not only would a new concept of society come into being, a golden hope for all mankind, but more than half the activity, economic activity in world history, would take place on this continent. Free to express their genius, individual Americans, men and women, in 3.5 seconds, would perform such miracles of invention, construction, and production as the world had never seen.”

America has proven that men and women not only can make their own history, but they can make it as they please, with circumstances chosen by themselves. Happy 4th of July to you all.  Let’s take time this week to step back and realize just how fortunate we are to live in a time and place where the fire of invention still burns hot, course corrections (however messy they may be) still take place, and the future remains bright.  May we continue to honor the legacy of those who came before us by striving to uphold the principles that have made this country a beacon of hope and freedom for the world.

(Released early in honor of the United States Semiquincentennial. We first published a version of this same Monday Morning Outlook in celebration of July 4th, 2023.)

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Implications: Following a string of better-than-expected reports, the US labor market disappointed in June. Nonfarm payrolls rose 57,000, however when including downward revisions for prior months, fell 17,000.  That said, the US employment picture has clearly strengthened during the first half of 2026, adding on average 92,000 jobs a month versus an average of just 10,000 per month in 2025. This is good news because last year’s jobs slowdown, as well as fears around AI replacing employment, are likely behind the recent string of victories for Socialists in Democratic primaries which ironically will only undermine future job growth further if they are elected. Speaking of AI, it seems clear that the worst-case scenarios aren’t unfolding. Jobloss.ai which tracks layoff announcements and aggregates them says there have been roughly 127,000 jobs lost to AI since the beginning of 2025. While that is a large number, keep in mind the US currently has roughly 162 million employed people. Turning to the details of today’s report, job gains in June were led by health care & social assistance, and professional & business services.  We like to follow payrolls excluding government and health care & education (which are often driven by government policies), which fell 20,000 in June.  Though Federal government payrolls did increase 2,000 June, they are down 323,000 since the Trump Administration took office.  Leaving out the end of the Census every decade, the decline in Federal payrolls in the past seventeen 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.  We also saw the unemployment rate tick down to 4.2% in June. However, that was due to a large decline in the labor force that outpaced the 507,000 decline in civilian employment, an alternative measure of jobs that includes small-business start-ups. Notably this measure has been much weaker than nonfarm payrolls so far in 2026 after significantly outperforming in 2025. Finally, average hourly earnings rose 0.3% in June, which given the recent (though we believe temporary) increase in inflation likely struggled to keep pace with higher prices for the month.  Put it all together and we expect continued jobs gains in the months ahead.  In other recent news, initial jobless claims fell 1,000 last week to a still-low 215,000; continuing claims increased 2,000 to 1.814 million.

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Implications: Activity in the manufacturing sector continued expanding in June, but at a slightly slower pace than the previous month. This is now the sixth consecutive month of expansion for the ISM Manufacturing index, an encouraging development for an industry that has faced significant challenges over the past three years.  While we remain cautious of the broader economy, it appears that the reshoring of production, AI buildout, and favorable business tax incentives such as bonus depreciation for domestic capex under the “Big Beautiful Bill” are providing meaningful support to the industry.  Looking at the major measures of activity, new orders and production both fell in June but sit firmly above 50 at 56.0 and 52.2, respectively, signaling expansion.  It is important to remember that until this year, new orders had been very weak going back to 2023, leaving manufacturers focused on order backlogs to keep production going.  So it’s great to see backlogs have grown each month here in 2026 after more than three straight years in contraction.  But despite the notable improvement in demand, manufacturers have remained reluctant to add new workers, with the employment index remaining in contraction territory for the 33rd consecutive month. However, of the eighteen major manufacturing categories, more reported employment growth in June (nine) than contraction (three), a sign the industry’s employment picture may be turning a corner. The best news in today’s report was that the prices index fell from 82.1 to a still-elevated 73.0 in June, after the U.S.-Iran peace agreement discussions sent energy prices lower with further declines likely.  Notably, a survey comment from the Petroleum & Coal Products category wrote, “With the potential ending of the Iran war, management is expecting us to go back to February pricing structures and plans since the increase in oil prices was driven by the war and not regular market influences.”  In other news this morning, construction spending climbed 0.1% in May, as a large increase in homebuilding more than offset a decline for manufacturing construction. On the employment front, ADP’s measure of private payrolls increased 98,000 in June versus a consensus expected 120,000.  We’re estimating tomorrow’s official report (out a day early due to Friday’s market closure for Independence Day) will show a nonfarm payroll gain of 70,000 with the unemployment rate remaining steady at 4.3%.  Finally, on the housing front, the FHFA index and the national Case-Shiller index both declined 0.1% in April but remain up 2.0% and 0.8%, respectively, in the past year.

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Alan Greenspan passed away last week at the ripe old age of 100.  Other than presidents, few Americans have wielded as much power in the arena of economic policy as Greenspan did during his roughly eighteen years and five months at the helm of the Federal Reserve.

Greenspan was originally appointed by President Reagan, but later re-appointed by Bush I, Clinton, and Bush II.  His greatest accomplishment was consolidating and advancing the gains made against inflation under his predecessor Paul Volker.  Volker deserves the credit for whipping inflation in the early 1980s.  But the PCE Deflator rose at a 3.1% annual rate in his last four years at the Fed.  During Greenspan’s entire tenure inflation averaged 2.5%.  

Another accomplishment was that after Bill Clinton was elected president, with the support of many voters who wanted to boost spending, Greenspan convinced him to keep the budget caps put in place under Bush the Elder in 1990 and focus on deficit reduction, instead.  In the meantime, Greenspan was a consistent advocate for cutting tax rates on investment and eliminating taxes on capital gains.  He also advocated against the minimum wage.

Perhaps his greatest legacy was getting the Fed to pursue a 2% inflation goal.  By law, the Fed is supposed to pursue both stable prices and maximum employment.  Many policymakers would like the Fed to emphasize the employment part, even if inflation moves back up.  Greenspan made it clear that if the goal is to maximize long-term job creation (as opposed to giving it a temporary boost), that the best way for the Fed to do that was by focusing on stable prices.  

In other words, the only way to achieve both goals was to focus on just one of them.  Otherwise, the extra jobs that might be created temporarily would be more than offset by job losses in the inevitable recession that followed, when monetary policy would have to get tighter.   He also had the patience to explain this important point calmly and patiently to dovish Senators and Representatives time and time again.   

But this doesn’t mean Greenspan was always a hawk.  During the 1990s, before there was clear evidence of an internet-related acceleration in productivity growth, he was able to convince other policymakers to hold off on aggressive rate hikes in spite of rapid economic growth and job creation.

Those other policymakers were using something called the “Phillips Curve,” a Keynesian framework that assumed faster growth meant the Fed had been too easy and inflation was going to rise.  Greenspan argued that if productivity growth was faster (faster growth in output per hour worked), then growth could accelerate but inflation would remain tame.  He prevailed and was right.       

But that doesn’t mean Greenspan was flawless.  In 1999-2000s, Greenspan ended up raising rates too aggressively, trying to offset a “wealth effect” related to stock market gains, very soon before an equity peak that threw the wealth effect in reverse.  He then held rates too low in 2003-2004, stoking a housing bubble.  And when the bursting of that bubble generated a financial panic Greenspan focused on lax regulation as the culprit.  Instead, he should have blamed overly loose monetary policy, mark-to-market accounting, “too big to fail,” and GSEs like Fannie Mae and Freddie Mac, which became much too big during his tenure and with nary a peep of warning from the Fed.

Regardless, Alan Greenspan’s time at the Fed was largely a success.  If Kevin Warsh’s goal is to do better as chairman, the country would be blessed if he succeeds.

Brian S. Wesbury – Chief Economist
Robert Stein, CFA – Deputy Chief Economist

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Implications:  New orders for durable goods declined 4.5% in May, but the details are much better than the headline suggests. The decline in new orders was entirely due to the volatile commercial aircraft category, which was also the reason overall orders rose 8.5% in April.  Wild swings like this are why orders excluding transportation provide a much better check on the broader economy. Orders excluding transportation continue to rise, up 1.3% in May, and 10.2% in the past year, the largest annual gain in four years. All major categories outside transportation rose in May, led by primary metals (+3.0%), industrial machinery (+1.9%), and fabricated metal products (+1.5%). Orders for most of the major categories have picked up steam recently: primary metals, fabricated metal products, machinery, and computers & electronic products have each experienced double-digit growth in the past year. Particularly, orders for computers & electronic products are up at a 22.5% annualized rate in the past six months, close to the largest gain for any six-month period in twenty years.  As a result, factories are having a hard time keeping up, with unfilled orders up 8.5% in the past year.  Arguably the most important number in today’s release is core shipments – a key input for business investment in the calculation of GDP – which rose 0.3% in May.  If unchanged in June, core shipments would rise at an 8.2% annualized rate in Q2 versus the Q1 average.  Business investment has shown strength recently as core shipments have consistently risen since mid-2025, driven by a more favorable tax environment and artificial intelligence spending.  In other recent news, the Kansas City Fed Manufacturing Index, a measure of factory sentiment in that region, rose to 11 in June from 8 in May.

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Nuclear energy is a crucial component of the global energy landscape. Unlike fossil fuels, nuclear power plants produce a substantial amount of electricity without emitting greenhouse gases, making them a key player in reducing carbon footprints and achieving net-zero emission goals. In this week’s “Three on Thursday,” we take a deeper look at what the nuclear picture looks like around the world. For a detailed analysis, click the link below.

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