Implications: Industrial production posted a modest gain in February, rising for the fourth consecutive month to hit a new post-COVID high. More broadly, industrial production is up 2.5% since the Trump Administration took office in January 2025, despite huge shifts in trade policy and tariff uncertainty.  Meanwhile, the manufacturing sector is up 2.6% over that same period. While these numbers aren’t enough to get excited about yet, it’s clear that a new upward trend in activity is emerging. Digging into the details for February, manufacturing was the biggest source of strength, rising 0.2%. The volatile auto sector contributed to the gain, with activity jumping 1.6% in February.  Manufacturing ex-autos (which we think of as a “core” version of industrial production) also posted a gain of 0.1%. The typical bright spots in the “core” measure were present in today’s report as well.  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 0.7% in February.  High-tech manufacturing is up a strong 8.6% in the past year, the fastest 12-month growth rate of any category. However, the manufacturing of business equipment wasn’t far behind, up 6.3% in the past year, signaling reindustrialization in the US outside of just the high-tech industries mentioned above. The mining sector was also a tailwind in February, rising 0.8%. Gain in oil and gas production and the drilling of new wells more than offset a decline in the extraction of other metals and minerals.  Finally, utilities output (which is volatile and largely dependent on weather) declined 0.6% in February. In other manufacturing news this morning, the Empire State Index – a measure of factory sentiment in the New York region – declined to -0.2 in March from +7.1 in February. Finally, the NAHB index, a measure of homebuilding sentiment, increased to 38 in March.  Keep in mind readings below 50 signal a greater number of builders view conditions as poor versus good, now the 23rd consecutive month that has been the case.

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In the aftermath of the first Internet stock-market bubble of the late 1990s the economy went into a relatively shallow recession starting in 2001.  That recession was precipitated by a tight monetary policy, with the Federal Reserve setting short-term interest rates consistently above the pace of nominal GDP growth (real GDP growth plus inflation).  In that sense – as a result of tight money – the 2001 recession was similar to the recessions of 1970, 1973-74, 1980, 1981-82, and 1990-91.

Since that 2001 recession, it’s been almost twenty-five years with the US economy only in two more recessions lasting a grand total of twenty months.  By historical standards, it’s unusual to have spent so little time in recession.  Even odder, is that the key factor behind the two recessions we’ve had since 2001 have not been overly tight money.

The first recession was the so-called Great Recession of 2008-09, when overly stringent mark-to-market accounting standards turned the spark of the bursting of the housing bubble into an inferno in the banking system.  Yes, the Fed had been too loose for years before then, but it wasn’t particularly tight going into the crisis.

Then came the mini-COVID depression of 2020, when governments and fear of illness led to massive temporary (and often irrational) shutdowns of economic activity.

Once again, the Fed and monetary policy wasn’t the culprit.  As a result, it’s sensible to fear that the next recession might also be for reasons other than monetary policy and the Iran War could fit the bill. 

How this conflict ends and how quickly is hard to gauge.   Although the US would like to see a popular revolt that transitions to a completely new and stable government, without rule by the mullahs, some sort of military coup is also possible, where more secular-oriented leaders in the Iranian armed forces step forward if they are willing to accommodate some US demands, perhaps in exchange for getting control of local oil revenue.        

For now, oil prices that were around $65 per barrel before the war were approaching $100 by Friday.  And now some fear a temporary closure of the Strait of Hormuz could spike oil prices even higher.  About 20 million barrels of crude per day typically pass through that area, which is about 20% of global consumption.  In turn, some analysts are considering scenarios with oil getting to $200 per barrel.

A price spike that high would almost certainly hurt the purchasing power of countries that are dependent on foreign sources of energy and would generate uncertainty and volatility elsewhere.  But as a net petroleum exporter, the US economy is more resilient to – and insulated against – oil price spikes than it’s been in many decades.

The US consumes about 20 million barrels per day (roughly equal to the amount sent through the Strait, although the US itself only gets a small portion of that particular oil flow).  So, if US consumption didn’t change, US purchasers would have to pay an extra $2.7 billion per day for oil compared to before the war started.  (20 million times $135). That’s not chump change.  Worse, it could lead to a bear market in stocks with a loss of wealth that adds to the cost.

But it’s important to recognize that other things would change, as well, including creating a huge income boost for energy producers, incentivizing more domestic production.

In the meantime, it’s important for policymakers to recognize that a negative oil supply shock would not create the kind of inflation the Fed is designed to fight.  It’d lead to a big shift in relative prices while not altering the money supply, which is the ultimate source of inflation or the lack thereof.  

We think the Fed would probably react by temporarily standing still on monetary policy as what would make an oil price spike inflationary is if the Fed reacts by easing policy to try to ease the blow to some consumers.  Then higher general price inflation would be likely.

Brian S. Wesbury – Chief Economist

Robert Stein, CFA – Deputy Chief Economist

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Implications:  Real GDP for the fourth quarter was revised lower to a 0.7% annualized rate, with downward revisions to net exports, personal consumption, business investment, and government spending more than offsetting an upward revision to inventories. For a clearer picture of underlying growth, we focus on “core” GDP – consumer spending, business fixed investment, and residential construction – excluding more volatile components like inventories, government outlays, and trade. Core GDP was revised down to a 1.9% annual rate from the initial 2.4%. The revision lower was driven by weaker consumer spending on services as well as less commercial construction and business investment in intellectual property.  Consumer spending is now estimated to have grown at a 2.0% rate, revised down from 2.4%, while business investment is estimated to have grown at a 2.3% rate, down from an initial estimate of 3.7%. So why did headline GDP grow significantly more slowly than Core GDP?  Primarily because government purchases shrank at a 5.8% annual rate, led by the federal government, where purchases dropped at a 16.7% rate.  As a result, government purchases reduced the pace of real GDP growth by 1.0 percentage points, the largest drag for the category since Q3 2020.  Net exports – which was initially estimated to contribute 0.1 percentage points to fourth quarter GDP – was revised lower, now shaving off 0.2 percentage points from the headline. We expect volatility in this category to continue given the Supreme Court ruling against much of the Trump Administration’s tariffs in February. The more troublesome part of the report comes from the inflation front, where the GDP price index was revised higher to a 3.8% annualized rate from an initial estimate of 3.6%.  GDP prices were up 3.3% in 2025, above the 2.5% increase in 2024.  At the same time, real GDP rose 2.0% in 2025, down from the 2.4% increase in 2024.  Core GDP grew 2.4% in 2025 versus 2.9% in 2024.  In other words, the U.S. experienced slightly slower growth, paired with higher GDP inflation in 2025.  Not a desirable mix.

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Implications:  New orders for durable goods treaded water to start off the year, remaining unchanged from December. That said, the details of today’s report were much better than the headline. The tepid reading was driven by a 0.9% decline in transportation equipment – particularly a 23.7% drop in defense aircraft. Transportation is a notoriously volatile category month-to-month, so we prefer to focus on orders excluding transportation for a better check on the broader economy. Orders excluding transportation rose 0.4% in January, led by primary metals (+0.8%), computers and electronic products (+0.8%), and fabricated metal products (+0.6%). The only major category which did not increase was electrical equipment (-0.6%), which follows two straight months of unusually strong readings.  Note that computers and electronic products, primary metals, and electrical equipment have had strong growth recently, with each experiencing double-digit annualized growth in the past three months. Particularly, computers and electronic products are up at a 20.8% annualized rate in that time frame. These elevated new orders should translate into shipments in the months ahead. Speaking of shipments, the most important number in today’s release, core shipments – a key input for business investment in the calculation of GDP – declined 0.1% in January following strong gains in the past few months. If unchanged in February and March, these shipments would be up at a moderate 2.4% annualized rate in Q1 versus the Q4 average. Finally, unfilled orders rose 0.8% in January and are up 11.1% in the past year, the most for any 12-month period in almost four years.

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Implications:  Consumers started 2026 with healthy headline numbers on income and spending, but a rise in inflation ate up most of the new spending power.  On a positive note, private-sector wages and salaries rose 0.6% in January, while dividend income rose 2.0%.  Unfortunately, government transfer payments continue to rise at a faster pace. It should be noted that January typically sees an outsized increase in government transfer payments as cost-of-living adjustments to social security go into effect, and that was once again the case as social security payments rose 3.1% in January, while other transfer payments were partially offset by a decline in Affordable Care Act enrollments. Taken together, January transfer payments rose 0.8%.  Over the past twelve months, private sector wages and salaries are up 5.0%, while government transfer payments have risen 8.5%.  We hope to see private earnings rise at a faster pace than government transfers as we progress deeper into 2026, as private earnings are a more reliable (and desirable) long-term source of income.  On the spending front, personal consumption rose 0.4% in January, as a 0.7% increase in services was partially offset by a 0.4% decline in goods.  Services are up 6.3% from a year ago, compared to a 3.0% increase in goods.  The spending number sounds better than it was, however, with inflation representing the bulk of the increase. PCE prices – the Fed’s preferred inflation metric – rose 0.3% in January, while the year-ago reading now stands at 2.8%, above the 2.6% rate for the twelve-months ending in January 2025.  “Core” prices, which strip out the volatile food and energy categories, rose 0.4% in January, with the year-ago comparison moving up to 3.1%, up from the 2.8% reading for the twelve-months ending in January 2025.  Accounting for inflation, real consumption rose a modest 0.1% for a third consecutive month. It remains to be seen how geopolitical uncertainty, higher oil prices, and a subdued employment market will impact consumers’ propensity to spend in the months ahead.

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Geopolitics have once again collided with global energy markets. In this week’s Three on Thursday, we examine where the oil flowing through the Strait of Hormuz typically goes, how much supply could be at risk if flows are disrupted, and whether the U.S. Strategic Petroleum Reserve could help cushion the impact domestically. For more details, click on the link below.

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Implications: Flashy headline, but the details offer little reason to get excited.  Homebuilding surprised to the upside for the second month in a row in January, as housing starts beat even the most optimistic forecast of any economics group surveyed by Bloomberg, rising 7.2% to an eleven-month high.  However, the gain was entirely due to the volatile multi-unit category, where starts jumped 29.9% for the month and are up 54.2% in the past year. Single-family starts, on the other hand, declined 2.8% in January and remain 6.5% lower than they were a year ago.  Further down the pipeline, permits for new builds fell 5.4% to a 1.376 million annual rate, lagging consensus expectations. Both the single-family and multi-unit categories contributed to the decline, but the split between the two is evident here as well: multi-unit permits are up 6.6% over the past year, while single-family permits are down 11.6%.  One way homebuilders have been able to combat sluggish activity is by focusing their efforts on completing projects.  That was the case again in January, as completions rose 4.8% to a 1.527 million annual rate.  Completions are 7.5% lower than they were a year ago, but despite the slower trend, they have outpaced starts and permits in ten out of the last twelve months.  With strong completion activity and tepid growth in starts, the total number of homes under construction has fallen 9.6% 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 – such as high home prices, tariffs that raise building costs, restrictive local building regulations, new immigration enforcement that makes it difficult to find or replace workers, and nearly the largest completed single-family home inventory since 2009 – 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, with the average 30-year fixed mortgage rate falling to 6.21% in January, the lowest level since August 2022. Unfortunately, the outlook for interest rates going forward has become murkier recently given the outbreak of war with Iran, and affordability remains a major challenge for millions of would-be homebuyers as rates are still roughly double what they were for much of 2021.  All of this suggests homebuilding should continue to drag, particularly in next month’s report, as large parts of the U.S. were hit with abnormally snowy weather in February.

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Implications: Trade volatility continued in January as the trade deficit significantly shrank to $54.5 billion in January after widening sharply in December. The decline in the deficit for the month was due to both a rise in exports, which increased $15.8 billion, as well as a decline in imports, which fell $2.6 billion. A noticeable part of the decline in the deficit in January came from nonmonetary gold – a category not included in GDP calculations – which will soften the impact of net exports on Q1 GDP. 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 $13.3 billion in January, but is still down 2.5% (or $17.1 billion) from a year ago.  Over the past year, exports have risen 10.4% while imports declined 11.3%. The GDP math related to the trade deficit suggests that so far, on net, more of what we purchased overall was made domestically, meaning faster real GDP growth.  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 49.4% in January versus January 2025. Accelerated demand for high tech equipment to fuel the massive AI investment is clear in the data with imports from Taiwan up 96% in January versus January 2025. Also in today’s report, the dollar value of U.S. petroleum exports once again exceeded imports, marking the 47th consecutive month of America being a net exporter of petroleum products. In other news this morning, initial jobless claims declined 1,000 last week to 213,000, while continuing claims fell 21,000 to 1.850 million.  This is consistent with modest job growth in March.

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Implications:  Inflation came in as expected in February, with the Consumer Price Index rising 0.3% and the year-ago comparison holding steady at 2.4%. “Core” inflation, which strips out food and energy, rose a consensus-expected 0.2%, while the year-ago comparison remained at 2.5%.  Looking at the details, headline inflation was led by the volatile energy and food categories in February, with prices increasing 0.6% and 0.4%, respectively.  Housing rents (those for actual tenants as well as the imputed rental value of owner-occupied homes) was the main driver of core inflation for the month and has been over the last few years.  The good news is that the category finally appears to be turning over, with rents rising only 0.2% and up at a 2.4% annualized rate over the last six months, lagging core inflation.  Other notable increases in the core grouping include prices for medical care services (+0.6%), airline fare (+1.4%), and hotels (+1.1%).  Many analysts – including those at the Federal Reserve – warned of a renewed inflation surge from tariffs in 2025.   But if you’ve been reading our content over the past year, then you would have known to look past the tariffs and instead focus on the M2 measure of the money supply for understanding where inflation would go.  Tariffs 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 were not surprised to see inflation continue its bumpy path downward in 2025.  Now, both headline and core inflation sit at or near their lowest twelve-month pace since the great inflation scare began nearly five years ago.  While progress has been made, inflation still remains above the Federal Reserve’s 2.0% target, and the data do not yet capture the effects of surging oil prices following the outbreak of war with Iran on February 28th.  As a result, this report will not be enough to persuade Fed officials to resume rate cuts at the meetings next week.  Instead, the next rate cut will have to wait until at least June, when the Fed should have new leadership.

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Implications: Existing home sales rebounded modestly in February, following severe winter storms that held back activity in January.  That said, sales remain near the low seen following the Great Financial Crisis, and are 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 early 2025 and now sit around 6.1%, the lowest rate since 2022. Unfortunately, the outlook for interest rates going forward has become murkier recently, with the war on Iran raising energy costs and threatening to have an upward impact on inflation expectations.  Meanwhile, the median price of an existing home is up only 0.3% versus a year ago. Aggregate wage growth (hourly earnings plus hours worked) has been consistently outpacing median home price gains over the past year for the first time since 2023, which improves affordability. The biggest headwind remains inventories, where growth continues although at a slower pace than last year. This has led to a months’ supply of homes (how long it would take to sell existing inventory at the current very slow sales pace) of 3.8 in February, 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.

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