In this week’s “Three on Thursday,” we examine the state of student loan debt through 2025, and the financial stress it continues to impose on millions of Americans. To see where things stood at the end of last year, click on the link below.

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Implications: Don’t get too concerned about today’s headline decline, this isn’t the start of another housing bust. While January posted the largest monthly decline in sales since 2013, the main culprit was likely severe winter storms across the US that held back buyer activity. Look for a rebound in activity next month as this temporary factor reverses. The overall trend in sales likely 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 20 basis points in the past couple weeks to 6.3%. Second, the Federal Reserve decided to take a pause on rate cuts in yesterday’s meeting as they wait to see the impacts of the conflict on US economic data. 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 13% 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 most 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 an open question, less expensive options and an abundance of inventories may give home sales a modest boost in 2026. In other news this morning, initial jobless claims declined 8,000 last week to 205,000, while continuing claims rose 10,000 to 1.857 million. Finally, on the manufacturing front, the Philadelphia Fed index – a measure of factory sentiment in that region – rose to +18.1 in March from +16.3 in February.

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In what is supposed to be Jerome Powell’s next to last meeting as chairman, there was plenty for the FOMC to discuss, but little action taken.  As expected, there was no rate cut at today’s meeting, but changes to economic projections and comments at the press conference gave some light into how the Fed is processing political and geopolitical events, and how those events are shaping the Fed’s outlook.

The only notable change in the Statement from January was the addition of a new sentence stating the “implications of developments in the Middle East for the U.S. economy are uncertain.”  Notably Fed Governor Miran once again voted against today’s decision to keep rates unchanged, preferring a 0.25% rate cut. Governor Waller, who also dissented in favor of a cut back in January, voted with the remaining FOMC members to keep rates unchanged.  

Moving to the Summary of Economic Projections (the “dot plots”) shows inflation concerns rising, but anticipated to be short-lived.  The Fed’s preferred PCE inflation measure is now forecast to rise 2.7% in 2026, versus a 2.4% forecast back in December. But inflation is still expected to move toward the longer-run 2.0% inflation target by the end of 2027.  At the same time, the Fed slightly upgraded the outlook for GDP for 2026 (to 2.4% from 2.3%) as well as for each of the next two years.  The unemployment rate forecast for 2026 remained unchanged.  

The question now becomes, should the Fed react to what they expect is a temporary inflation impact and largely outside of their control?  Early in the press conference, Powell made a surprisingly transparent and honest comment that even the FOMC is taking today’s forecasts with a grain of salt, stating that many members have “no conviction” on how things will evolve and therefore moved little from what they had forecast before events in Iran began. 

Instead, the Fed is focused on goods inflation and watching if tariff-related price increases from last year roll off in 2026. It’s a bit odd the emphasis the Fed continues to put on goods inflation, considering PCE goods prices rose 1.3% in the twelve months ending in January, compared to 3.5% inflation in the less tariff-exposed services sector.  Yet when this stubbornly high services inflation, most notably in the “super-core” inflation category (PCE services excluding energy and housing) that the Fed itself created during COVID came up during Q&A, Powell largely dismissed it, saying simply that it’s frustrating these prices haven’t declined, but they should come down eventually.  Apparently if it doesn’t fit the Fed narrative of the day, it’s not worth dwelling on.

Finally, Powell addressed his future with the Fed.  In the event that a new Chair is not confirmed before Powell’s term ends on May 15th, he will stick around and continue to serve his role until a replacement is appointed. He also stated that he has no intention of leaving the Federal Reserve Board of Governors until his ongoing investigation with the Department of Justice is well and truly behind him.  As a reminder, his term as Fed Chair ends mid-May, but his seat on the Board of Governors runs through January of 2028. It’s unusual for a Fed Chair not to vacate their seat on the board when their Chairmanship is up, but it is not required, and Powell may linger at the Fed for the foreseeable future.     

What should you takeaway from today’s meeting?  The Fed isn’t sure how the economy, inflation, or the employment market will react to events in Iran, and they aren’t interested in guessing.  There are six weeks between now and the next FOMC meeting at the end of April, and by then we should have a much better idea of both the magnitude and duration of the economic ripples out of the Middle East. In terms of inflation, we still believe that the M2 money supply is a much more reliable tool for forecasting sustained inflation. To track our ongoing analysis of how oil flows, tariffs, employment, and the money supply are impacting the outlook for the United States, we would encourage you to keep an eye on our Three on Thursday publications.

Brian S. Wesbury – Chief Economist

Robert Stein – Deputy Chief Economist

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Implications: Producer prices rose sharply higher in February, increasing 0.7%, and up 3.4% from a year ago. In contrast to prior months, the increase was broad-based, with both the headline and core readings beating consensus expectations. As a result, what little odds of a March rate cut that might have existed before this report should go to zero.  However, a look at the details shows a slightly less cautionary story. More than half the gain in February was due to a 0.5% increase in service costs. Service costs have risen significantly in the past three months, up at an 8.1% annualized rate in that timeframe. However, with volatile readings from trade and transportation due to the Supreme Court ruling on the Trump Administration’s tariff policies, stripping out these categories offers a deeper look at the underlying trends. A version of “core” services, which excludes the categories of trade, transportation, and warehousing increased 0.6% in February, but is up at a more moderate 3.4% annualized rate in the past three months. Many assumed it would be goods prices that would lead inflation higher, given the higher tariff rates under President Trump, and while goods prices increased 1.1% in February, twenty percent of the rise is due to a 48.9% jump in vegetables. On top of that, the strong February reading follows two months of price declines, meaning goods prices are up a much slower 2.5% in the past year. It must be noted that while the goods reading was propelled by the rise in prices for energy (+2.3%) and food (+2.4%), “core” producer prices – which excludes those typically volatile categories – also rose 0.5% in February. Expect volatility in the months ahead as the ongoing war in Iran puts pressure on oil prices and disrupts global supply chains. However, sustained movements in overall inflation are led by the money supply, which is up 4.3% in the past year versus the 6% trend prior to COVID when inflation remained low. Volatility may continue month-to-month, but we expect this monetary tightness will bring inflation down, eventually leaving room for rate cuts to restart at some point later in 2026. In other recent news, pending home sales, which are contracts on existing homes, rose 1.8% in February, following a 1.0% decline in January, suggesting a modest rise in existing home sales (counted at closing) in March.

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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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