Implications: Activity in the manufacturing sector accelerated in May, with the ISM Manufacturing index beating expectations and rising to the fastest pace since 2022. This is now the fifth consecutive month of expansion for the index, an encouraging development for an industry that has faced significant challenges over the past three years.  While we have remained cautious given last year’s head-fake, 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, even as many recent economic indicators have pointed toward a weakening economy.  Looking at the details, growth remained broad in May, with sixteen out of the eighteen major manufacturing categories reporting expansion, while one reported contraction and one reported no change.  The major measures of activity were mostly higher, including the two most important indexes, new orders and production, which rose further into expansion territory at 56.8 and 54.3, respectively.  Until recently, order books had been very weak going back to 2023, leaving manufacturers leaning on their order backlogs to keep production going.  The great news is that backlogs started growing again in 2026 and that has continued through May, with the index sitting at 52.2 – now the fifth consecutive month in expansion territory – when before it had contracted for more than three straight years.  Despite the notable improvement in demand, manufacturers remain reluctant to add workers with the employment index remaining in contraction territory for a 32nd consecutive month, at 48.6. Meanwhile, pricing pressures remain elevated, with the prices index registering 82.1 in May.  While that is an improvement from last month’s 84.6 reading, it remains significantly above January’s 59.0 and near what was seen during the post-COVID inflation surge, where the index reached the low 90s. In other news this morning, construction spending climbed 0.4% in April, as large increases for homebuilding, office, and power projects more than offset a decline for manufacturing construction.

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A little more than six months ago there were narratives circulating that national housing prices were in an even bigger bubble than the one twenty years ago and headed for an “inevitable” collapse.  Given that national home prices dropped about 27% from peak to bottom in the last housing bust, that would be something to worry about.   

But we pushed back against this theory and, so far, a collapse in home prices hasn’t happened.  National home prices declined 0.2% in March according to the Case-Shiller index, but rose 0.1% according to the FHFA index.  In the past year, home prices are up 0.7% and 1.7%, respectively, according to these two widely-used measures.  In other words, no collapse.  

Instead, what we have is a very slow upward trend.  Notably, home prices are climbing slower than general price inflation and at the slowest rate since the bottom of the housing bust in 2012.

Some might claim this is due to higher mortgage rates, but that doesn’t make sense.  Mortgage rates were higher back in 2023-24 when home price growth was faster.

What has changed, and what we think are the keys behind slower home price appreciation, is that the growth rate of the money supply has remained slower than the pre-COVID trend and a huge shift in immigration policy that started in early 2025, when the US went from admitting 2.7 million net new immigrants per year to roughly zero, on net.

The sudden lurch to much lower immigration has meant more rental units are available than would otherwise have been the case, likely surprising many landlords.   Zillow’s observed rent index is up only 1.9% from a year ago and rent growth has lagged general price inflation by the most in at least the past decade.

In turn, less upward pressure on rents means renters are less motivated to buy a home.  Which suggests that as long as the new stricter immigration policy remains in place slow growth in home prices should continue.     

Many homeowners may not like this side effect of the immigration shift – less rapid price appreciation – but both renters as well as homeowners who plan to move up the housing value-chain in the future should be happy.  It makes their future purchases more affordable.    

As such, one way to think of the shift in immigration policy is as a passive redistribution scheme that tends to help people who are younger and less wealthy (and who rent), at the expense of people who are older and more wealthy (and who own), but without needing the government to directly raise taxes and spend money on social programs.  

We wish that the politicians who want to actively redistribute wealth by raising taxes and increasing government spending would take this as a win for their side, but we’ve seen no sign of this yet.

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

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In 1747, Benjamin Franklin famously observed, “Lost time is never found again.” Today, his words remain just as relevant—while we constantly wish for more time, it is finite. In this edition of “Three on Thursday,” we examine and explore different aspects of time in our lives. To learn more, click the link below.

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Implications: New home sales struggled in April, coming in weaker than expected after back-to-back gains in previous months. Sales fell 6.2% in April and now sit at a 622,000 annual rate. That sales pace is on the weaker end of pre-pandemic levels, which has been a ceiling of sorts for activity the past couple of years.  Unfortunately, the ongoing Iran War and its impact on energy prices and inflation have introduced new challenges. First, financing costs have risen in response, with the average 30-yr fixed mortgage rate up roughly 40 basis points since the start of the conflict.  Second, despite a new Chairman at the Federal Reserve, further rate cuts are 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 8% from the peak in October 2022.  Meanwhile, the Census Bureau reports that from Q3 2022 to Q1 2026 (the most recent data available) the median square footage for new single-family homes built rose 3.7%. So, buyers are seeing a drop in the price per square foot, not just smaller/lower cost options.  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. In other recent housing news, the FHFA index rose 0.1% in March and is up 1.7% in the past year, while the national Case-Shiller index declined 0.2% in March but is up 0.7% from a year ago.  Expect home prices to remain on a very modest upward trend, slower than overall price ago.

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Implications:  Hold off on GDP for a moment. The most important data in this morning’s report was on economy-wide corporate profits, which rose 0.9% in the first quarter and are up 12.0% from a year ago.  The Federal Reserve, after posting massive losses for three consecutive years, finally returned to profitability in Q4 and eked out another small profit in Q1. Excluding the Fed, corporate profits were up 0.9% in Q1 and 11.0% from a year ago – the fastest growth for any four-quarter period since 2023.  The increase in Q1 was entirely due to profits from domestic non-financial industries, which rose 3.7%. Profits from domestic financial companies declined 0.3%, while profits from the rest of the world fell 9.8%.  Plugging in these profits into our Capitalized Profits Model suggests stocks remain overvalued.  Now back to our regularly scheduled programming….Real GDP for the first quarter was revised lower to a 1.6% annualized rate, with downward revisions to inventories and personal consumption more than offsetting an upward revision to homebuilding and net exports. 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 slightly lower to a 2.4% annual rate from the initial 2.5%. The revision lower was driven by weaker consumer spending on services as well as slightly less business investment in intellectual property.  So why did headline GDP grow more slowly than Core GDP?  Primarily because trade continues to move in volatile swings, shaving off 1.3 percentage points from the headline in Q1. Given the Supreme Court’s order rolling back much of the Trump administration’s 2025 tariffs along with ongoing war in the Middle East, we expect volatility in this category to persist.  The most worrisome part of the report was that inflation remains far from the Fed’s 2.0% target, with GDP prices rising at a 3.5% rate in Q1 and up 3.3% from a year ago. Nominal GDP rose at a 5.2% rate in the first quarter and is up 5.9% 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 still filtering through the data, don’t expect rate cuts in the near term. However, recent M2 growth suggests lower inflation on the other side of the Iran conflict.

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Implications: Consumers ramped up spending in April and more than kept pace with rising inflation.  Unfortunately, personal income was unchanged for the month (and fell 0.5% including downward revisions to prior months), coming in below even the lowest estimate submitted by forecasters and marking the second time in three months income has stalled.  That said, the details were a little stronger than the headline.  Private sector wages and salaries rose 0.3% in April, but that was fully offset by a drop in farm proprietors’ income which had seen a one one-time jump in bridge payments from the Farmers Bridge Assistance Program in March and was simply returning to normal levels.  On the spending side, personal consumption rose 0.5% in April, led by gasoline and other energy goods as well as housing and utilities.  Collectively, goods spending (which includes energy costs) jumped 0.6% in April while spending on services increased 0.4%.  With spending once again outpacing income growth in April, the personal savings rate fell to the lowest level since mid-2022 at 2.6%.  This drop in savings allows for more spending today, but isn’t sustainable long-term.  Personal income is up only 2.5% in the past year, which suggests tepid growth in consumer spending ahead.  Meanwhile, the inflation picture has worsened temporarily due to the conflict with Iran. PCE prices – the Fed’s preferred inflation metric – rose 0.4% in April, while the year-ago reading increased to 3.8%, the highest since early 2023.  “Core” prices, which strip out the volatile food and energy categories, rose 0.2% in April, with the year-ago comparison rising to 3.3%, a notable uptick from the 2.6% pace for the twelve-months ending in April 2025.  The Fed will be watching this data closely under their new Fed Chair, while trying to determine how monetary policy – which operates with a lag – should respond as we progress deeper into 2026.  One critical piece of data the Fed should be (but hasn’t been) watching is the M2 measure of the money supply, which grew 0.5% in April and is up 4.7% in the past year.  For comparison, M2 grew at around a 6.0% annual pace in the low-inflation decade preceding COVID.  This constrained growth is important, as consumers can dip into saving or use money from tax returns to spend beyond their means for a period of time, but without outsized growth in M2, higher inflation will prove temporary.  In other news this morning, initial jobless claims rose 5,000 last week to 215,000, while continuing claims increased 15,000 to 1.786 million, suggesting jobs growth continues at a modest pace.

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Implications:  New orders for durable goods showed strength once again in April, rising 7.9% and continuing a trend that started in mid-2025. Not only did the headline come in well above consensus expectations, but underlying activity remained healthy. 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 continue to rise, up 1.1% in April and 9.1% in the past year, the largest annual gain since June 2022. The only major category outside transportation to decline in April was computers & electronic products, dropping 0.7%. However these orders are up 14.9% in the past year, the second largest annual increase for the category in about twenty years (only last month was higher at 16.3%). Other categories to rise in the month were fabricated metal products (+3.5%), primary metals (+1.9%), and electrical equipment (+0.6%). Note that 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. As a result, factories are having a hard time keeping up, with unfilled orders up 11.5% in the past year, the most for any 12-month period in more than four years. 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 0.4% in April.  If unchanged in May and June, core shipments would rise at a 6.8% 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 Philadelphia Fed Manufacturing Index, a measure of factory sentiment in that region, dropped to -0.4 in May from 26.7 in April.  The Kansas City Fed Manufacturing Index, a measure of factory sentiment in that region, slipped to 8 in May from 10 in April. Finally, the Richmond Fed index, a measure of mid-Atlantic factory activity, jumped to 13 in May from 3 in April.

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You don’t have to go very far to find lots of negative commentary in the popular press about the current state of the US economy.  High gas prices (due to a “war of choice”) are squeezing consumers’ budgets, and so the economy is headed for a ditch.  Many economists look back at history and blame lots of recessions on oil prices alone.

In terms of the official inflation reports, the popular narrative has a point.  Over time, inflation is a monetary phenomenon, but in the very short term an oil price spike can change measured inflation because consumers (and businesses) dip into savings temporarily to spend more and the basket of goods and services used to measure inflation doesn’t immediately change.  

As a result, the Consumer Price Index is up 3.8% from a year ago, which is well above the Federal Reserve’s 2.0% target.  This will likely keep the Fed from cutting short-term interest rates for at least the next few months.  However, an oil price shock is typically a temporary issue.  And the impact on the economy has been muted.  After adjusting for inflation – things appear not much different than before the war with Iran started.

While events in the Middle East are dramatic, we look at broader macro trends. To us, it’s surprising the economy has not paid more of a price for the reversal of massive COVID stimulus.  Deficits have been relatively stable and the money supply has slowed dramatically.  If the economy slowed, it would be because of this, not an oil price supply shock.

We also think US stocks are overvalued, although saying that repeatedly doesn’t mean they will fall, no matter what our official forecast is.  We are math and model driven, we are not traders and we have no way to judge pure momentum trades.

We also don’t think we’re on the verge of a 1980s-90s style economic boom, in spite of advances in Artificial Intelligence and technological innovation more generally.  

The size of government is substantially larger than it has been anytime during the age of the Internet.  For the past 20-25 years average real growth in the US has been just about 2% per year.  This is less than half the growth the US experienced in the 20 years post-WWII, and it is happening in spite of incredible new technologies that should raise productivity.  More resources being allocated by politicians rather than market forces always slows growth.

So, while we see what some might call malaise because government is such a drain on the economy, the evidence of the economy being on the verge of a recession simply isn’t there, at least not yet.  We appear to still be in the Plow Horse economy phase, where our thoroughbred technological race horse must carry an overweight bloated jockey. 

Real GDP grew at a 2.0% annual rate in the first quarter, and we think is growing at about a 3.0% annual rate so far in the second quarter.  The Atlanta Federal Reserve Bank’s GDP Now Model is even more optimistic for Q2, now projecting growth at a 4.3% rate.

In the meantime, initial claims for jobless benefits have averaged a very low 203,000 the last four weeks, lower than they were a year ago, six months ago, and three months ago.  Yes, job growth has slowed, but we think this is largely related to the shift to roughly net zero immigration over the past year or so.

Manufacturing production is up 1.2% from a year ago, which is not great, but not a sign of recession, either.  For comparison, manufacturing was down at a 0.4% annual rate in the ten years that ended in April 2025.

We get a report on April durable goods orders on Thursday and expect a big number, led by more aircraft orders.  Yes, aircraft orders are volatile from month to month, but airlines ordering more planes suggest they see through the fog of the recent conflict and all is not gloomy ahead.

Yes, much of recent economic growth is being led by AI and data centers, so a case can be made that economic growth is not very broad.  But at least the limited boom in AI and data centers is coming primarily from market forces, not government-directed malinvestment like housing in the early 2000s, or government-sponsored “green energy” of recent years.  

All is not well with the US economy, but the narrative of doom and gloom is being oversold as well.

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

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On February 20, 2026, the Supreme Court ruled 6–3 that President Trump’s tariffs imposed under the International Emergency Economic Powers Act (IEEPA) were unlawful. However, the decision offered little guidance on how the estimated $166 billion in tariff refunds would actually be administered. In this week’s “Three on Thursday,” we examine the evolving state of tariff refunds and the potential implications ahead. To find out more, click the link below.

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Implications: Homebuilding came in stronger than expected in April by declining less than the consensus from a spike upward in March. The best news was that the 1.465 million annual rate in April is the fastest pace of construction outside of last month in more than a year.  The bad news is that the decline in April was entirely due to single-family homes, which fell 9.0% in April and are down 2.4% in the past year. Overall housing starts are up 4.6% in the past year, but that is entirely due to the volatile multi-unit category, with multi-unit starts up 19.7% in that timeframe. Looking further down the pipeline shows a similar picture.  Permits for new builds rose 5.8% in April, beating expectations, but the strength came entirely from a 21.8% jump in the volatile multi-unit category. Single-family permits declined 2.6% in April to an eight-month low, now down 5.5% in the past year.  One way homebuilders have been able to combat sluggish activity in recent years is by focusing their efforts on completing projects. Completions rose 4.8% in April to a 1.449 million annual rate but have been slowing as of late, down 2.0% in the past twelve months.  Despite the slower trend, completions have outpaced starts in eight out of the last twelve months.  This has helped push the total number of homes under construction 8.5% lower than they were a year ago.  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.  This continues to be a challenging environment for builders, which can be seen in the NAHB index (a measure of homebuilding sentiment) rising to 37 in May from 34 in April. Keep in mind a reading below 50 signal that a greater number of builders view conditions as poor versus good, now the 25th consecutive month that has been the case. In other housing news, pending home sales, which are contracts on existing homes, rose 1.4% in April, following a 1.7% increase in March, suggesting a rise in existing home sales (counted at closing) in May. On the manufacturing front, the Philadelphia Fed index (a measure of factory sentiment in that region) declined unexpectedly to -0.4 in April from +26.7 in March.  Finally, in labor news this morning, initial jobless claims declined 3,000 last week to 209,000, while continuing claims rose 6,000 to 1.782 million.  These figures suggest continued job growth in May.

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