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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To say the least, since its inception in 1913, the Federal Reserve has had its ups and downs.  One thing most people don’t know is that prior to the invention of the Fed, other than during wars, there was almost no inflation. Various sources including the Federal Reserve regional banks show the purchasing power of $1 in 1900 was the same as or higher than it was in 1800.

The Government did print and borrow money during wartime, which caused inflation during the War of 1812 and the Civil War.  In between wars, when the US was often on a gold standard, the economy experienced deflation.

A gold standard basically keeps the money supply stable, but technology increases the production of goods and services, so if we don’t print more money, the average dollar price of things falls.  More goods chasing the same amount of dollars creates deflation (actually “good” deflation).

Since 1913 (and the invention of the Fed), the US has experienced cumulative inflation of 3,297%.  A massive difference when compared to the 1800s.  Moreover, as Milton Friedman proved, it was Fed mistakes with monetary policy that caused the Great Depression.  Then, in the 1960s and 1970s, because the Fed printed too much money the US experienced double digit inflation.

Paul Volcker took over the Fed in 1979 and fixed the Fed’s inflation problem but ended up causing two sharp recessions during that process.  Alan Greenspan followed Volcker and, from 1985 to 1998, the Fed ran spectacularly good monetary policy.  Then it tightened too much in 1999 and then loosened too much during the dot.com crash.  Excessively low rates from 2000-2005 caused a housing bubble which eventually became the Great Financial Crisis.

In our opinion, the Fed’s reaction to that crisis (printing trillions of dollars with Quantitative Easing) was a huge mistake.  The Fed followed it up with even more QE during COVID, and that easy money caused the worst inflation since the 1970s.

Like we said, the Fed has had its ups and downs.  One thing we don’t think enough people think, or talk, about is how much QE has changed our banking system and monetary policy.  We’ve written about it frequently.

To summarize it in a nutshell: It is a myth that QE saved the economy in 2008.  We started QE in September and passed TARP in October 2008.  The S&P 500 fell an additional 40% in the next six months.  When we ended overly strict mark-to-market accounting in March 2009, the economy and market both bottomed.

What QE did was flood the banks with reserves as the Federal Reserve grew its balance sheet massively.  So, instead of selling bonds into a free market, the Treasury sold them at interest rates well below inflation because the Fed was buying them.  This money ended up as deposits in banks.

In order to keep that money contained, the Fed increased capital requirements and liquidity rules on banks to absurd levels.  The Fed also paid banks to hold those reserves.  In other words, the Fed took the risk of owning Treasury debt and mortgage-backed securities while banks held risk free reserves.

During QE 1,2&3 those reserves stayed contained and did not cause inflation.  But when Jerome Powell did QE during COVID, he reduced liquidity rules and M2 grew 42%...it was the easiest forecast of inflation we have ever made.  The crazy thing is that Powell won’t talk about M2…reporters won’t ask about it at his press conferences because he just denies that there is any relationship.  He still blames supply chains for inflation.

More importantly, the Fed’s QE has created income inequality and a divide between the young and the old.  Because capitalism is often blamed for inequality, it’s no wonder almost 2/3rds of Americans under 30 have a “favorable view” of socialism.

So when J. Powell complains about threats to Fed Independence, can he actually understand that Fed policy has influenced politics more than any other time in history?  Tripling the money supply in 18 years is massive interference in economic activity and it impacts the political world.

We want an Independent Fed, but what the Fed has done has complicated that.  And now with Powell not leaving the Fed, he is doubling down on his mistakes.  He should go.  Let Kevin Warsh take over.  And move to unwind QE.

Fed policy in the next few months will be interesting.  The market is actually pricing in a rate hike, mainly because the CPI and PPI both exceeded consensus last month.  However, the money supply is still growing relatively slowly and housing prices are growing only 1% YOY.  In other words current inflation is likely influenced by Iran, not the money supply.   We still think it is more contained than the market thinks.  

Kevin Warsh apparently wants to do QT and cut interest rates at the same time.  We are not sure this is a wise policy to follow, however, at least it is a change from what we have been doing lately.  It’s time to make the Fed great again…that means following a different path.  And we certainly hope Kevin Warsh is the chair to do that.  Powell certainly wasn’t.

Brian S. Wesbury – Chief Economist

Robert Stein, CFA – Deputy Chief Economist

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Implications: Industrial production surprised to the upside in April, beating even the most optimistic forecast of any economics group surveyed by Bloomberg.  Overall activity rose 0.7%, with underlying details showing broad-based gains.  The largest positive contribution in April came from the manufacturing sector, which posted a gain of 0.6%. The volatile auto sector rebounded in April, with activity jumping 3.7%.  Meanwhile, manufacturing ex-autos (which we think of as a “core” version of industrial production) rose 0.3%, a fourth consecutive monthly gain. 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 1.0% in April.  High-tech manufacturing is up a strong 9.2% in the past year, the fastest 12-month growth rate of any major category. Meanwhile, manufacturing of business equipment rose 1.5% in April and was up 6.0% in the past year, signaling a broader reindustrialization. Utilities output (which is volatile and largely dependent on weather from month to month) also posted a gain of 1.9%. Notably, this series has been on an upward trend since 2023 following nearly 20 years of stagnation as power hungry data centers have boosted demand for US power generation. Finally, the one weak spot in today’s report came from the mining sector, which posted a decline of 0.1%.  A drop in the drilling of new wells more than offset unchanged oil and gas production and a small gain in the extraction of other metals and minerals in April. So far, we still haven’t seen US energy companies boost production significantly in response to higher prices caused by the Iran War. Finally, in other news this morning, the Empire State Index – a measure of factory sentiment in the New York region – increased to +19.6 in May from +11.0 in April.

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