Implications: Industrial production came in much higher than expected in September as broad-based gains were coupled with a surge in utility output to push up activity for a sixth consecutive month. Looking at the details, the volatile and tariff-exposed auto sector fell 3.0% in September.  However, manufacturing excluding autos (which we think of as a “core” version of industrial production) rose 0.6%.  As a result, overall manufacturing was still up a solid 0.3%.  Notably, manufacturing ex-autos has been on a consistent upward trend since the start of 2025, a sharp reversal from the downward trend from 2018-2025. Production in high-tech equipment, which has been a consistent source of strength recently due to data center construction and the reshoring of semiconductor production, jumped 1.5% in September. Activity in this sector is up 17.6% in the past year, the fastest of any major category. The manufacturing of business equipment remained unchanged in September but is up 6.8% in the past year, easily outpacing the 1.1% gain in overall manufacturing and signaling a broader reindustrialization.  Looking outside the manufacturing sector, mining activity eked out a gain of 0.2% in September.  The increase was driven by gains in oil and gas extraction which more than offset declines in drilling activity and the extraction of other minerals.  Finally, utilities output posted a gain of 3.5% in September. This series has been on an upward trend since 2023, following nearly twenty years of stagnation, as power hungry data centers have boosted demand for US power generation. On the inflation front, import prices rose 1.1% in September and export prices rose 2.2%.  In the past year, import prices are up 8.1%, while export prices have risen 11.6%.

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Investor borrowing to fund stock purchases, known as margin debt, has surged over the past three years and currently sits at historic levels. In this week’s “Three on Thursday,” we take a closer look at the $1.5 trillion in margin debt outstanding as of August 2026. To find out more, click the link below.

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Implications: Flashy headline, modest details.  Retail sales rose 0.8% in September, easily beating consensus expectations, while sales in previous months were revised higher.  However, most of the surprise can be attributed to a 6.4% jump in gas stations sales, reflecting higher prices at the pump, not a boost to economic activity.  Still, growth was broad-based with eight of thirteen major sales categories rising in September.  We like to follow “core” sales, which strip out the volatile categories for autos, building materials, and gas stations and is important for estimating GDP.  This measure rose 0.3% in September and was up at a solid 5.7% annual rate in the third quarter versus the Q2 average.  This is consistent with our view that real GDP grew at about a 3.0 - 3.5% annual rate in Q3. Within the core grouping, sales at nonstore retailers have been a major bright spot in recent months but slowed in September, rising 0.3% after a 2.0% jump in August. Consumers pulled back on spending in September at stores for sporting goods & hobbies (-0.5%), miscellaneous stores (-3.0%), and general merchandise stores (-0.1%). Meanwhile, sales at restaurant and bars – the only glimpse we get at services in this report – increased 1.1% in September following an upwardly revised +1.4% gain in August.  Sales in this category have shown solid growth since February and stand 7.0% higher than a year ago, outpacing the 6.3% increase for overall sales. It’s important to remember that none of these figures are adjusted for inflation.  Nominal retail sales have risen 6.3% in the past year, but factoring in inflation, “real” inflation-adjusted sales are up 2.5% in the past twelve months. While higher prices have inflated the headline figures, US consumers continue to spend despite a challenging economic backdrop.  In other recent news this morning, initial jobless claims last week ticked up by 1,000 to 199,000; continuing claims declined 4,000 to 1.710 million.  These figures suggest continued job growth.

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Implications: Producer prices surged in September, rising across the board. The Producer Price Index rose 1.3%, the largest monthly gain since 2022, and above even the most aggressive forecast by any Economics Group on Bloomberg. While more than 40% of the headline increase was due to energy (which rose 10.8% for the month), final demand prices excluding energy also rose 0.7% in September, as the second-order effects of higher energy prices work their way through the economy.  Looking at the details, goods prices rose 2.6% in September, the largest monthly increase since these data were first collected in 2009. Half of this increase can be traced to gasoline prices, which jumped 20.3% in September, and are up 64.3% in the past year.  Food prices (+1.2%), and other energy-related categories like diesel, jet fuel, and crude petroleum also rose. On the services side, prices rose 0.8%, led by a 3.9% increase in margins for machinery and vehicle wholesaling.  Further back in the supply chain, price increases for intermediate goods were broad-based, with elevated energy prices continuing to burden businesses at every stage of production. Prices for processed intermediate goods rose 2.5% in September, driven by a 21.0% increase in diesel fuel. Meanwhile, prices for unprocessed intermediate goods also rose 8.4%, led by a 28.3% jump in crude petroleum. Both unprocessed and processed intermediate goods are up by the most in any twelve-month period since 2022. Excluding food and energy, “core” producer prices rose 0.7% in September, while the twelve-month change rose to 5.0%, well above the 3.0% increase for the twelve months ending September 2025. Overall producer prices are up 6.3% in the past year, over double the change from the twelve months ending September 2025. In other recent news, the Empire State Index, which measures manufacturing sentiment in the New York region, rose to 25.5 in October from 7.6 in September. Also, the Philadelphia Fed Manufacturing Index, a measure of factory sentiment in that region, fell to 20.9 in October from 37.8 in September.

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Implications: Consumer prices matched expectations by rising 0.6% in September, pushing the year-ago comparison up to 3.7%.  “Core” CPI, which excludes food and energy, surpassed expectations and rose 0.3%, with the year ago comparison rising to 2.6%. A surge in fuel costs led the overall index higher, with energy prices rising 5.2% in September, now up 20.4% versus a year ago. In fact, the 9.1% jump in gasoline prices accounted for more than half of the headline increase in September. However, “core” CPI (which excludes food and energy) came in hotter than expected, rising 0.3% for the second consecutive month. Housing rents (both those for actual tenants and the imputed rental value of owner-occupied homes) have been the primary contributor to core inflation over the last few years but have been trending toward slower gains in 2026, rising 0.3% in September. Meanwhile, airline fares continue to climb, rising 1.2% in September and 22.4% in the past year. Prices for hotels (+2.3%), used vehicles (+0.7%), and college tuition (+1.2%) also made notable contributions, partially offset by declining prices for internet services (-1.3%) and prescription drugs (-1.2%). The worst news in today's report was that wages lost ground in the battle against inflation, as "real," inflation-adjusted hourly earnings declined 0.5%, continuing a trend that has left them down 0.7% in the past year. September also marked the 66th consecutive month that both headline and core inflation have been above the Federal Reserve’s official 2.0% target, a fact that Chairman Kevin Warsh and the FOMC were well aware of when they decided to raise interest rates last month for the first time in three years. The problem is that rate hikes hit interest rate sensitive sectors like autos and housing, which are already soft, while doing nothing to open the Strait of Hormuz and little to slow investment in AI and data centers, which remains the economy’s leading source of strength.  While we don't expect the Fed to raise rates again at its meeting later this month, another hike looks likely in December. Regardless of what the Fed decides, however, inflation will continue to weigh on the economy until supply-side conditions improve.

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Implications: Existing home sales eked out a small gain in September but remained disappointing as the recent jump in mortgage rates kept potential buyers on the sideline.  Looking at the big picture, activity has been stuck in low gear since the end of the COVID pandemic, with the annual sales pace hovering around 4.000 million. That is roughly in line with the aftermath of the Great Financial Crisis, and well below the roughly 5.250 million annual pace pre-COVID (let alone the 6.500 million pace during COVID).  The main issue remains affordability which has taken a turn for the worse recently due to ongoing conflicts around the world driving up energy costs and short-term inflation.  The result has been a rapid increase in 30-year mortgage rates, which are up 140 basis points since February and now sit around 7.5%. Buyers are also unlikely to get any help from the Federal Reserve, which has begun hiking rates again in response.  However, there is some good news for buyers. Since the COVID pandemic, many existing homeowners have been reluctant to sell due to a “mortgage lock-in” phenomenon, after buying or refinancing at much lower rates before 2022.  This meant that potential buyers had to deal with limited options.  However, the existing home inventory has been improving recently and now sits at the highest level since the pandemic (though still well below pre-COVID levels).  Meanwhile, the months’ supply of homes (how long it would take to sell existing inventory at the current very slow sales pace) was 4.8 in September, nearing the benchmark of 5.0 that the National Association of Realtors uses to denote a normal market.  Finally, though the median price of an existing home sits near a record high, it is up only 1.3% versus a year ago. Aggregate wage growth (hourly earnings plus hours worked) has been consistently outpacing median home price gains since early-2025, which gradually improves affordability. While many cross currents remain, the fundamentals for a modest improvement in home sales are starting to emerge. On the employment front, initial jobless claims two weeks ago ticked down by 2,000 to 197,000; continuing claims rose 17,000 to 1.716 million.  These figures suggest that job growth continues.

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Sound and stable money promotes long-term economic growth.  And “independent” central banks are more likely to deliver it.  For most of the 1800s, the US was on the gold standard, which meant policy was insulated from political interference.  But once the Federal Reserve was created in 1913, it became susceptible to political pressures.

In the late 1960s and 1970s, inflation took off because politicians – particularly presidents – were able to lean on the Fed to get it to conduct monetary policy according to what they wanted, even if it meant more inflation down the line.

We hate to use economic jargon, but monetary policy is well known to have a “time inconsistency” problem, in that an overly loose policy can generate more economic growth in the short-run, but this comes with greater costs in the long run (in the forms of both higher inflation and slower growth) once monetary policy gets tight again.

Politicians often don’t care about the long run negative effects, because they happen after the next election or when they’re already out of office. 

This is one reason President Reagan was so special…he focused on doing the right thing for the long run and fixing the mistakes of the 1970s.  He told then-Chairman Paul Volcker that it was the Fed’s job to conduct monetary policy in a way that contained inflation and protected the value of the dollar.  Reagan then left him alone to pursue that goal.  President Clinton let Alan Greenspan pursue monetary policy without interference, too.    

The odd part about the current debate regarding Fed independence is that former Chairman Jerome Powell and his allies are often held up as a model for independence, or as supporters of Fed independence when that is far from the truth.  It was Powell himself who aided and abetted massive COVID over-spending by the federal government.  The Fed kept monetary policy extraordinarily loose, held interest rates artificially low, bought government debt, and printed extraordinary amounts of new money.

A 40-year high in inflation, artificially low costs for deficit spending, and a surge in inequality due to artificially boosting asset values were the result.  Rather than admit those mistakes, take his leave, and let new Chairman Kevin Warsh take the Fed back toward sound money, Powell has stuck around at the Fed after his term as chairman expired.  We don’t know if he is undermining Warsh in his attempt to reform the Fed, but it certainly muddies the waters.  

None of this means President Trump is without blame.  If Board member Lisa Cook committed mortgage fraud, then let the justice system play out.  And even if Powell did a poor job of overseeing construction costs at the Fed, this is not exactly the first instance in which a government agency has spent more than projected on a construction project.

We would rather see criticism of the Fed focused on actual monetary policy mistakes, rather than these sideshow issues.  This would give Kevin Warsh the green light to conduct sound monetary policy to support long-term growth.

Brian S. Wesbury – Chief Economist

Robert Stein, CFA – Deputy Chief Economist

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With U.S. Treasury yields reaching their highest levels since 2002 and the federal government showing little sign of paring back spending, questions about who finances the federal debt have come back into focus. In this week’s “Three on Thursday,” we examine the U.S. Treasury market, particularly how the foreign investor base is evolving and what it could mean going forward. To find out more, click the link below.

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Implications: The trade deficit widened once again to $105.6 billion in August, the largest since the surge in early 2025 as importers were front-running the tariffs the Trump Administration had promised for April 2025.  Bottom line: other than with China, it’s hard to see any global impact from U.S. tariffs. The trade deficit has been steadily rising since the start of the summer, which marks a break from the pattern over the past year, when the deficit held around $50 - 70 billion, albeit with considerable volatility. The increase reflected a $4.5 billion rise in exports alongside a much larger $17.2 billion increase in imports. The rise in exports was driven by nonmonetary gold, crude oil, and fuel oil. On the imports side, crude oil, nonmonetary gold, and semiconductors led imports to the highest level on record. Trade data is not adjusted for inflation, so big swings in oil prices, as we have seen throughout this year, can have a large impact on the trade balance. On top of that, nonmonetary gold (also volatile) is excluded from the BEA’s GDP calculations. So what then are the underlying signals showing? Imports of AI related capital goods (computers, computer accessories, semiconductors, and telecommunications equipment) are up $273 billion year-to-date versus the same period last year, compared to just a $107 billion increase in overall goods imports. Yes, that means more than the entire increase in the trade deficit is accounted for by the tech sector, likely due to the build-out of AI and data centers.  This has caused goods imports to become the most concentrated in a single product category than at any point on record going back to 1999 (see more in our recent Three on Thursday). This massive AI investment wave has propelled Taiwan to become one of our closest trade partners, with imports from the country up 56.8% year-to-date compared to the same period last year. On the other hand, the official figures show that China, once the dominant exporter to the U.S., has slipped to a fourth place behind Mexico, Canada, and Taiwan, with exports to the U.S. down 16.3% year to date compared to the same period last year.  We say “official figures” because it is also possible that China is now laundering some of their exports to the U.S. through other countries.  Meanwhile, the total volume of trade, exports plus imports, which shows the extent of business and consumer interaction across the border, increased $21.7 billion in August. This measure has risen 17.0% in the past year, with exports up 10.7% and imports up 22.2%.  Also in today’s report, the dollar value of U.S. petroleum exports once again exceeded imports, marking the 54th 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 nearly as much as in prior decades), largely due to domestic refinement capabilities.

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Implications: Service sector activity continued to expand at a solid pace in September, with the ISM Services index coming in at 54.9, just slightly below both last month’s reading and consensus expectations. Service activity continues to show resilience in the face of multiple headwinds this year. Despite the prices index reaching a four-year high in September, the overall services index has registered above 53.0 for ten consecutive months, the longest stretch since 2022. Looking at the details, overall growth was broad in September with thirteen of the major service industries reporting expansion, while four reported contraction, and one reported no change. The major measures of activity were mixed in September.  Both business activity and new orders fell from their multi-year highs in August: the business activity index fell to 56.5 from 61.7, and the new orders index declined to 59.8 from 60.9.  Both forward-looking indices have shown expansion in each of the last sixteen months.  As a result, order backlogs have started to stack up. The backlog of orders index rose to 56.6 in September, the highest in over four years, and the eighth consecutive month in expansion. Survey comments reveal a hesitant outlook surrounding both elevated prices and a higher interest rate environment. However, some report that it has not been enough to dampen growth. One comment from the Wholesale Trade industry notes that “Demand remains very strong. Manufacturers have very little breathing room to keep up with demand, and in some cases, typical lead times have slipped.”  This mounting pressure has caused service companies to add to payrolls in September, with the employment index rising back into expansion territory at 50.1. While one month does not make a trend, it is a welcome sign in an industry that has struggled to consistently hire for the past three years. Unfortunately, the highest reading of any index was once again the prices index, which rose to 74.0 in September, now the sixth time this year the index has breached 70.0. Though the index remains elevated, it remains below the worst we saw during the COVID when M2 surged by 42% and the prices paid index reached the low 80s.

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