Implications:  Durable goods orders paired back in October after strong reports in August and September, but a look at the details shows promising signs of activity for the fourth quarter.  Once again, transportation orders dominated the headline reading, falling 6.5% in October as defense aircraft orders plunged 32.4% and commercial aircraft orders dropped 20.1%.  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.  Those orders rose 0.2% in October, led by computers & electronic products (+1.0%), machinery (+0.8%), and fabricated metal products (+0.5%), while electrical equipment (-1.5%), and primary metals (-0.7%) declined.  Note that the declines for both electrical equipment and primary metals follow strings of unusually strong readings over the prior six months, while machinery (where orders are up at an 11.6% annualized rate in the past six months) and computers & electronic products (9.7% annualized) continue to show strong performance, which should feed 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 – rose 0.7% in October, following a 1.2% jump in September.  If unchanged in November and December, these shipments would be up at a 5.9% annualized rate in Q4 versus the Q3 average. In other news today, the M2 measure of the money supply rose 0.1% in November and is up 4.3% over the past twelve months – below the historical growth rate of ~6% – suggesting lower inflation in the year ahead.

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Implications:  We got another double-dose of data this morning, this time showing industrial production increased 0.2% in November following a 0.1% decline in October.  Overall, it looks like industrial production has been growing modestly recently but has generally been weighed down by weakness in the manufacturing sector where we haven’t seen a gain in four months. Looking at the details, the volatile auto sector has been primarily responsible, with activity declining 1.0% in November following a 5.1% decline in October.  However, manufacturing ex-autos (which we think of as a “core” version of industrial production) posted a gain of 0.1% in both November and October. In the past year, auto production (which is also highly sensitive to President Trumps’s tariff policy) is down 5.7% while “core” manufacturing is up 2.7%. Meanwhile 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, posted gains of 1.1% in November and 1.8% in October.  High-tech manufacturing is up 11.8% in the past year, the fastest pace of any major category.  Meanwhile, the manufacturing of business equipment isn’t far behind, up a strong 11.2% in the past year, signaling reindustrialization in the US outside of just the high-tech industries mentioned above. The mining sector was also a source of strength in November, jumping 1.7% following a decline of 0.8% in October. Notably, oil and gas production, the drilling of new wells, and the extraction of other metals and minerals are all up versus September. Look for a continued upward trend in activity in this sector as the Trump Administration takes a more aggressive stance with permitting. Finally, utilities output (which is volatile and largely dependent on weather), declined 0.5% in November after a 2.6% increase in October. In other manufacturing news this morning, the Richmond Fed Index, a measure of factory sentiment in that region, increased to a still weak -7.0 in December from -15.0 in November.

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Implications:  Economic growth was very strong in the third quarter, but not quite as strong as the headline annual growth rate of 4.3% suggests.  We like to follow Core Real GDP, which includes consumer spending, business fixed investment, and home building, and excludes more volatile categories like government purchases, inventories, and international trade.  Core Real GDP grew at a 3.0% annual rate in the third quarter and was up 2.6% versus a year ago.  Those figures are both very close to the 2.8% growth rate in Core GDP since the pre-COVID peak (at the end of 2019).  Even if you take the headline 4.3% growth rate of overall real GDP at face value, real GDP is up 2.3% from a year ago, which is slightly below the growth rate of 2.4% since the pre-COVID peak.  That said, we don’t want to sound dismissive about solid economic growth.  The 4.3% growth rate in Q3 was achieved in spite of a continued decline in inventories, a decline that likely ended in Q4, meaning continued economic growth, at least for the time being.  In addition, business investment in equipment rose for the third straight quarter, which could help lift productivity growth.  Meanwhile, corporate profits rose 4.2% in the third quarter and are up 9.1% from a year ago.  (Adjusting for losses at the Federal Reserve, corporate profits were up 3.9% in Q3 and are up 7.2% from a year ago.)  But here’s the bad news.  Even with record high profits, plugging the current range for long-term interest rates into our Capitalized Profits Model suggests the S&P 500 is still substantially overvalued.  And, in the meantime, the Federal Reserve needs to be careful about reducing short-term rates.  GDP Prices rose at a 3.8% annual rate in Q3 and are up 3.0% from a year ago.  Nominal GDP – real GDP growth plus inflation – was up at an 8.2% annual rate in Q3 and is up 5.4% from a year ago.  These figures suggest the Fed should pause rate cuts for the time being, unless and until there is more evidence that inflation is heading back down toward its 2.0% target.

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The Bible story of the virgin birth is at the center of much of the holiday cheer this time of year.  The book of Luke tells us that Mary and Joseph traveled to Bethlehem because Caesar Augustus decreed a census should be taken.  Mary gave birth after arriving in Bethlehem and placed baby Jesus in a manger because there was “no room for them in the inn.”

Some people think Mary and Joseph were mistreated by a greedy innkeeper, who only cared about profits and decided the couple was not “worth” his normal accommodations.  This version of the story (narrative) has been repeated many times in plays, skits, and sermons.  It fits an anti-capitalist mentality that paints business owners as greedy, or even evil.

It persists even though the Bible records no complaints and there was apparently no charge for the stable.  It may be the stable was the only place available.  Bethlehem was over-crowded with people forced to return to their ancestral home for a census – ordered by the Romans – for the purpose of levying taxes.  If there was a problem, it was due to unintended consequences of government policy.  In this narrative, the government caused the problem.

The innkeeper was generous to a fault – a hero even.  He was over-booked, but he charitably offered his stable, a facility he built with unknowing foresight.  The innkeeper was willing and able to offer this facility even as government officials, who ordered and administered the census, slept in their own beds with little care for the well-being of those who had to travel regardless of their difficult life circumstances.

If you must find “evil” in either of these narratives, remember that evil is ultimately perpetrated by individuals, not the institutions in which they operate.  And this is why it’s important to favor economic and political systems that limit the use and abuse of power over others.  In the story of baby Jesus, a government law that requires innkeepers to always have extra rooms, or to take in anyone who asks, would “fix” the problem.

But these laws would also have unintended consequences.  Fewer investors would back hotels because the cost of the regulations would reduce returns on investment.  A hotel big enough to handle the rare census would be way too big in normal times.  Even a bed and breakfast would face the potential of being sued.  There would be fewer hotel rooms, prices would rise, and innkeepers would once again be called greedy.  And if history is our guide, government would chastise them for price-gouging and then try to regulate prices.

This does not mean free markets are perfect or create utopia; they aren’t and they don’t.  But businesses can’t force you to buy a service or product.  You have a choice – even if it’s not exactly what you want.  And good business people try to make you happy in creative and industrious ways.

Government doesn’t always care.  In fact, if you happen to live in North Korea or Cuba, and are not happy about the way things are going, you can’t leave.  And just in case you try, armed guards will help you think things through.  

This is why the Framers of the US Constitution made sure there were “checks and balances” in our system of government.  These checks and balances don’t always lead to good outcomes; we can think of many times when some wanted to ignore these safeguards.  But, over time, the checks and balances help prevent the kinds of despotism we’ve seen develop elsewhere.

Neither free market capitalism, nor the checks and balances of the Constitution are the equivalent of having a true Savior.  But they should give us all hope that the future will be brighter than many seem to think.

(We’ve published a version of this same Monday Morning Outlook during Christmas week, each year, since 2009.)

Brian S. Wesbury – Chief Economist

Robert Stein, CFA – Deputy Chief Economist

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Implications: Existing home sales eked out a small gain in November to hit a nine-month high, though overall activity continues to trudge along at a disappointing pace. The current sales rate of 4.130 million remains near the lowest since 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).  That said, affordability has been improving in several notable ways. First, 30-year mortgage rates have been trending lower since May and now sit around 6.3%, near the lowest rate since 2023. Meanwhile, the median price of an existing home is up just 1.2% versus a year ago. Aggregate wage growth (hourly earnings plus hours worked) has also begun to consistently outpace median home price gains over the past year for the first time since 2023, which improves affordability. In addition, inventory growth continues although at a slower pace than earlier this year. The months’ supply of homes (how long it would take to sell existing inventory at the current very slow sales pace) remained at 4.2 in November, a considerable improvement versus the past few years, though still below the benchmark of 5.0 that the National Association of Realtors uses to denote a normal market.  However, challenges remain, including that many existing homeowners remain reluctant to sell due to a “mortgage lock-in” phenomenon, after buying or refinancing at much lower rates before 2022.  It looks like potential buyers will have to continue to deal with limited options which will be a headwind to sales.  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. On the manufacturing front, the Kansas City Fed Manufacturing Index, a measure of factory sentiment in that region, declined to +1 in December from +8 in November.

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In this week’s “Three on Thursday,” we take a closer look at recent immigration trends in the United States and how federal policy has shifted over the past several years. During his first term, President Trump made reducing illegal immigration a central priority, expanding physical barriers at the southern border and increasing enforcement. Now in his second term, President Trump has moved to reestablish tighter controls. For a deeper dive, click the link below.

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Implications:  BLS staff were furloughed in October during the recent government shutdown and did not collect price data for October 2025, limiting the agency’s ability to make month-over-month comparisons across many categories in November.  Despite the blip in data, the November CPI report revealed some important inflation developments.  The headline shows the Consumer Price Index rose a total of 0.2% for the two months ending in November and the twelve-month comparison slowed unexpectedly to 2.7%, versus a consensus increase of 3.1%.  “Core” prices, which strip out food and energy, also rose 0.2% over the two months ending in November, while the twelve-month core comparison moved down to 2.6%, the slowest pace since 2021.  Housing rents (those for actual tenants as well as the imputed rental value of owner-occupied homes) have been the main driver of core inflation over the last three years, but that tide has turned: rents rose 0.2% in the two months ending in November and are up at a 1.6% annualized rate over the last three months, lagging both headline and core inflation.  Airline prices – which had contributed outsized gains to the core category in recent months – reversed course in October and November, with prices dropping 6.6% over the two months.   Other notable categories to fall over the two months include prices for hotels (-1.7%), apparel (-0.7%), and motor vehicle insurance (-0.4%). We’ve been saying for some time that investors should look past tariffs and instead focus on the M2 measure of the money supply for understanding where inflation will go.  Tariffs can raise prices for tariffed items, but they leave less money for consumers to spend on goods and services. They 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 three years – we expect inflation to continue trending lower. In other news this morning, initial jobless claims declined 13,000 last week to 224,000; continuing claims rose 67,000 to 1.897 million.  Meanwhile, on the manufacturing front, the Philadelphia Fed index – a measure of factory sentiment in that region – fell to -10.2 in December from -1.7 in November.

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Implications:  Nonfarm payrolls rose 64,000 in November itself, beating the consensus expected 50,000.  However, October payrolls fell 105,000 and revisions for August and September subtracted another 33,000.  As a result, combining all of this, payrolls were 74,000 lower in November than when we last glimpsed the labor market for September.  But before you get panicky about jobs it’s important to recognize that the downswing was largely due to a big drop in government; not the federal shutdown, but the Trump Administration’s efforts to trim government jobs that resulted in “deferred resignations” that finalized in October.  Federal payrolls dropped 162,000 in October and then another 6,000 in November, the tenth straight monthly decline for a total drop of 271,000 since January.  Long term, these efforts should grow the private sector, including private sector jobs, more than we lose in the government.  Private-sector payrolls rose a respectable 52,000 in October and then 69,000 in November.   Data on civilian employment (an alternative measure of jobs that includes small business start ups) was not available for October due to the shutdown, but were available for November, when they were 96,000 higher than in September.  And although the unemployment rate was 4.6% in November versus 4.4% in September, the increase was due to a welcome 323,000 gain in the labor force (people who are either working or looking for work), which is not a bad sign.  These figures are also impressive in light of strict enforcement of immigration laws, as well as uncertainty around trade policy and tariffs.  We also like to follow payrolls excluding three sectors: government, education & health services, and leisure & hospitality, all of which are heavily influenced by government spending and regulation (including COVID lockdowns and re-openings).  This measure of “core payrolls” increased 16,000 in November following a 23,000 decline in October.  While this remains relatively weak, it follows a string of large consistent declines earlier this year and signals that the private sector may be turning the corner as government payrolls shrink.  On the inflation front, the Fed will be happy that average hourly earnings rose only 0.1% and are up 3.5% from a year ago.  If productivity growth is near a 1.5% annualized trend in the years ahead (hopefully higher with AI!), a 3.5% growth rate for wages is consistent with the Fed’s 2.0% inflation goal.

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Implications:  Retail sales for October generated a soft headline, but stronger details. Overall retail sales were unchanged for the month, but slipped 0.1% including revisions for prior months.  However, sales are still up 3.5% from a year ago and sales in October rose in eight out of the thirteen major categories.  The flat reading for overall sales was largely the result of a 1.6% drop in autos, due to the expiration at the end of September of an up to $7,500 credit for buying electric vehicles.  The expiration of that credit pulled some auto purchases into the third quarter, making comparisons harder for October.  Meanwhile, sales by non-store retailers (think internet and mail-order) rose 1.8% as the early months of holiday-shopping season kicked off.  “Core” sales, which exclude volatile categories such as autos, building materials, and gas stations, increased by 0.6% in October.  The core number is crucial for estimating GDP, because when it calculates GDP the government uses other sources for autos, building materials, and gas, not the retail report.  If unchanged in November and December, these sales will be up at 3.3% annual rate in Q4 versus the Q3 average.  Perhaps the worst news in the report was that sales at restaurants & bars – the only glimpse we get at services in the report, which make up the bulk of consumer spending – declined 0.4% in October while previous months’ activity were revised significantly lower.  We will be watching this closely in the months ahead.  In the meantime, note that in spite of recent weakness these sales are up at a 5.2% annualized rate through the first ten months of the year versus a 2.5% annualized increase for overall sales.  In other recent news, the Empire State Index – a measure of factory sentiment in the New York region – declined unexpectedly to -3.9 in December from +18.7 in November.  On the housing front, the NAHB Index (a measure of homebuilder sentiment) rose to 39 in December from 38 in November, the third consecutive monthly increase.  Keep in mind a reading below 50 signals a greater number of builders view conditions as poor versus good, now the twentieth consecutive month that has been the case.

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We’re finally breaking out of the clouds! Economists have mostly been flying blind because of the government shutdown, but this week the data really start to flow again.  In particular, we get a partial report on the employment situation in October and a full report for November, retail sales in October, and consumer prices in November.

Combined, October and November employment data will likely show modest continued growth in jobs.  If you believe ADP, October will be up and November down; if you believe jobless claims, October will be weak and November better.  Either way, it’s important to recognize that given the huge policy shift from lax to strict immigration enforcement, the push by the Trump Administration to thin government payrolls, as well as the ongoing aging of the population and layoffs attributed to AI, payroll growth should be slow.

In the meantime, the retail sales report for October should be relatively soft.  Sales of cars and light trucks were the slowest for any month this year.  However, it was not because of the government shutdown.  Instead, federal electric-vehicle tax credits worth up to $7,500 expired at the end of September, which pulled many purchases into the third quarter.  We will be focusing on retail sales excluding volatile autos, in particular sales at restaurants and bars, which is the only part of the report that covers the service sector.

On Thursday the Labor Department will release the Consumer Price Index report for November and might include some key data for October, as well.  In addition to the headline figures, we will be looking at details that hint at new trends.  In particular, is housing rent inflation continuing to slow.  

Primary rents for actual tenants rose 4.8% in the twelve months ending in September 2024 but a slower 3.4% in the twelve months ending in September 2025.  Given slower money growth in the past three years, this deceleration should continue. We see no threat of outright deflation, but the Federal Reserve will pay close attention to rents when deciding how much room it might have to cut rates in 2026. 

At last week’s meeting, the median prediction from Fed officials was that short-term rates would only drop one more quarter point next year.  Meanwhile, the futures market is pricing in two cuts of that size.  We think two cuts are more likely than one and there is even the possibility of three cuts.  A new Fed Chair won’t have carte blanche, but if the economy and inflation both slow the case for more than one cut will be compelling.  

As our readers know we believe the path of M2 is more important than the actual level of interest rates, and last week the Fed restarted quantitative easing, which should boost M2 in the months ahead.  

In terms of President Trump’s pick for Fed Chair, what we would like to know is what the contenders think about reversing the regime of “abundant reserves” and the Fed paying banks interest on reserves.  These policies were unnecessary for the Fed for nearly its first one hundred years, but its current leaders are adamant about keeping them after they were implemented in the Great Financial Crisis of 2008-09, a crisis these new policies did nothing to stop or fix.  Restarting QE seems like a shot across the bow to anyone who wants to alter course and return to a scarce reserve system.

Brian S. Wesbury – Chief Economist

Robert Stein, CFA – Deputy Chief Economist

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