William Penn, the Quaker leader and founder of Pennsylvania, saw time as a divine gift—precious yet often squandered. In 1693, he captured this wisdom in Some Fruits of Solitude, a collection of reflections on life and virtue, where he famously observed, “Time is what we want most, but what we use worst.” In an era where life was uncertain and often brief, his words served as a call to live with intention. Today, they remain just as relevant—while we constantly wish for more time, it is finite. In this edition of “Three on Thursday,” we examine different aspects of time. 

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Implications:  Housing starts pulled back sharply in January following a surge in December, but the 9.8% drop may not be entirely indicative of the underlying trend, as unusually cold weather hit the country in January and likely held down homebuilding.  Looking at the details, the drop in starts was broad-based, with both single-family and multi-family declining, and three out of four regions contributing.  Compared to a year ago, housing starts are down 0.7%, while permits for new builds are down 1.7%.  Both starts and permits sit at roughly the same levels as 2019, not a good sign for potential homebuyers.  It appears that part of the reason why homebuilding has lagged of late is due to builders focusing on completing projects.  Home completions rose 7.6% for the month (up 9.8% in the past year) and were at a faster pace in January than any month from 2021-2023.  With strong completion activity and tepid growth in starts, the total number of homes under construction continues to fall, down 15.6% in the past year.  That type of decline is usually associated with a housing bust or recession, but we don’t see it happening.  Homebuilding has run well below the 1.5 million-plus pace we believe is needed to keep up with population growth and scrappage (due to both voluntary knockdowns as well as disasters like fires, floods, hurricanes, and tornados.)  And with the brief exception of COVID, the US has consistently built too few homes almost every year since 2007.  As a result of the shortage of homes, we think housing is far from a bubble, and expect housing prices to continue higher in 2025 in spite of some general broader economic headwinds.  In other words, look for modest improvement in housing in the year ahead even as the rest of the US economy slows down.  In other recent housing news, the NAHB Housing Index (a measure of homebuilder sentiment) dropped to 42 in February from 47 in January.  Keep in mind that a reading below 50 signals a greater number of builders view conditions as poor versus good.  On the manufacturing front, the Empire State Index, which measures manufacturing sentiment in the New York region, increased to 5.7 in February from -12.6 in January.

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The Framers of the Constitution designed our government to be small.  Not so small and weak as the one under the Articles of Confederation, which the Constitution replaced, but small nonetheless.  So small that as of 1928, 150 years after the American Revolution and just before the Great Depression, federal spending was only 3% of GDP.

In time, the legal barriers to a much larger peacetime government were removed piece by piece.  In 1883 the government created a civil service system for federal workers designed to limit patronage and corruption.  At the time, it seemed like an innocent step, not intended to grow the government.  After all, except during wartime, the government had stayed small, and civilian government workers had little incentive (or much leverage) to use it toward any particular political ends.

Then came FDR and the New Deal starting in 1933, which broke through limits on peacetime federal power.  FDR set up permanent entitlements and regulatory agencies which were run by a sprawling administrative state.  Slowly, but surely, rules (and penalties to enforce them) expanded to the point that unelected government workers were effectively “making law” outside the scope of the Constitution.

Then in 1974 Congress passed a law to strip the president of the power of “impoundment.”  Prior to that, presidents dating back to Thomas Jefferson had often used the impoundment power, in which they recognized the legislative “power of the purse” as the right of Congress to hand the president a purse full of money, not the ability to force the president to spend every dollar in that purse.

Next, in the 1980s, the Supreme Court decided in the Chevron case that federal bureaucratic rule-makers could legally interpret for themselves how to enforce often lazily written laws passed by Congress.  Put it all together and we had all the ingredients necessary for a massive central government that voters had little ability to limit…until recently.

Last year the Supreme Court decided the Loper Bright case, stripping regulators of the ability to decide on their own whether Congress had authorized new rules.  Now, people can fight back in court more easily.

And now the Trump Administration is exercising presidential power to the max to both limit government spending and re-assert the president’s power over the executive branch of government, including over civil service personnel.

This is important because in the 140+ years since the civil service system was created government workers have gone from largely disinterested observers of a very small government to an extremely well-funded, unionized bureaucracy that believed in the power and righteousness of big government.  Apparently, as DOGE has found, this included doling out massive subsidies to their friends in the “non-profit” sector.

What many have forgotten is that the Executive Branch of the government exists because of Article II of the Constitution, which vests executive power in the president.  Yes, some of the spending Trump is cutting has been authorized by Congress.  But if the president is to have dominion over the executive branch, a dominion he can only fully exercise if he controls who works in the executive branch, can’t he eliminate the positions needed to spend that money?  Or can Congress or unelected judges force him to spend it by essentially commandeering executive power?

Yes, we get it: if Congress passed a law last year saying money should be spent this year, then it sounds strange that a new president can just cancel that spending.  But part of the reason it sounds weird is because we haven’t had a president in fifty-plus years willing to fully test the limits of his constitutional authority, including impoundment. 

We are sure some legal “experts” will claim that if Trump wants to cut spending then he has to wait and negotiate with Congress on next year’s spending bills, otherwise, he’s “breaking the law.”  But there’s a huge difference between a president trying to spend money not authorized by Congress and a president trying to exercise his full authority to not spend money.  It takes two to tango, and it’s entirely plausible the Framers would have been OK without spending unless there’s a law passed to do so plus a willing president in the Oval Office at the time an actual expenditure is made.

Put it altogether and we may be at a watershed moment that rivals the New Deal as the most important since the Civil War in terms of the what the US government looks like over the next few generations.  Investors should watch carefully and there is no telling exactly how it will turn out.

Brian S. Wesbury – Chief Economist

Robert Stein, CFA – Deputy Chief Economist

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Implications:  Industrial production continued to rebound at a faster than expected pace in January, though not as strong as December’s broad-based “Trump Bump” in activity.  It’s true that businesses can now look forward to an easier regulatory environment in the next four years, as well as lower tax rates on profits.  However, manufacturers will now also have to contend with uncertainty surrounding tariffs (whether they are actually put in place or not), and the resulting changes in supply chains.  For example, overall manufacturing output fell 0.1% in January, which was entirely due to the auto sector, where activity dropped 5.1%.  Given the amount of activity that happens in the auto industry across the US southern border, trade negotiations with Mexico will exacerbate volatility in this sector.  Meanwhile, non-auto manufacturing (which we think of as a “core” version of industrial production) increased a healthy 0.3% in January.  Part of this was likely catchup activity as the Boeing machinists got back to work following a recent strike resolution, with aerospace parts and equipment production jumping 6.0%.  Another notable gain in this “core” measure came from the production in high-tech equipment which rose 0.1% in December, likely the result of investment in AI as well as the reshoring of semiconductor production.  High-tech manufacturing is up 6.2% in the past year.  The utilities sector (which is volatile and largely dependent on weather) was also a huge source of strength in January, jumping 7.2% to an all-time record high as colder than normal temperatures boosted demand for home heating.  Finally, the mining sector posted a decline of 1.2% in January.  A slower pace of oil and gas production, metal and mineral extraction, and drilling for new wells all contributed.  Look for an upward trend in activity in that sector in 2025 as the incoming Trump Administration takes a more aggressive stance with permitting.

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Implications:  US consumers pulled back sharply in the first month of the year, with sales declining by the most in nearly two years. It’s possible bad weather and wildfires had something to do with it, but the details of the report were ugly.  The 0.9% decline in January (-0.7% when factoring in revisions to previous months) was broad-based, with nine out of thirteen categories showing declines, led by a 2.8% pullback in auto sales, which had been running hot of late (up 8.3% in 2024, the biggest increase since 2021).  We like to follow “core” sales, which strips out the often-volatile categories for autos, building materials, and gas.  That measure declined 0.5% in January, the largest drop since March 2023.  Within core sales, nonstore retailers (internet and mail-order) were responsible for most of the decline, falling 1.9%. The good news is that sales at restaurant and bars rose a solid 0.9% in January.  We watch this category closely since it is the only glimpse we get at services in the retail sales report, which suffered heavily during the COVID years but have since returned to the forefront for the US consumer.  As a whole, retail sales are up 4.2% on a year-to-year basis.  “Real” inflation-adjusted retail sales are up 1.2% in the past year but still down from the peak in early 2021.  This highlights the ugly ramifications of inflation: consumers are paying higher prices today but taking home fewer goods than they were more than three years ago.  And while the Fed has cut interest rates a total of 100bps since September, it is not at all clear that inflation problems are behind us.  We hope they have the resolve to stomp out the embers of inflation even if economic troubles come.  In other news this morning, import prices rose 0.3% in January while export prices jumped 1.3%.  In the past year, import prices are up 1.9% while export prices are up 2.7%.

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Last week, the Bureau of Labor Statistics (BLS) released the final benchmark revision of payrolls for the year ending in March 2024 which showed a downward adjustment of 589,000 jobs. In this week’s “Three on Thursday,” we explore what happened and its implications for jobs. Every August, the BLS publishes a preliminary set of revisions to payroll growth, with the final revision in February. Curious about the results?

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Implications:   The embers of inflation continue to glow, and in January they burned hotter.  Don’t expect another rate cut from the Federal Reserve anytime soon.  Consumer prices jumped 0.5% for the month (+5.7% annualized) and came in well above consensus expectations, with the twelve-month reading at 3.0%, barely below the 3.1% inflation in the year ending January 2024.  Looking at the details, the pick-up in inflation was broad-based, with energy rising 1.1% and food up 0.4%.  But it’s important to note that these two often-volatile categories have not been what’s kept inflation from returning back to the Fed’s 2.0% target.  “Core” prices, which strip out food and energy, rose 0.4% in January (also above consensuses expectations) with the twelve-month reading increasing to 3.3%, which is above headline inflation.  Yes, the main driver of core inflation has been housing rents, which continue to run hot (+0.3% in January), though not as rapidly as in the years prior.  Some analysts – including those at the Fed – have argued that housing rents have artificially boosted inflation due to the way it’s measured.  But a subset category of prices that Fed Chair Jerome Powell said back in November 2022, “may be the most important category for understanding the future evolution of core inflation” – known as the “Supercore” (which excludes food, energy, other goods, and housing rents) – surged 0.8% in January, the fastest monthly increase in a year.  The increase was led by higher prices for used vehicles (2.2%), motor vehicle insurance (+2.0%), and hotels (+1.7%).  If the Fed still looks at this measure (they never seem to mention it anymore) then they would not be happy to see these prices up 4.1% in the last year.  No matter which way you cut it, inflation is still running above the Fed’s 2.0% target, and it is no longer improving.  And yet, the Fed has cut rates a total of 100bps since September.  Moving forward, we expect the Fed to remain on hold until inflation renews its long and winding march toward 2.0%, or the economy slows substantially.

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The federal government gets a great deal of grief when it issues economic reports and it’s not hard to see why.  The last several years include lots of reasons for skepticism about the “experts,” with many of them related to COVID – “fifteen days to slow the spread,” six-feet distance rules that turned out to have no scientific basis, school lockdowns, dying from COVID versus dying with COVID...etc. – the list goes on and on.

Add to that experts vouching for Trump-Russia Collusion in 2016-17 and then casting doubt about Hunter Biden’s laptop in 2020 and we can see why many investors have become skeptical about everything the federal government says, including the monthly reports on the economy, like the jobs report that comes out early every month.

We think skepticism is warranted, too, but also think that sometimes the government gets a little too much grief.  The US economy is massive with lots of moving parts; trying to keep track of it is an enormous undertaking and in most cases the mid-level government workers charged with the employment report, for example, are doing the best they can with the tools they have available.

Case in point: Friday’s jobs report showing nonfarm payrolls up 143,000 in January, upward revisions of 100,000 for November and December, but a downward revision of 589,000 for March 2024, almost a year ago.  Some observers focused on that last part, the downward revision that seemed to swamp those other upward moves.

Obviously, that big downward revision is important.  But let’s put it in context.  Back in August the Labor Department reported that based on data from unemployment claims it expected to revise March 2024 payrolls downward by 818,000.  At that point many said this proves that the Labor Department had been putting its thumb on the scale to help the Biden Administration say the economy was better off than it actually was.

But if the Labor Department were really trying to help the incumbents, why wouldn’t it just say back in August that it doesn’t expect any significant downward revisions and then wait until February to announce the final and large downward revision, well after the election?  Why would they publish an ‘estimated’ downward revision of 818,000 in August and then get to a much smaller actual revision of 589,000 this past week?  A conspiracy here just doesn’t make sense.  It's also important to recognize that even with that 589,000 revision, job creation was a still solid 2.3 million in the year ending March 2024 versus a prior estimate of 2.9 million.

However, Friday’s report also included a massive upward revision to civilian employment and the labor force.  Was this because of some sort of sudden economic surge?  Of course not; it was because the Labor Department finally got numbers from the Census Bureau recognizing some of the massive surge in immigration of the past several years.  The revisions increased the size of the adult civilian population (outside institutions) by 2.9 million, with 2.0 million of them working.

If you are looking for a conspiracy, maybe this was it.  Did the Census Bureau ignore the magnitude of immigration flows until after the recent election, which would help explain why civilian employment lagged payroll growth by 4.7 million in the four years ending in December?  In other words, maybe politics did play a role.

Today, the labor market is in a pretty good place.  Stay skeptical, but apply that skepticism as much to conspiracy theories as you do to the actual reports.

Brian S. Wesbury – Chief Economist

Robert Stein, CFA – Deputy Chief Economist

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Implications:  The job market continued to expand at a moderate pace in January, but there were major revisions to prior reports that have a heavy influence on how to see the economy, both to the upside and the down.  Nonfarm payrolls rose a moderate 143,000 in January, lagging consensus expectations.  However, revisions for November/December added 100,000, bringing the net gain to a robust 243,000.  We 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 (that includes COVID lockdowns and re-openings for leisure & hospitality).  This “core” measure of jobs rose 53,000 in January, besting the 30,000 monthly average in the past year.  The problem is that every year in early February the Labor Department calculates new payroll numbers for the prior year through March and these figures show a 589,000 downward revision for payrolls in March 2024, which means payrolls grew only about 2.4 million in the year ending March 2024 versus a previous estimate of 2.9 million.  The other big revision was in the household survey, where the government finally started revising up data based on the massive flow of immigration in the past several years.   The civilian noninstitutional population was revised up by 2.9 million, 2.1 million of whom were in the labor force (working or looking for work) and 2.0 million of whom were employed.  So, while the household survey shows a gain of 2.2 million in employment in January, 2.0 million of that is just due to a new larger estimate of the US population.  The worst news in the report was that total hours worked declined 0.2% in January after declining in December, as well.  The best news for workers was that average hourly earnings increased 0.5% in January and are up 4.1% from a year ago, outpacing inflation.  The problem is that the Federal Reserve likely wants to see slower growth in wages to be confident about reaching its inflation goal of 2.0%.  In turn, that means no rate cuts for at least the next couple of meetings.  In other recent news on the job market, unemployment claims rose 11,000 last week to 219,000; continuing claims increased 36,000 to 1.886 million.  These figures are consistent with continued job growth in February.  In other news, productivity (output per hour) rose at a 1.2% annual rate in Q4, capping a year with moderate 1.6% productivity growth.

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In this week’s edition of “Three on Thursday”, we take a look into the energy relationship between Canada and the United States. A common belief is that because the U.S. now produces more energy than it consumes—becoming a net exporter—it should no longer be reliant on imports from countries like Canada. But is that really the case? 

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