Implications:  Overall retail sales declined in January as severe winter weather that swept across much of the country disrupted consumer activity during the month. Looking at the headline, the -0.2% decline was slightly better than the consensus estimate of -0.3%, with seven out of the thirteen major service industries moving lower in the month.  Looking at the details, the largest decline came from a 3.0% drop at health & personal care stores – the biggest decline for the category since the COVID lockdown. Falling sales at gasoline stations (-2.9%) and autos (-0.9%) also contributed.  The good news is that “core” sales, which strip out the volatile categories for autos, building materials, and gas stations – important for estimating GDP – rose 0.2% in January and was revised slightly higher in previous months.  The effects of cold weather were most evident among brick-and-mortar retailers; along with the drop at health care and personal stores, sales also fell sharply at clothing stores (-1.7%) and sporting goods stores (-1.2%).  Meanwhile, the category for restaurants & bars – the only glimpse we get at services in this report – slipped 0.2% in January, the third decline in the last four months.  These sales are up 3.9% in the last year (above the increase for overall sales) and will be worth watching in the months ahead as a bellwether for the consumer's overall well-being.  Another category we are closely monitoring is non-store retailers (think internet and mail-order), which naturally benefitted from consumers stuck at home during the month.  This category increased 1.9% in January and is up 10.9% in the past year, the highest of any major category.  Finally, it’s important to remember the impact inflation has on retail sales.  Overall sales have risen 3.2% in the past twelve months, but “real” inflation-adjusted sales were up only 0.7% during that timeframe and still below the peak in early 2022.  In other words, no growth in nearly four years. While some of the weakness in this month’s report may reverse in the months ahead, the broader trend remains soft.  In other recent news, import prices rose 0.2% in January while export prices rose 0.6%.  In the past year, import prices are down 0.1%, while export prices have risen 2.6%.

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Implications: The job market was weak in February but not a reason to panic.  Nonfarm payrolls fell 92,000 for the month, coming in well below consensus, and when including downward revisions to prior months the net decline was 161,000.  The private sector, which has been stronger than headline payrolls, posted a decline of 86,000 driven by leisure and hospitality, healthcare, and education. Meanwhile civilian employment, an alternative measure of jobs that includes small-business start-ups, also posted a decline of 185,000. But while the February report was undoubtedly soft, we don’t think it signals a recession.  First, a huge winter storm hit half the country last month.  Second, a nursing strike hit health care jobs, which declined 28,000 in February. Both of these factors should reverse next month. Third, now that we have revisions to jobs data, we know that private payrolls declined in four separate months last year even as real GDP rose 2.2% and avoided recession. In that context, today’s headline losses look a lot less worrying for the broader economy. Also, given the large gains in jobs in January, it makes more sense to look at today’s data in combination to cut through the volatility. That shows an average gain in private sector payrolls of 30,000 per month, by no means a booming economy, but probably consistent with slower trend growth following massive shifts in immigration policy that have significantly reduced labor supply. Given the data on Q4 productivity that was released yesterday showing an increase of 2.8% in the past year, real GDP can continue to grow even with the slowing labor market. Those productivity gains have also sustained healthy gains in pay, with average hourly earnings going up 0.4% in February and 3.8% in the past year.  That said, total hours worked remained unchanged in February and are up a weaker 0.6% in the past year.  As a result, total earnings rose 4.4% in the past year despite the broader weakening in the labor market. One last thing to keep in mind is that federal payrolls, excluding the Post Office and Census, are down 322,100 since the Trump Administration took office, the steepest drop in decades.  But even factoring that in suggests we should expect headline numbers on payroll growth to be slow in the months ahead. In other recent news, initial jobless claims remained unchanged last week at 213,000, while continuing claims rose 46,000 to 1.868 million.

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In this week’s “Three on Thursday,” we examine the current state of U.S. household indebtedness and financial health. Curious about the latest trends? Click the link below to get a clearer picture of where things stood in the fourth quarter.

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Implications:  The service sector had positive momentum in February, as the ISM Services index jumped to 56.1, beating even the most optimistic forecast from any economics group surveyed by Bloomberg. The February reading is the highest since July of 2022.  Looking at the details, fourteen out of the eighteen major service industries reported growth for the month, while three reported contraction, and one remained unchanged. The major measures of activity were mostly higher in February, with all standing above 50, signaling growth. The business activity index climbed for the fifth straight month to reach the highest level in almost two years at 59.9.  Meanwhile, the new orders index jumped to 58.6 from 53.1 in January, marking eleven out of the last twelve months the index has expanded. Survey comments point to a variety of headwinds and tailwinds facing service companies, which have been affected by unusually cold weather and the recent Supreme Court ruling on tariffs. However, even with the shake-up from the tariff ruling, uncertainty surrounding future trade policy is waning. Notably, a survey comment from the Agriculture industry wrote, “Our industry seems to have adapted to the tariffs. The costs are embedded into the import cost the company has to shoulder.” Given the stability, service companies have increased hiring for the third consecutive month, with the employment index rising to 51.8. However, breadth remains limited, as only seven industries reported an increase in employment versus five that reported a decline. The highest reading of any category was once again the prices index, which moved to 63.0.  Though the index remains elevated, it is still far from the worst we saw during the COVID supply-chain disruptions, when the index reached the low 80s.  We will continue to monitor the M2 money supply – which has grown very slowly over the last 3+ years – for whether these pressures turn inflationary.  In other news this morning, ADP’s measure of private payrolls increased 63,000 in February versus a consensus expected 50,000.  We’re estimating Friday’s official report will show a nonfarm payroll gain of 33,000 with the unemployment rate remaining steady at 4.3%. In other recent news, cars and light trucks were sold at a 15.8 million annual rate in February, up 6.1% from January and down 1.6% from a year ago.

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Implications: Activity in the manufacturing sector surprised to the upside for the second month in a row in February, while the price index signaled that inflation remains stubbornly high.  Although the ISM Manufacturing Index slipped to 52.4, this marks the first time the ISM Manufacturing Index has been in expansion territory for consecutive months since it briefly rose above 50 last January and February. While we remain cautious given last year’s head-fake, the recent strength is a welcome development for an industry that has faced an army of headwinds in recent years.  Looking at the details, growth broadened in February, with twelve out of the eighteen major manufacturing categories reporting growth (versus nine in January), while five reported contraction, and one reported no change.  The major measures of activity were mixed, as the categories for new orders and production retraced from January’s rapid pace, but remain in solid expansion territory at 55.8 and 53.5, respectively.  Notably, outside of January, this is the highest new orders reading in nearly four years.  It’s important to remember that order books were already weak heading into last year, and to keep production going, manufacturers had to rely on their order backlogs. The order backlog index was in contraction territory for thirty-nine consecutive months before moving into expansion territory last month, and the pace accelerated in February, with the index rising to 56.6. Despite signs of improving demand, it was not enough to meaningfully change hiring efforts.  The employment index rose to 48.8 in February – the highest level in a year – but remains below 50, signaling contraction, now for the 29th consecutive month.  The bad news in the report was a renewed pickup in pricing pressures, with the prices index jumping to 70.5 in February from 59.0 in January. With the recent Supreme Court ruling against much of the Trump’s Administration tariffs, along with the rise in oil prices following the U.S. and Israel strike on Iran, we expect volatility to continue for this category in the months ahead.  In other news this morning, construction spending rose 0.3% in December, as increases in homebuilding and power projects fully offset declines across most other categories.

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As we all know, the US and Israeli militaries attacked Iran.  The old Ayatollah and his successor are dead, along with much of the rest of Iran’s political and military leadership.  How should investors respond?

First, in overnight trading oil prices were up over 8%.  US stock price indices are also down. And in a flight to safety, 10-year Treasury bond yields fell under 4%.  When the US invaded Iraq in March 2003, the stock market rose sharply and nearly doubled between then and the peak in 2007.

But that stock market was undervalued after the dot.com crash of 2000-2003.  Today, the market is over-valued.  History may rhyme, but it doesn’t repeat.  War is uncertain, and while the US and Israel are dominating, investors would be foolish to assume they know every twist and turn to come.  Even here at home, where threats exist.

So we would like to turn our attention to what seems like a seismic shift in the direction of threats to Western Civilization.  Not long ago, during COVID, Klaus Schwab and the World Economic Forum published a book titled “COVID-19: The Great Reset.”  Politicians around the world, including Boris Johnson, Angela Merkel, Joe Biden, Kamala Harris, and others talked about “Building Back Better,” which was a euphemism for The Great Reset.  The platform included Green Energy and the Paris Agreement, Open Borders, Global Taxes, International Cooperation, and Sustainable Development.  While a generalization…it seems clear the supporters of Build Back Better wanted even more government spending and more bureaucratic control.

Over recent decades, bureaucracies (the EU, UN, NATO, WHO, the US administrative state) have all increased control over free markets because they believe capitalism hurts the environment and creates inequality.  Second, China, Russia, Iran, and North Korea have actively attempted to undermine the US and its capitalist system.  And third, cartels and gangs have proliferated, some fielding armies.

In other words, there are three sets of institutions or groups trying to reset the world and put roadblocks in the way of capitalism.  They want a Great Reset that gives them more power.

But the US, in its 250th year, seems to be reaching back to its roots.  The US is saying “no” to bureaucrats and corruption in international organizations, and “no” to terrorism and cartels who are willing to use violence (like the mafia) to get their way.  

Back in 1908, we founded the Bureau of Investigation (BOI), the precursor to the FBI, to fight corruption in government and then shifted to fighting gangsters and the mafia.  Similarly, recent actions are designed to fight the enemies of freedom today.  If there is a common theme running though the actions of the US in the past year, it is fighting back against the institutions, governments, and entities which want to undermine capitalism.  That would be a really Great Reset.

Brian S. Wesbury – Chief Economist

Robert Stein, CFA – Deputy Chief Economist

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Implications: The key to producer prices is to watch the trend, not one-off volatile readings. Producer prices started 2026 by rising 0.5% in January, despite falling prices from the typically volatile food and energy categories.  But even with the outsized monthly reading, producer prices moderated on a year-ago basis and are up 2.9% versus January 2025.  A look at the details shows the jump in January itself was concentrated and unlikely to sustain in the months ahead. Over twenty percent of the increase came from a rise in margins for machinery and equipment wholesaling, which rose 14.4%. As a result, prices for the broader services category rose 0.8% in January and are up 3.4% in the past year.  Many likely assumed it would be goods prices that would be leading inflation higher, given the higher tariff rates implemented under President Trump, but goods prices declined 0.3% in January (this was before the Supreme Court ruling that moved tariff rates) and are up a modest 1.6% in the past year.  It must be noted the January goods reading was muted by the abovementioned declining prices for energy (-2.7%) and food (-1.5%).  “Core” producer prices – which excludes those typically volatile categories — rose 0.8% in January, tied for the largest month increase since mid-2022.  We don’t expect the wholesale margins that pushed January producer prices higher will continue in the months ahead.  Again, watch the trend, not one-off readings. Sustained movements in overall inflation are led by the money supply, which rose 0.3% in January, is up 4.3% in the past year (historically, M2 growth has averaged around 6% per year).  Volatility may continue month-to-month, but we expect this monetary tightness will keep inflation relatively subdued, leaving room for rate cuts to restart at some point later in 2026.  In other recent news, initial jobless claims rose 4,000 last week to 212,000, while continuing claims declined 31,000 to 1.833 million.  This is consistent with modest job growth in February.  On the housing front, the FHFA index rose 0.1% in December and is up 1.8% in the past year, while the national Case-Shiller index rose 0.4% in December and is up 1.3% from a year ago.  Expect only modest gains in home prices to continue given a deceleration in rents, which means potential homebuyers have less motivation to buy.  On the manufacturing front, the Richmond Fed index, a measure of mid-Atlantic factory activity, fell to -10 in February from -6 in January, while the Kansas City Fed Manufacturing Index rose to 5 in February from a reading of 0 in January. 

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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. Within hours, the President issued an Executive Order rescinding the IEEPA tariff orders, directed that collections cease as soon as practicable, and threatened a new 15% across-the-board tariff on all countries. Both actions took effect Tuesday, but the new Section 122 tariff was implemented at 10% instead of 15%. In this week’s “Three on Thursday,” we examine what this legal shift means for tariffs moving forward as well as possible refunds. Click the link below for more insight.

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The Trump Tariffs are dead, long live the Trump Tariffs!

As we expected, the Supreme Court struck down most of the new tariffs President Trump had imposed since taking office thirteen months ago.  While Congress gave the President “emergency” powers to regulate trade in a 1977 law, the Court, in a 6-3 ruling said that law does not expressly include tariffs.  As a result, many Trump tariffs exceeded the powers Congress delegated to the president.

The tariffs struck down include extra tariffs on China, Canada, and Mexico based on illegal immigration and drug trafficking, “liberation day” tariffs intended to address trade deficits, as well as additional duties on Brazil and India, based on the way the former country handled the prosecution of its former president and the latter’s handling of Russian oil.

However, other Trump tariffs remain in place.  These include those on steel and aluminum as well as tariffs on China that date back to the first Trump Administration.  In addition, there are other legal avenues for President Trump to use to impose tariffs.  Justice Kavanaugh went so far as to spell those out in his dissent.  And the president announced a new 10%+ tariff (over the weekend, he said he would raise this to 15%) on the rest of the world using those other legal avenues.

In other words, Trump’s tariffs are going to change and evolve but aren’t going away.  As a result, the reaction in markets on Friday (stocks up, bond yields down) is likely to reverse once the smoke clears.

Some are claiming the Court decision will mean lower inflation, but if tariffs remain, that argument falls apart.  More importantly, that argument is flawed economically.  Inflation is a monetary phenomenon.  Higher tariffs meant consumers had to spend more on tariffed goods, but that meant less money left over for other goods and services.  Inflation is caused by too much money supply chasing too few goods and money supply growth has been slow.

And lost in the noise is some good news for those who want a smaller, less intrusive government.  The court ruling may have been a bitter pill for the Trump Administration to swallow, but over time the reasoning used to strike down the tariffs will make it tougher to expand the power of the federal government.  For example, if a future president wanted to use “emergency” tariffs to punish countries that don’t limit carbon emissions or countries that strictly limit immigration, then those tariffs wouldn’t be legal, either.

Higher tariffs are also likely to outlast this presidency.  If a Republican is elected in 2028, it’s doubtful that new administration would make a major break from Trump on trade policy or lose the revenue generated by tariffs.

Another possibility is a Democrat wins the presidency in 2028, but the GOP maintains control of the U.S. Senate.  If so, it’s very unlikely that president would have enough Senate votes to raise income taxes or taxes on corporate profits.  In turn, that means keeping tariffs to help finance spending increases without a huge expansion in the budget deficit.  Yes, deficit spending has grown wildly in the past, like during the Global Financial Crisis and COVID – but that was when the interest cost of the debt was about 1.5% of GDP, not 3.0%+ like it is now.            

If we get a Democratic Sweep in 2028 – President, Senate, and House – then lower tariffs are possible.  But would you want to be the president who cuts tariffs on China only to have them invade Taiwan six or nine months later?  We think geopolitical issues will limit cuts in some tariffs in the years ahead.  

The big issue remaining to be decided is whether the tariffs struck down by the Court will be refunded.  The Supreme Court punted that issue back to the lower court.  For all we know, that lower court may decide a refund would be a windfall gain for some businesses because it was their customers who truly paid the extra cost and those customers will not get the refund money.  Or the court could decide refunds are due but it could take years for the refunds to actually happen.  

In the meantime, while the Trump tariffs seemingly died, they are not gone for good.  And while many may hate the tariffs for all kinds of philosophical and economic reasons, the economy continues to grow with relatively low inflation.

Brian S. Wesbury – Chief Economist

Robert Stein, CFA – Deputy Chief Economist

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Implications: We got another double dose of monthly data this morning as Federal agencies continue to catch up on the backlog from the government shutdown, and new home sales continue to show signs of life. While December showed a small decline in sales, that came on the heels of the largest monthly gain since 2022 in November. Looking at the big picture, buyers purchased 745,000 homes at an annual rate in December, and sales are up 3.8% in the past year. While the December pace remains below the highs of the pandemic, sales are at roughly the fastest pace since 2022 and above pre-pandemic levels which had been a ceiling of sorts for activity the past couple of years.  Although the housing market continues to face challenges, there are reasons for modest optimism. First, financing costs have been trending lower, with the average 30-yr fixed mortgage rate now around 6.2%. Notably, that is the lowest since 2022, and buyers have reasons for further optimism on financing costs. Several more rate cuts are expected from the Federal Reserve in 2026, the Trump Administration recently nominated a new Fed chair who is likely to be even more accommodative, and there is talk of Fannie and Freddie purchasing more mortgages as well. Meanwhile, prices have been trending lower for new builds in the past several years. Median sales prices are down 10% from the peak in October 2022.  The Census Bureau reports that from Q3 2022 to Q3 2025 (the most recent data available) the median square footage for new single-family homes built fell 6.3%. So, while part of the drop in median prices is due to smaller/lower-cost homes, there has also been a drop in the price per square foot.  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. It looks like a combination of lower mortgage rates, less expensive options, and an abundance of inventories may give home sales a boost. On the housing front, pending home sales, which are contracts on existing homes, declined 0.8% in January after falling 7.4% in December, signaling that existing home sales (counted at closing) likely declined in February.

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