Implications: Industrial production started 2026 on a healthy note, posting the largest monthly gain in nearly a year and beating consensus expectations. More broadly, industrial production is up 2.2% in the past year despite huge shifts in trade policy and tariff uncertainty that coincided with the Trump Administration taking office. Meanwhile, the manufacturing sector is up an even stronger 2.5% in the past year. While these numbers may seem modest, they represent the fastest 12-month growth rates for those series since 2022 during the COVID reopening. Digging into the details for January, manufacturing was the biggest source of strength, rising 0.6%. The volatile auto sector contributed to the gain, with activity jumping 1.4% in January.  Manufacturing ex-autos (which we think of as a “core” version of industrial production) also posted a gain of 0.5%. 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 1.9% in January.  High-tech manufacturing is up a strong 8.9% in the past year and has typically posted the fastest 12-month growth rate of any category. However, the manufacturing of business equipment overtook it in January, up 9.4% in the past year, signaling reindustrialization in the US outside of just the high-tech industries mentioned above. Utilities output (which is volatile and largely dependent on weather), was also a tailwind in January, rising 2.1%. Finally, the mining sector was a minor drag on growth in January, declining 0.2%. Declines in oil and gas production and the drilling of new wells more than offset a gain in the extraction of other metals and minerals.  In other recent manufacturing news, the Empire State Index – a measure of factory sentiment in the New York region – declined slightly to +7.1 in February from +7.7 in January.

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Implications:  Homebuilding finished 2025 on a positive note, with starts hitting a five-month high and rising 6.2% to a 1.404 million annual rate, beating even the most optimistic forecast for any Economics group surveyed by Bloomberg.  Despite the jump, starts remain 7.3% lower than a year ago, which is not surprising given the number of headwinds builders face, including the largest completed single-family home inventory since 2009, high home prices, restrictive local building regulations, stricter immigration enforcement that makes it difficult to find or replace workers, and the impact of tariffs on building costs.  All of this has translated into building rates reminiscent of 2020 – no growth in five years.  Digging into the details of the report, both single-family and multi-unit starts contributed to the increase in December itself.  Single-family starts rose 4.1% but remain 9.0% lower than a year ago. Multi-unit starts jumped 11.3% in December but are down 3.0% from a year ago.  Building permits rose 4.3% to a nine-month high in December, but that was completely due to a 15.2% jump from the volatile multi-unit category.  Single-family permits declined 1.7% and remain 10.9% lower than a year ago.  One way homebuilders had been combatting sluggish activity was by focusing their efforts on completing projects.  New home completions were red hot in 2024 but slowed in 2025.  Completions rose 2.3% in December itself to a 1.525 million annual rate but are down 0.1% in the past year.  Despite the slower trend, completions outpaced starts and permits in ten out of the twelve months in 2025.  With strong completion activity and tepid growth in starts, the total number of homes under construction has fallen 10.5% in the last twelve months.  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. The encouraging news is that affordability has shown some signs of improvement, with the average 30-year fixed mortgage rate falling to 6.25% in December, the lowest level since August 2022.  However, affordability remains a major challenge for millions of would-be homebuyers as rates are still roughly double what they were for much of 2021.  Putting this altogether, it’s no wonder why the NAHB index, a measure of homebuilding sentiment, remains muted, slipping to 36 in February.  Keep in mind a reading below 50 signals a greater number of builders view conditions as poor versus good, now the 22nd consecutive month that has been the case.  

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Implications:  New orders for durable goods closed out a volatile 2025 by falling for the second time in the past three months. That said, the details of today’s report were much better than the headline. The decline in new orders was driven by a 24.9% drop in commercial aircraft orders, following a 98.2% increase in November.  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 climb, rising 0.9% in December and finishing the year with the ninth consecutive monthly gain. All major categories outside transportation rose in December, led by computers and electronic products (+3.0%), primary metals (+1.7%), and fabricated metal products (+0.9%). Note that both computers and electronic products and machinery had strong growth in 2025, with each rising in at least ten months of the year. Particularly, machinery is up at a 11.2% annualized rate in the past six months.  These elevated new orders should translate 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 0.9% in December and were up at an 8.2% annualized rate in Q4 versus the Q3 average. Core shipments consistently rose in the back half of 2025, which could be evidence of Trump Administration’s push for manufacturing reshoring beginning to take hold.  However, for the Administration’s goals to fully materialize, it will have to translate into a much-needed resurgence in payrolls in that sector in the year ahead.

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If you’re grading the economy based on real GDP, it looks pretty good; if grading based on jobs, not so much.

As we explain below, it looks like the economy grew at a 3.2% annual rate in the fourth quarter, which would be the third straight quarter of 3.0%+ after the Q1 slump related to importers front-running the Trump tariffs.  It would also mean the economy grew 2.7% in 2025, a slight acceleration from 2.4% in 2024.

And yet job growth has sputtered.  Private payrolls rose 172,000 in January, the most in more than a year.  But the Labor Department also reported that including an annual “benchmark revision,” which factors in data on jobless claims, as well as updating a “birth/death” model tracking new businesses and ones that have closed, private jobs only grew 367,000 in 2025, slower than the 1.021 million in 2024.  Excluding health care and social assistance, payrolls declined last year.

One reason for the disparity is productivity, which appears to be picking up.  Another is the strict enforcement of immigration laws.  The US has gone from net immigration flows of 2.7 million per year to something much closer to zero.  Mathematically, if output grows faster than employment, productivity is rising, possibly because of AI.  However, we doubt real GDP will continue growing at 3.0%+ and expect slower growth for Q1.  It’s much too early to declare the start of a new technology-driven boom.   

Consumption: Auto sales dropped at an 18.6% annual rate in Q4 after the end of subsidies for EVs.  “Real” (inflation-adjusted) retail sales excluding autos rose at a 0.4% rate and real service spending appears up at a 3.0% pace.  Combined, this brings our estimate of real consumer spending to a 2.4% rate, adding 1.6 points to the real GDP growth rate (2.4 times the consumption share of GDP, which is 68%, equals 1.6).

Business Investment: We estimate a 3.1% growth rate for business investment, with gains in equipment and intellectual property leading the way.  A 3.1% growth rate would add 0.4 points to real GDP growth.  (3.1 times the 14% business investment share of GDP equals 0.4).

Home Building: Residential construction appears to have declined at about a 10.0% rate in the fourth quarter, possibly reflecting a lack of workers to build homes while strict immigration enforcement makes more units available for rent.  A 10.0% annualized drop would be a 0.4 point drag on real GDP growth.  (-10.0 times the 4% residential construction share of GDP equals -0.4).

Government: The Trump Administration has cut federal payrolls faster than at any time in many decades, but only direct government purchases (not government salaries or transfer payments) count when calculating GDP.  We estimate these purchases were up at a 1.8% rate in Q4, which would add 0.3 points to the GDP growth rate (1.8 times the 17% government purchase share of GDP equals 0.3).

Trade: It looks like the trade deficit shrank for the third straight quarter after the temporary surge in Q1.  This forecast may change when the trade report arrives Wednesday morning, but for now we’re projecting net exports will increase the Q4 real GDP growth rate by 0.8 percentage points.

Inventories: After a decline in Q3, it looks like businesses restocked shelves and showrooms in Q4, boosting inventories and generating what we are estimating as a 0.5 percentage point boost to real GDP growth.

Add it all up, and we get a 3.2% annual real GDP growth rate for the fourth quarter.  Good news, but we don’t expect growth as strong in Q1 or for 2026 as a whole.

Brian S. Wesbury – Chief Economist

Robert Stein, CFA – Deputy Chief Economist

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Implications:  Inflation came in below expectations in January, with the Consumer Price index rising 0.2% and the year-ago comparison cooling to 2.4%.  “Core” inflation, which strips out food and energy, rose a consensus-expected 0.3%, while the year-ago comparison moved lower to 2.5%. Many analysts – including those at the Federal Reserve – warned of a renewed inflation surge from tariffs in 2025.   But if you’ve been reading our content over the past year, then you would have known to look past the tariffs and instead focus on the M2 measure of the money supply for understanding where inflation would go.  Tariffs 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 3+ years – we were not surprised to see inflation continue its bumpy path downward in 2025.  Now, both headline and core inflation sit at or near their lowest twelve-month pace since the great inflation scare began nearly five years ago.  While progress has been made, inflation still remains above the Federal Reserve’s 2.0% target.  Looking at the details, headline inflation was held down by the volatile energy category in January, with prices dropping 1.5%, while its often-volatile counterpart, food prices, rose 0.2%.  Housing rents (those for actual tenants as well as the imputed rental value of owner-occupied homes) was the main driver of core inflation for the month and has been over the last few years.  The good news is that the category finally appears to be turning over, with rents rising only 0.2% and up at a 2.4% annualized rate over the last five months, lagging core inflation.  Meanwhile, airline prices continue to move in large swings, rising 6.5% in January after a 3.8% increase in December.  Putting it altogether, this report should provide further evidence to the Fed that inflation is trending down to its 2.0% target. There is a high chance that nothing happens on the rate front between now and the end of Powell’s term, but investors should watch for a substantive shift in tone come May when Kevin Warsh likely replaces him as Chairman.

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Every August or September, the BLS publishes a preliminary set of revisions to payroll growth for the prior year, with the final revision in February. Yesterday, the Bureau of Labor Statistics (BLS) released the final benchmark revision of payrolls for the year ending in March 2025 which showed a downward adjustment of 898,000 jobs. Curious about the details? Click the link below for more information.

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Implications: Existing home sales started off 2026 on a weak note, posting the largest monthly decline since 2022. But don’t get too worried about today’s headline, seasonal factors were likely to blame. It looks like winter storms in January temporarily delayed contract closings. Activity in the South (which is the largest sales region) fell 9.0% in January and was most affected by severe weather.  Look for a large rebound next month as the seasonal effects dissipate. That said, even after a rebound, sales will remain 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).  The good news is that affordability has been improving in several notable ways. First, 30-year mortgage rates have been trending lower since early 2025 and now sit around 6.3%, near the lowest rate since 2022. Buyers also have reasons for further optimism on financing costs. The Federal Reserve will continue to cut rates this year, the Trump Administration recently chose 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, the median price of an existing home is up only 0.9% 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. The biggest headwind continues to be inventories, where growth continues although at a slower pace than last year. This has led to a months’ supply of homes (how long it would take to sell existing inventory at the current very slow sales pace) of 3.7 in January, well below the benchmark of 5.0 that the National Association of Realtors uses to denote a normal market.  Many existing homeowners also remain reluctant to sell due to a “mortgage lock-in” phenomenon, after buying or refinancing at much lower rates before 2022.  This means potential buyers will have to continue to deal with limited options.  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. In other news this morning, initial jobless claims declined 5,000 last week to 227,000. Meanwhile continuing claims rose 21,000 to 1.862 million.

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Implications:  Good news for January, bad news for last year.  Nonfarm payrolls rose 130,000 in January, beating the consensus expected 65,000.  Even better, private payrolls increased 172,000 as overall government jobs declined 42,000 with a 34,000 loss at the federal level.  Over time, we think the decline in government will lead to more private sector jobs than would otherwise be the case.  Excluding government as well as health care & social assistance, payrolls rose 49,000 in January, better than any month in 2025.  Backing the positive news on payrolls, civilian employment, an alternative measure of jobs that includes small-business start-ups, increased 528,000 in January. This large increase, paired with a 387,000 gain in the labor force, pushed the unemployment rate down to 4.3% in January from 4.4% in December.  Meanwhile, average hourly earnings rose 0.4% in January as total hours worked in the private sector increased 0.4%.  As a result, total earnings increased 0.8%, tying or beating the best months in 2024-25.  So, what’s not to like about today’s report?  First, keep in mind that seasonal adjustment factors for January are normally very large (more than 2.5 million), so it remains to be seen if these factors, which are based on the past (including COVID), are accurate going forward.  Second, the Labor Department made substantial revisions to prior years, making 2024-2025 look not nearly as strong as previously estimated.  As part of an annual “benchmark revision” based on data on unemployment claims, nonfarm payroll growth was revised down by 898,000 in the year ending March 2025.  In addition, the Labor Department updated it’s “birth/death” model for businesses, which pushed down the estimate for job growth after March 2025.  As a result, it now says nonfarm payrolls only gained 181,000 last year versus a prior estimate of 584,000.  Keep in mind that federal payrolls, excluding the Post Office and Census, are down 312,000 from a year ago, the steepest drop in decades.  But even factoring that in suggests private payroll growth is trending well below 100,000 per month, much less the 172,000 in January.  Look for much slower headline numbers on payroll growth in the months ahead.

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Implications:  Retail sales were unexpectedly soft in December and the details of the report weren’t any better.  The headline shows overall retail sales were unchanged in December, but slipped 0.1% including revisions for prior months, lagging behind the consensus expected gain of 0.4%.  Sales were up 2.4% in 2025 but have slowed recently, up at a 1.5% annualized rate in the last three months.  Eight out of the thirteen major categories declined in December, led by a 0.2% drop for the volatile autos category.  The largest increase came from a 1.2% bump for building materials, matching its previous monthly gain.  We like to track “core” sales, which strip out the volatile categories for autos, building materials, and gas stations. 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.  That measure declined 0.1% in December and was down 0.4% after factoring in revisions.  Factoring in December, these sales were up at 2.6% annual rate in Q4 versus the Q3 average, consistent with solid overall economic growth in the fourth quarter.  Within the core grouping, sales at restaurants & bars – the only glimpse we get at services in the report, which make up the bulk of consumer spending – declined 0.1% in December.  Despite the decline, these sales were up 4.7% in 2025, more than the increase for overall sales.  We will continue to watch this category closely in the months ahead as a bellwether for the consumer's overall well-being.  Another category we are closely monitoring is nonstore retailers (think internet and mail-order), which eked out a 0.1% gain in December despite expected strength following a record breaking online holiday shopping season.  Keep in mind that seasonal adjustments play in factor in this – unadjusted sales at nonstore retailers rose 17.1% in December.  Finally, it’s important to remember the impact inflation has on retail sales.  Overall sales rose 2.4% in 2025, but “real” inflation-adjusted sales were down 0.2% in the year and still below the peak in early 2022.  No growth in almost four years.  In other news this morning, import prices rose 0.1% in December while export prices rose 0.3%.  In the past year, import prices are unchanged, while export prices have risen 3.1%.  In employment news last week, initial claims rose 22,000 from the week prior to 231,000, while continuing claims rose 25,000 to 1.844 million.

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A recent Census Bureau report shows population growth is slowing.  The U.S. population increased just 0.5% in the year ending July 1, 2025 versus 1.0% in the year ending July 1, 2024, which aligns with a sharp drop in net immigration so far in 2025.  We wondered which states attracted more of these immigrants.

In a recent Three on Thursday, we focused on domestic net migration between states, which you can find here and encourage you to sign up for here. That analysis showed Americans continue to move toward states with lower tax burdens and a lower cost of living.

However, immigrants into the U.S. follow a different pattern.  We examined where new immigrants are settling and compared those to SmileHub’s rankings of the “States Most Supportive of People in Poverty.” SmileHub ranks all 50 states from 1 (most supportive) to 50 (least supportive). 

The results show immigrants are disproportionately heading toward states that offer more generous support for people in poverty.  In the most recent year, the ten states with the highest net international migration (FL, WA, MA, NJ, RI, TX, NY, CT, VA, and NC) had an average poverty-support rank of 18 (higher than average).  By contrast, the ten states with the least international net migration (WV, WY, MT, VT, ID, WI, NM, NH, AL, and AR) provided less support and had an average SmileHub rank of 32.  Looking back to 2020 confirms the pattern. Since then, the top ten states for international net migration averaged a poverty-support rank of 14, while the bottom ten averaged 33.

However, Florida and Texas have higher immigration based on location, even though they rank low in terms of support for people in poverty; if we exclude them from the data, the other eight states had an average SmileHub rank of 11, which shows an even stronger link between support for people in poverty and immigration flows.

It's also important to recognize that the strong link between poverty-support and more immigrants doesn’t prove immigrants are seeking the largest handouts.  States with more support for people in poverty could have more problems coaxing low-skilled citizens into the labor force, which could create more demand for low-skilled immigration, who, depending on the state, have less access to benefits.

Meanwhile, looking at domestic net migration with the same criteria shows a stark difference. The ten states with the most domestic net migration had both below average poverty support and lower taxes.  The ten states that attracted the fewest internal migrants had an average poverty support rank of 13 (high poverty support) and typically higher costs of living.

In other words, while immigrants disproportionately settle in states with more generous welfare systems, domestic migrants move in the opposite direction—away from high-tax states with expansive social programs.  What this implies is that over time a loose set of immigration policies will tend to decrease the national political power of states with expansive support for people in poverty, while strict immigration policies will tend to increase the power of states with smaller welfare states and lower taxes.  No wonder immigration is such a hot button issue!

Brian S. Wesbury – Chief Economist

Robert Stein, CFA – Deputy Chief Economist

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