Implications:  Durable goods orders showed strength in November after a brief pare back in October, rising 5.3% – the most in six months. While the gain in new orders was largely due to a 97.6% increase in volatile commercial aircraft orders, a look at the details still reveals promising signs of activity in the fourth quarter.  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 0.5% in November, led by electrical equipment (+1.7%), fabricated metal products (+1.0%), and machinery (+0.5%). The only major category which did not increase in November was primary metals (0.0%), only the third month in the past year the category did not rise. Note that both electrical equipment and machinery have seen unusually strong readings over the past year, with each up in at least nine out of the past twelve months.  Particularly, machinery is up at a 10.9% annualized rate in the past six months, the largest gain for any six-month period since 2021. 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 0.4% in November following strong gains in September and October.  If unchanged in December, these shipments would be up at a 7.5% annualized rate in Q4 versus the Q3 average.  Finally in other recent manufacturing news, the Kansas City Fed Manufacturing Index, a measure of factory sentiment in that region, remained unchanged at 0 in January.

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The Fed meets on Wednesday to discuss the direction of monetary policy.  With the futures market pricing the odds of “no change in rates” at 97.2%, no one should expect a rate cut at this meeting…or, we think, anytime soon.

Some, including the Trump Administration, might complain about steady short-term interest rates and say Fed Chief Jerome Powell is playing politics.  The claim about playing politics may be true but for now, Powell has the data on his side.  The economy looks solid and inflation remains stubbornly higher than the Fed’s 2% target.

Real GDP grew at a rapid 4.4% annual rate in the third quarter, the fastest quarterly pace in two years.  We like to follow other key measures of economic activity and although they didn’t grow as rapidly, they don’t signal a problem with economic growth, either.

“Core GDP,” which includes consumer spending, business fixed investment, and home building, while excluding the more volatile categories like government purchases, inventories, and trade, grew at a respectable 2.9% annual rate in Q3.  In the meantime, Real Gross Domestic Income, an alternative to Real GDP that is just as accurate over time, rose at a 2.4% rate in Q3.  Not great, but not bad either.  (Remember, the Federal Reserve thinks the long-term growth rate of the economy should average 1.8%, so even 2.4% is faster than that long-term average.)

More impressively, it looks like economic growth in the fourth quarter could come in even faster.  At present, the Atlanta Fed’s GDP Now model suggests the economy grew at a 5.4% annual rate in the fourth quarter.  Yes, much of this is related to a very favorable international trade report for October, which might reverse in November (new data to be released Thursday).  But even if we exclude that by looking at Core GDP for Q4, the economy appears to have grown at about a 2.7% rate.  Not bad.  

The Fed is also looking at the labor market.  While not as strong as the overall economy, the reports there are not showing clear stress, either.  The unemployment rate finished 2025 at 4.4% versus 4.1% a year ago, but private-sector payroll growth continues, in spite of a big drop in net immigration into the US.  Yes, growth in private sector payrolls has been narrow and mostly confined to health care and social assistance, but we don’t think the Fed is focused on this issue for now.  More importantly, the household survey, which contacts people directly rather than surveying employers, shows jobs up 2.4 million in the past twelve months.

Nor is inflation signaling a need for rate cuts.  The Consumer Price Index rose 2.7% in 2025 (December/ December), with core prices, which exclude food and energy, up 2.6%.  And, just released with the GDP data, the GDP Deflator was up at a 3.8% annual rate in the third quarter.  

There are reasons to believe inflation may decline in the next several months.  One key reason is that the M2 measure of the money supply is up only 4.3% in the past year, slower than the pre-COVID trend of about 6.0% per year, which coincided with an average annual CPI inflation rate of less than 2.0%.  As Milton Friedman taught us decades ago, inflation is always and everywhere a monetary phenomenon.

In addition, the way the government calculates the CPI may also lead to a drop in measured inflation.  Zillow’s observed rent index tends to lead the CPI’s measure by about one year and Zillow’s measure of rent decelerated in 2025, suggesting the CPI’s measure of rents will decelerate this year.  That’s a big deal because rent of shelter is about 35% of the overall CPI.  This is also consistent with stricter enforcement of immigration law, right or wrong, putting downward pressure on rents nationwide.

Put it all together and we have a Fed that until Powell departs in May is not only politically inclined to reject rate cuts, but at least for the time being has the economic data to back up its case.  If the Trump team really wants an easier monetary policy, it could drain the Treasury General Account, which currently holds almost $900 billion at the Fed.  By spending that money rather than hoarding it and issuing more debt, it could quickly boost M2 by about 4%.

Brian S. Wesbury – Chief Economist

Robert Stein, CFA – Deputy Chief Economist

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Implications:  Consumers were spending at a healthy clip as they kicked off the 2025 holiday season.  Starting with income, private-sector wages and salaries led the way rising 0.4% in November following a 0.5% increase in October.  Government transfer payments increased 0.2% in November and 0.4% in October.  This is a welcome shift from the trend that started in early 2024 where government transfer payments became an increasing share of consumers’ monthly spending power.  Government transfer payments are still up a massive 8.8% in the past year while private sector wages are up 3.9%, but it appears the tides may be beginning to turn. We hope to see private earnings continue to rise at a faster pace than government transfers – which are not a reliable (or desirable) long-term source of income – and will be watching this data closely in the year ahead.  On the spending front, personal consumption rose 0.5% in November.  Goods spending rose 0.7%, led by recreational goods & vehicles as well as footwear and apparel. Services spending increased 0.4% in November, with outlays on financial services, health care, and housing rising the most.  Moving over to inflation, PCE prices, the Fed’s preferred inflation metric, rose 0.2% in November while the year-ago reading rose to 2.8% from to 2.7%.  That 2.8% pace in the past twelve months is up slightly from the 2.6% rate for the twelve-months ending November of 2024, but it’s important to note that inflation readings between May and November of 2024 were relatively subdued before rising at an above average rate to start 2025.  This will be worth keeping an eye on in the months to come as continued monthly readings in the 0.2%-0.3% range would result in the year-over-year reading trending back down toward the 2.0% target.  Pair this with signs from the housing market that rents have subdued (housing is the single largest component of PCE prices), while M2 growth continues to run below the historical 6% rate, and we believe inflation is likely to decelerate in the year ahead.  In other recent news, construction spending rose 0.5% in October, with residential construction leading the way, up 1.3% following a 1.4% decline in September.  Staying on the housing front, pending home sales, which are contracts on existing homes, plunged 9.3% in December – the largest monthly drop since April 2020 - after a 3.3% gain in November, signaling that existing home sales (counted at closing) likely declined in January.

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In 2022, global population surpassed eight billion people for the first time, marking an eightfold increase since 1800. While global population is still growing in absolute numbers, population growth rates peaked decades ago. What lies ahead? For more insight into global population trends, click the link below.

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Implications: The economy was on firm footing in the third quarter, with real GDP up at a 4.4% annual rate, an upward revision versus the prior estimate of 4.3%.  Upward revisions to inventories, business investment (primarily structures), and net exports were enough to fully offset downward revisions to home building and consumer spending on services.  The 4.4% annual growth rate in Q3 is the fastest quarterly pace in two years, but the details are not quite as strong as the headline suggests.  For a better gauge of sustainable growth, we look at “core” GDP—consumer spending, business fixed investment, and home building—while excluding the more volatile categories like government, inventories, and trade.  Core GDP grew at a 2.9% annual rate in Q3, slightly below the prior estimate of 3.0%, and up 2.6% from 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 4.4% 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.  More notable were corporate profits: the second look at Q3 profits showed solid growth of 4.5% from Q2 (versus a previous estimate of +4.2%) with a 9.3% gain versus a year ago. Adjusting for losses at the Federal Reserve, corporate profits were up 4.1% in Q3 and are up 7.5% from a year ago. Real Gross Domestic Income, an alternative to Real GDP that is just as accurate over time, rose at a 2.4% rate in Q3 and is up 2.4% from a year ago.  Good, but not as fast as the growth in Real GDP.  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 8.3% annual rate in Q3 and up 5.4% from a year ago.  In labor news this morning, initial jobless claims rose 1,000 last week to 200,000 while continuing claims declined 26,000 to 1.875 million. Taken altogether, these figures suggest the Fed will pause rate cuts at the meeting next week as they wait for more evidence of a deteriorating labor market or that inflation is heading back down toward its 2.0% target.

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After more than a decade of analyzing, writing, speaking, warning, and complaining about the Federal Reserve’s use of an “Abundant Reserve” monetary policy we are glad to finally see more focus on its impact.  Treasury Secretary Scott Bessent, Senator Rand Paul, Senator Ted Cruz, and now Representative Thomas Massie have weighed-in during recent weeks about many serious issues.

Secretary Bessent said “If I want a new chair in my office…I have to go through the appropriations process….The way the Fed works there are no appropriations.  They just print the [money].”

Senator Paul and his staff found that the Fed was paying private banks (including many foreign banks) $100s of billions to hold reserves.  Senator Cruz argued that by losing money on its portfolio, the Fed was costing taxpayers potentially trillions of dollars over a decade.  And now Representative Massie says the Fed’s Quantitative Easing fueled excessive government spending and debt.  And don’t forget inflation.

All these political leaders are correct.  As we have written before, the Fed’s Quantitative Easing programs essentially turned the Fed into a huge hedge fund.  It created trillions of new dollars by increasing bank reserves and used them to purchase Treasury debt and mortgage-backed securities.

Both the 2008-2015 and the 2020-2022 episodes of QE coincided with huge government deficit spending programs.  This wasn’t a coincidence.  If the private financial system were expected to finance the lockdown of the economy and the paying of people to stay at home, it would have charged the government more than the Fed charged.

But the Fed bought short-term government debt (T-bills) at essentially 0% rates and 10-year debt at 2% yields, or less.  Because the Fed cannot buy directly from the Treasury, it used banks as intermediaries.  The banks knew that when they bought Treasury debt at auction, they could immediately sell that debt to the Fed.  The Fed bought the debt from the banks by creating massive amounts of reserves.

Because the Fed was given the go-ahead by Congress to pay banks interest on reserves, the banks took that risk-free cash.  Banks were perfectly willing to do this because they thought bond yields alone were not compensating them for the risk.

The Fed thought it could borrow short and lend long with no inflationary consequences.  Of course, as we pointed out, and forecasted, the Fed was wrong.  And when interest rates rose with inflation, the Fed’s balance sheet turned upside down.  Now, the Fed has $856 billion in unrealized losses on its bond portfolio.

Moreover, over the past seven quarters, the Fed has paid private banks and institutions roughly $360 billion to hold reserves, but only earned $270 billion in interest from its bond holdings.  In other words, the Fed lost roughly $90 billion. 

The Fed doesn’t care if it makes a loss because it never has to mark anything to market prices and can just create money at will to pay its expenses.  In 2007, the Fed’s balance sheet was $850 billion.  Today it is $6.6 trillion.  And with this increased balance sheet leaving trillions sloshing around, the Fed’s management has become lax.  It went from 17,100 employees in 2012 to 21,000 employees today even though technology has increased productivity (for example, we now clear checks electronically and the Fed doesn’t do it with a fleet of jets).

And lax may be the wrong word.  The Fed actually went “woke.”  It used its swollen balance sheet to do “research” on climate change, and declared it a risk to banks.  It only rescinded its official guidance to banks about accounting for climate change when Donald Trump became President.  The Fed also hired people to manage DEI programs.

In other words, the Fed became political.  Two other events also took place.  It cut interest rates before the November election.  And Chairman Powell ignored all previous Fed guidance about staying out of fiscal policy and said very publicly that Trump’s tariffs would be “inflationary.”

The reason we mention all this is that Fed leadership, some lawmakers, and many in the press are complaining about recent political pressure on the Fed.  But by choosing to facilitate a larger government and not limiting its work to its statutory mandate, the Fed has been delving into politics on its own.

We’d prefer an independent Fed that pursued a monetary policy with zero to minimal inflation.  Hopefully the next leader of the Fed will bring us closer to that ideal.

Brian S. Wesbury – Chief Economist

Robert Stein, CFA – Deputy Chief Economist

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Implications:  Industrial production ended 2025 on a healthy note, rising for a second month in a row and easily beating consensus expectations.  Both overall industrial production and manufacturing output grew 2.0% in the past year despite huge shifts in trade policy and tariff uncertainty. Looking at the details for December, the manufacturing sector posted a gain of 0.2%, and when including positive revisions to prior months rose 0.5%. The volatile auto sector continued to be a source of weakness, with activity declining 1.1% in December.  However, manufacturing ex-autos (which we think of as a “core” version of industrial production) posted a gain of 0.3%. In the past year, auto production (which is also highly sensitive to President Trumps’s tariff policy) is down 2.8% while “core” manufacturing is up 2.4%. 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, increased 0.7% in December.  High-tech manufacturing is up 10.9% in the past year, the fastest pace of any major category.  Meanwhile, the manufacturing of business equipment isn’t far behind, up a strong 10.0% 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 December, rising 2.6%. Finally, the mining sector was a drag on growth in December, declining 0.7%. Oil and gas production, the drilling of new wells, and the extraction of other metals and minerals all fell in December.  In other recent manufacturing news, the Empire State Index – a measure of factory sentiment in the New York region – rose to +7.7 in January from -3.7 in December. Meanwhile, its counterpart the Philadelphia Fed index jumped unexpectedly to +12.6 in January from -8.8 in December. On the labor front, initial jobless claims fell 9,000 last week to 198,000 while continuing claims declined 19,000 to 1.884 million. These figures suggest job growth continues. We also got trade data recently, with import prices up 0.1% and export prices up 3.3% in the twelve months ending in November. Finally on the housing front, the NAHB Index (a measure of homebuilder sentiment) fell to 37 in January from 39 in December.  Keep in mind a reading below 50 signals a greater number of builders view conditions as poor versus good, now the twenty first consecutive month that has been the case.

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This past week, SpaceX received federal approval to dramatically increase the size of its Starlink constellation, clearing the way for the launch of an additional 7,500 satellites into low-Earth orbit.  While this would have seemed impossible a decade ago, the space industry hardly bats an eye today, as mega-constellations like Starlink have become an increasingly familiar component of modern infrastructure. For more insights on the rapid advances in spaceflight technology, click the link below.

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Implications: Existing home sales closed out 2025 on a healthy note, rising for a fourth consecutive month and hitting the fastest pace since 2023. That said, the current sales rate of 4.350 million remains near the low 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 May and now sit around 6.2%, near the lowest rate since 2022. Buyers also have reasons for further optimism on financing costs. The Federal Reserve is continuing to cut rates, the Trump Administration will soon appoint 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 0.4% 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 earlier this year. This has led to the months’ supply of homes (how long it would take to sell existing inventory at the current very slow sales pace) falling to 3.3 in December, 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.

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Implications:  Retail sales for November generated a strong headline, but softer details. Overall retail sales rose 0.6% for the month, but previous activity was revised lower, dropping the monthly gain to a 0.4% increase when factoring in revisions.  Sales are up 3.3% from a year ago but have slowed recently, up at a 2.3% annualized rate in the last three months.  While the gain in November was broad-based with ten out of the thirteen major categories rising, it was largely the result of a 1.0% rebound in the volatile autos category after an expiring tax credit for EVs temporarily held down the category in October.  Meanwhile, the 1.4% gain at gas stations was the second biggest contributor to the headline increase, which can also swing from month to month.  “Core” sales, which strip out the volatile categories for autos, building materials, and gas stations, increased by 0.4% in November, but was up 0.2% after factoring in revisions.  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 December, these sales will be up at a 3.7% annual rate in Q4 versus the Q3 average.  The good news is that sales at restaurants & bars – the only glimpse we get at services in the report, which make up the bulk of consumer spending – rose 0.6% in November while previous months’ activity were revised higher.  These sales are up at a 5.7% annualized rate through the first eleven months of the year versus a 2.8% annualized increase for overall sales.  We will continue to watch this category closely in the months ahead.  Finally, it’s important to remember the impact inflation has on retail sales.  Overall sales are up 3.3% on a year to year basis, but “real” inflation-adjusted sales are up just 0.6% in the past year and still down from the peak in early 2022.

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