Weekly Economic Report 7.2.26

Alright, let’s start by pointing out that the apparently weak June employment report is extraordinarily bullish for the continuation of this capital spending boom. What! Yes!!! We estimate that compensation – as measured by our income proxy of wages rates x hours worked – grew at a 4.2% annual rate in the second quarter. That is the same as the first quarter, the same as the annual average, and 0.1% below the annual average a year ago. Clearly, firms are in total control of their wage bill. Meanwhile, we estimate nominal GDP grew at a 6.0% annual rate in the second quarter – mostly on inflation – up from 5.8% in the first quarter, which matched the annual average, which was 1.2% higher than the annual reading in mid-2025. So, wage growth stable, with revenues accelerating – mainly due to price hikes – means much better profit margins. Given capital spending trails profits by two years, and we are still not at a profit peak, we expect more heavy investment in equipment and software – driving more inflation in those sectors and big profit margins for selected producers – which spirals back into more investment. Will this end – and maybe badly? Yes, but unlikely in 2026.

EU07-02-2026.pdf

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