Reef Report

Headline Inflation

Core Inflation

Inflation continues to cool and the balance of risks between inflation and unemployment continues to shift. The Fed held rates steady at 3.5% to 3.75% at its January meeting, acknowledging in its statement that “uncertainty about the economic outlook remains elevated.” Powell noted the economy is starting 2026 “on a firm footing,” but also conceded that the job market has “clearly softened” and hiring remains “low.” Two Trump-appointed governors, Waller and Miran, dissented in favor of a cut. The committee is stuck between inflation that is still running above target and a labor market that is deteriorating in ways they can’t ignore. If Kevin Warsh is confirmed as the new Fed chair, and that remains an “if” given Senator Tillis’s pledge to block the nomination until the DOJ’s investigation into Powell is resolved, expect continued political pressure on the Board to restart their stalled engine of further cuts.

Unemployment Rate

Job Openings

This is the year of agents. AI agents are improving at a rapid pace and business leaders are paying attention. Workers are too, but for different reasons. As these agents continue to build out capabilities and attack real workflows, the looming question grows: what jobs will AI replace first, and how fast? White-collar work is the primary target. These roles are expensive, numerous, and increasingly within reach of what current AI systems can do. This will be the biggest employment topic of the year, and in subsequent years, as we face the reality of how to manage labor in the age of intelligence.

Mortgage rates touched 6% on February 19th, and in the days since we have seen rates dip into the 5s. Breaking through that psychological threshold has the chance to pull the housing market out of the permafrost, but keep in mind that even as we move into sub-6 territory, we are still far from affordability metrics that would indicate a rapid improvement.

Mortgage Payments to Household Income Ratio

Nominal Monthly Mortgage Payment

Median Sales Price of New Houses Sold

Median Sales Price of Existing Houses Sold

While volume is certainly skewing numbers and masking true price discovery, seeing prices decrease year-over-year is a welcome improvement. But as we’ve discussed over the past year, most homeowners don’t need to sell. They are locked into low rates, sitting on equity, and under no financial pressure to move. Demand is weak, but so is urgency on the supply side. It is worth noting that at the State of the Union, the administration called for making housing more affordable while simultaneously promising to protect home values. Those two goals are fundamentally at odds.

Current levels are actually quite in line with pre-2020 norms and showing healthy growth out of the structural shortages that have wildly distorted markets in recent years. The only thing that stops the inventory uptick from here is a healthy demand profile returning, and that remains to be seen.

Real Residential Construction Spend

New Home Inventory

New Housing Supply

Existing Housing Supply

Supply is a bit of a skewed metric as well, given the lack of volume in the market. What this signals is that we haven’t had a blowout in listings, no fire sales, and we also haven’t seen real changes in demand. Regional differences are becoming more pronounced here. Markets in the Sun Belt and parts of the South, where pandemic-era building was heaviest, are carrying more inventory and seeing softer pricing. Meanwhile, supply-constrained markets in the Northeast and Midwest remain tight by comparison. Overall, though, the picture is one of a market holding steady rather than breaking in either direction, waiting for a catalyst to shift demand one way or the other.

Construction Job Openings

Residential Construction Employees

Fed Governor Waller said the quiet part out loud on February 23rd. After annual revisions, 2025 produced an average of just 15,000 jobs per month. Even that number is likely biased upward, and corrections won’t come until 2027. Adjusting for anticipated revisions, payroll employment in the United States probably fell in 2025. That has only happened twice before outside of a recession since 1945. Unemployment sits at 4.3%. U-6 is at 8.0%. Job openings have dropped 12.9% year-over-year to 6.54 million. And nearly 90% of net private job creation has been concentrated in healthcare and social assistance. Outside of that single sector, it’s losses and stagnation.

Waller seemed amazed that the economy continues to post solid GDP numbers against this backdrop. The explanation is simple. The top 20% of earners account for 35% of consumer spending and own the vast majority of equities. Their wealth effect has propped up headline GDP. The bottom 60%, who own just 15% of stocks but drive 45% of spending, are already pulling back. That split doesn’t hold forever.

Citrini Research’s “2028 Global Intelligence Crisis” scenario went viral this week, racking up over 22 million views and briefly rattling software and financial stocks. The piece imagines AI agents displacing white-collar workers at scale, with “ghost GDP” inflating national accounts while real wages collapse. Citadel, Deutsche Bank, and others pushed back hard. But the thesis that AI-driven productivity could decouple corporate profitability from employment is not remotely new. CGP Grey laid out the same argument in 2014 with Humans Need Not Apply. The technology was theoretical then. It is not now. Citrini didn’t discover the problem. They dressed it in a Bloomberg terminal and gave Wall Street a reason to care about something the rest of the world has been watching unfold in real time.

AI agents are attacking real workflows today. Headcount reduction is the most obvious path for companies to show returns on their AI investments, and the pace of capability improvement is not slowing down. This will be the defining employment story of the year.

Mortgage rates hit 6.01% on February 19th and have since dipped into the 5s. Monthly payments are down to $1,965, off 12.3% year-over-year. New home prices are down 2.0% to $414,400, existing down 3.3% to $405,300. All of that is welcome. But rates are coming down slowly, and the five-year picture is the one that matters: payments are still up 64.7% and the payment-to-income ratio has climbed 44.4%. Builders are pulling back. Buyers are sidelined. The housing market stays frozen until affordability improves in a way people can actually feel, not just measure.

Trade policy has not delivered. The deficit didn’t narrow. Manufacturing didn’t pick up. Consumers are paying more and have less. Currency weakness is showing up. Everyone outside of the people who designed the policy saw this coming. Midterms will stifle action in Congress and at the executive level, which creates serious problems if the economy needs intervention. Leadership at many key institutions is untested and the bench is thin. If a recession shows up, the response will be slow, fragmented, and likely not enough.

The firings are what tip the ship. GDP is growing on wealthy consumer spending and AI capex, two narrow and fragile pillars that are increasingly disconnected from what most households are experiencing. The job market is the weakest it has been outside of a recession in decades. Equity markets are exhausted. Housing is frozen. The political system is heading into an election cycle that rewards doing nothing. A Fed governor expressed amazement that the economy continues to perform despite virtually no job growth. That amazement has a shelf life. The margin for error is shrinking every month.