January Consumption Contracts, While Pending Sales Retreat from Higher Mortgage Rates

By klrw460 March 1, 2024

The Bureau of Economic Analysis (BEA) reported that the Gross Domestic Product (GDP), adjusted for inflation, experienced a growth of 3.2 percent on a seasonally adjusted annualized rate (SAAR) in the fourth quarter of 2023, according to the second estimate. This figure marks a slight downgrade of one-tenth from the advance estimate. The adjustment was primarily attributed to a downward revision in private inventory investment, though this was somewhat mitigated by increases in local government and consumer spending. Gross Domestic Income (GDI) data for the fourth quarter is pending until the third GDP estimate; however, the GDI for the third quarter of 2023 was revised upwards by four-tenths to a SAAR of 1.9 percent.

In January, personal income, after adjusting for inflation, saw an increase of 0.7 percent, partly due to a 3.2 percent cost-of-living adjustment to Social Security payments. Despite this, Disposable Personal Income remained unchanged, affected by higher tax payments, and real personal consumption expenditures saw a slight decline of 0.1 percent. The saving rate experienced a minor increase of one-tenth to 3.8 percent. The Personal Consumption Expenditures (PCE) price index went up by 0.3 percent over the month, bringing the year-over-year rate down to 2.4 percent, the lowest since February 2021. The core PCE prices, excluding food and energy, rose by 0.4 percent over the month, with the annual rate slightly decreasing to 2.8 percent.

The Census Bureau reported a 6.1 percent decrease in durable goods orders in January, largely due to a significant drop in nondefense aircraft orders. Excluding transportation, the decline was more modest at 0.3 percent. Shipments of core capital goods excluding aircraft, a key indicator of business equipment investment, increased by 0.8 percent.

The Conference Board reported a decline in the Consumer Confidence Index by 4.2 points to 106.7, interrupting a three-month sequence of gains. The assessment of the current situation dipped by 7.7 points to 147.2, while future expectations saw a decrease of 1.7 points to 79.8.

According to the Census Bureau, sales of new single-family homes increased by 1.5 percent to a SAAR of 661,000, though the figure for December was revised downward. The supply of homes remained stable at 8.3 months, with the inventory of new homes for sale rising by 0.9 percent.

The National Association of REALTORS® indicated that the Pending Home Sales Index, a forward-looking indicator of home sales based on contract signings, fell by 4.9 percent to 74.3 in January, erasing most of its gains from December.

The FHFA Purchase-Only House Price Index reported a seasonally adjusted increase of 0.1 percent in December, culminating in a 6.5 percent rise in home prices on a non-seasonally adjusted basis for 2023.

Forecast implications suggest that real consumer spending in January retracted modestly after a surge at the end of 2023, with a slight decline following an upward revision for December. This suggests potential modest upside risks to Q1 2024 real consumption and GDP forecasts. PCE inflation aligned with expectations, considering earlier CPI and PPI reports, with both headline and core prices moving toward the Federal Reserve’s 2-percent target. Durable goods orders indicate a further cooling in goods demand, although the robust report on core capital goods shipments might prompt an upward revision to the Q1 2024 forecast for business fixed investment.

January’s new home sales potentially benefited from moderating mortgage rates at the end of 2023. However, with new home sales expected to increase in 2024, the forecast for a nearly 10 percent annual gain faces downside risks, particularly as the 30-year mortgage rate has started to increase towards 7 percent again. Furthermore, a significant decrease in pending home sales underscores the downside risk to the existing sales forecast, influenced by recent trends in the 30-year mortgage rate, likely leading to a downward revision in the near-term forecast for existing sales.

For the full details and insights, please refer to the original press release at the following link: https://www.fanniemae.com/research-and-insights/forecast/january-consumption-contracts-while-pending-sales-retreat-higher-mortgage-rates