Consumption Growth Shows Signs of Slowing Despite Easing Inflation, as New and Pending Sales Decline in May

Key Takeaways:

• Gross domestic product (GDP), adjusted for inflation, increased at a 1.4 percent seasonally adjusted annualized rate (SAAR) in Q1 2024 in the third and final estimate, an upgrade of one-tenth compared to the prior estimate, according to the Bureau of Economic Analysis (BEA). The upgrade reflects upward revisions to net trade, business fixed investment, and government spending. However, real personal consumption expenditures were again revised downward by five-tenths to a 1.5 percent annualized growth rate, a full percentage point lower than originally reported.
• Personal income, adjusted for inflation, jumped 0.5 percent in May, according to the Bureau of Economic Analysis. Real disposable personal income was also up 0.5 percent. Real personal consumption expenditures (PCE) rose 0.3 percent after contracting in April. The saving rate rose two-tenths to 3.9 percent, still low by historical standards. The PCE price index was flat over the month and increased 2.6 percent compared to a year ago. Core PCE prices increased just 0.1 percent over the month and 2.6 percent compared to a year ago, the slowest annual rate since March 2021.
• The Conference Board Consumer Confidence Index declined 0.9 points to 100.4 in June. Confidence in the present situation rose 0.7 points to 141.5, while expectations for the future declined 1.9 points to 73.0.
• The National Association of REALTORS® Pending Home Sales Index, which records contract signings of existing homes and typically leads closed sales by one to two months, declined 2.1 percent to 70.8 in May. This follows a 7.7 percent decline in April.
• New single-family home sales declined 11.3 percent to a SAAR of 619,000 in May, a six-month low, according to the Census Bureau. However, April new home sales were revised upward by more than 10 percent, and March’s figure was also revised upward. The number of new homes available for sale rose 1.5 percent to 481,000, remaining at the highest level since the Great Financial Crisis. The months’ supply jumped by 1.2 to 9.3, the highest level since October 2022.
• The FHFA Purchase-Only House Price Index increased a seasonally adjusted 0.2 percent in April. Compared to a year ago, home prices rose 6.4 percent, a deceleration of four-tenths from March, and the second consecutive month of slowing home price growth on an annual basis.

Forecast Impact:

First quarter GDP growth was revised upward slightly but the more important story is another large downward revision to personal consumption expenditures. We have long noted that recent strength in personal consumption had not been supported by real income growth, and we therefore expected that the consumer would eventually need to retrench to a more normal saving rate. While May income and spending data was more encouraging, downward revisions to prior months means we are likely to revise downward our second quarter consumption forecast. On the inflation front, core PCE, the Fed’s preferred inflation gauge, was a bit below our expectations. While we believe the Fed will likely need several months of reports like this one before being confident that inflation is sustainably returning to target, as of this writing, market pricing has shifted closer to two cuts this year rather than one.

The sharp decline in new home sales in May is better than it looks on its face given the large upward revision to April’s data; in fact, the average of new sales in April and May is modestly above our second quarter forecast. Still, inventories of new homes available for sale remain high, suggesting demand has likely softened. While we note that the new home sales data is volatile, we think the current momentum is probably downward, posing some risk to our intermediate-term forecast. Additionally, another decline in the pending home sales index suggests that existing home sales may have a bit further to fall in the next one to two months, especially given a relatively flat reading for sales in May when the pending home sales index fell more than 7 percent in April. Still, we continue to believe existing sales are near their floor already, and we expect a slow recovery in existing sales starting in the second half of 2024 as mortgage rates ease somewhat.

Nathaniel Drake
Economic and Strategic Research Group
June 28, 2024

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