Consumption Growth Still on Track for Strong Q1 as Pending Sales Surprise to the Upside

Key Takeaways:

• Gross domestic product (GDP) , adjusted for inflation, increased at a 2.6 percent annualized rate in Q4 2022, according to the third estimate from the Bureau of Economic Analysis (BEA), a downgrade of one-tenth of a percentage point from the prior estimate. The lower estimate was due to downward revisions to exports and consumer spending. This release also contains a measure of real gross domestic income (GDI), a theoretically equivalent measure to GDP, which declined in the fourth quarter at an annualized rate of 1.1 percent.
• Personal income, adjusted for inflation, rose 0.1 percent in February, according to the BEA. Real disposable personal income increased 0.2 percent after a 1.5 percent jump in January. Real personal consumption expenditures fell 0.1 percent, though this also followed an upwardly revised 1.5 percent increase in January. The PCE price index increased 0.3 percent in February and was up 5.0 percent over the year, decelerations of three-tenths for each compared to January. Excluding food and energy, core PCE increased 0.3 percent in the month and 4.6 percent compared to a year ago.
• The Conference Board Consumer Confidence Index rose 0.8 points to 104.2 in March, recovering only part of the combined 5.6-point slide over the prior two months. Confidence in the present situation was down 1.9 points to 151.1 while consumer expectations for the future increased 2.6 points to a still low 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, increased 0.8 percent to 83.2 in February. This follows an 8.1 percent jump in January.
• The FHFA Purchase-Only House Price Index increased 5.3 percent compared to a year ago in January, a deceleration of 1.4 percentage points compared to December. On a seasonally adjusted basis, prices rose 0.2 percent over the month. This is in contrast to the S&P CoreLogic Case-Shiller Home Price Index, which was down 0.2 percent on a seasonally adjusted basis in January, its seventh consecutive monthly decline, and was up only 3.8 percent over the year. The difference is likely due in part to the FHFA index not including properties purchased via jumbo loans.

Forecast Impact:

The third estimate of GDP came with the release of a -1.1 percent annualized gross domestic income (GDI) measurement for Q4, a stark contrast from the +2.6 percent annualized GDP figure. While large statistical discrepancies such as this are frequently revised away later and we had already partially discounted the strength of the GDP number due to large swings in inventory investment, the GDI report adds to evidence that the economy had slowed toward the end of 2022. However, we also know the economy picked up steam to begin 2023, with the one-time level shift in consumption in January only experiencing a partial giveback in February. With another small gain in real disposable incomes in February, we still believe consumption is on track for a strong quarter barring any potential disruptions to consumer confidence following recent banking turmoil (notably, we didn’t see much evidence of this in the Conference Board survey).

In housing, we had expected a rather large pullback in pending sales for February. Based on incoming mortgage application data we continue to expect a pullback to come, perhaps occurring in March. Still, the stronger-than-expected reading points to some upside risk in our near-term home sales forecast. Even with mortgage rates pulling back somewhat in recent weeks, we expect existing home sales to be generally soft as affordability will remain a major constraint and most existing homeowners will remain “locked in” to their existing low-rate mortgages. This is likely to continue to weigh on home price growth as well, which we expect to be modestly negative through 2023 and 2024.

Nathaniel Drake
Economic and Strategic Research Group
March 31, 2023

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