Economic Data Continues to Look Mixed as New Home Sales Jump in May

Key Takeaways:

• Gross domestic product (GDP), adjusted for inflation, increased at a 2.0 percent seasonally adjusted annualized rate (SAAR) in Q1 2023, an unusually sharp upward revision of seven-tenths from the prior release, according to the third estimate from the Bureau of Economic Analysis (BEA). Real personal consumption expenditures were revised upward by four-tenths to a SAAR of 4.2 percent, the fastest rate in almost two years. Net exports were also revised upward. Gross domestic income (GDI), a theoretically equivalent measure to GDP but in practice may differ due to measurement error, was revised upward by five-tenths to a SAAR of -1.8 percent.
• Personal income, adjusted for inflation, rose 0.3 percent in May, according to the BEA. Real personal disposable income was also up 0.3 percent, though this didn’t translate to higher personal consumption expenditures, which were flat. The saving rate increased three-tenths to 4.6 percent. The Personal Consumption Expenditures (PCE) price index rose 0.1 percent over the month and was up 3.8 percent over the year, a deceleration of five-tenths. Core PCE prices rose 0.3 percent over the month and 4.6 percent over the year.
• Durable goods orders jumped 1.7 percent in May, according to the Census Bureau. While much of the gain was due to a surge in nondefense aircraft orders, core capital goods orders (nondefense excluding aircraft) still posted a solid 0.7 percent gain.
• The Conference Board Consumer Confidence Index increased by 7.2 points to 109.7 in June, its highest level since January 2022. Confidence in the present situation was up 6.4 points to 155.3 and consumer expectations for the future rose 7.8 points to 79.3.
• New single-family home sales rose 12.2 percent in May to a SAAR of 763,000, the highest rate since February 2022, according to the Census Bureau. The months’ supply declined nine-tenths to 6.7 due to the higher sales rate and slightly fewer new homes available for sale, which was down 0.9 percent to 428,000.
• 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 2.7 percent to 76.5 in May, its lowest level since December 2022.
• The FHFA Purchase-Only House Price Index rose a seasonally adjusted 0.7 percent in April, translating to an annualized rate of 9.3 percent. Compared to a year ago, prices were up 3.1 percent, a deceleration of six-tenths compared to March.

Forecast Impact:

The large upward revision to Q1 GDP indicated the economy was growing at a healthy pace to start the year. The much weaker GDI figure still gives us some pause, though, as those two measures should theoretically equal one another but are currently 3.8 percentage points apart, an unusually large divergence. The average of GDP and GDI, which can be useful when the difference between the two measures is large, now sits at 0.1 percent, which would signal an economy in stagnation. The May personal income report also signaled that consumption has slowed dramatically in Q2, supportive of our forecast for a slower pace of growth moving forward. However, solid increases in core capital goods orders and consumer confidence suggest a recession is not imminent. While we still anticipate a recession to begin by the end of this year, there are considerable risks to our forecast due to the mixed nature of incoming data.

The decline in the pending home sales index is supportive of our forecast for ongoing weakness in the existing home sales market stemming from an extremely limited inventory of homes for sale. Tight inventories continue to be supportive of prices, though, as evidenced by another strong gain in the FHFA house price index. It is also causing would-be buyers to turn to new construction as new home sales were stronger than our recent forecast, though this comes as little surprise after last week’s reported surge in housing starts. May also saw the second largest increase on record for sales of new homes that have not yet been started, which surged to the highest level since January 2022. While some of this may be statistical noise, it suggests further support for new home construction over the coming months.

Nathaniel Drake
Economic and Strategic Research Group
June 30, 2023

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