Economic Data Sends Mixed Signals as New Home Sales Remain Resilient

Key Takeaways:

• Gross domestic product (GDP), adjusted for inflation, increased at a 1.3 percent seasonally adjusted annualized rate (SAAR) in Q1 2023, according to the second estimate from the Bureau of Economic Analysis, an upgrade of two-tenths from the advance estimate. The upward revision was due in part to upgrades to inventory investment, government spending, business fixed investment, and consumer spending. Gross domestic income (GDI), which is a theoretically equivalent measure to GDP and is included in the second release of GDP, declined at a 2.3 percent annualized rate, its second consecutive quarterly decline.
• The Minutes from the Federal Open Market Committee (FOMC) May 2-3 meeting showed officials divided on whether additional rate hikes would be necessary. “Some” participants noted that “returning inflation to 2 percent could continue to be unacceptably slow,” meriting additional hikes. Still, others noted that if the economy evolves as they expect, further policy firming after this meeting may not be necessary. “Optionality” was stressed as important by “many” participants as the lagged effects of more restrictive monetary policy work their way through the economy.
• New single-family home sales rose 4.1 percent in April to a seasonally adjusted annualized rate (SAAR) of 683,000, though March’s figure was revised downward, according to the Census Bureau. On a year-over-year basis, April marked the first annual gain in new home sales since February 2022. The months’ supply of units for sale declined three-tenths to 7.6, its lowest level since March 2022, as the faster sales rate outpaced the 0.2 percent gain in new homes for sale, which sits at 433,000 units.
• 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, was flat in April at 78.9.

Forecast Impact:

The second estimate of GDP includes the release of GDI, which has now been significantly weaker than GDP for the past two quarters. While these measures should theoretically equal one another, in practice they may differ due to measurement error in one or both estimates. Large statistical discrepancies, defined as the difference between GDP and GDI, are frequently later revised away, though there’s no reliable way to know whether it’s more likely that GDP is revised down or GDI is revised up (or some combination of the two). It’s sometimes useful to take the average of the two measures, which would show an annualized growth rate of -0.4 percent in Q4 2022 and -0.5 percent in Q1 2023, much weaker than our current understanding of the economy. While we are unlikely to make significant revisions to our forecast based on this information, it is something worth monitoring and presents some possible downside risk to our near-term outlook.

The FOMC minutes suggest heightened uncertainty over whether the Fed has finished hiking in the current cycle. While our baseline forecast remains that the Fed will hold the policy rate at its current level before making one rate cut in Q4, risks to this forecast are likely to the upside and are largely dependent on how the economy evolves over the next several months.

New home sales were about in line with our expectations. The strength in sales of not-started homes, improved builder optimism, and positive data on starts and permits all point to stronger housing starts in the near term. However, as we expect the economy to decelerate, we think housing activity will slow later this year. This is also consistent with the flat pending sales reading, which supports our forecast for ongoing sluggishness in existing home sales.

Nathaniel Drake
Economic and Strategic Research Group
May 25, 2023

Opinions, analyses, estimates, forecasts, and other views of Fannie Mae’s Economic & Strategic Research (ESR) group included in these materials should not be construed as indicating Fannie Mae’s business prospects or expected results, are based on a number of assumptions, including that the ongoing debt ceiling impasse will be resolved in a manner that avoids default, and are subject to change without notice. How this information affects Fannie Mae will depend on many factors. Although the ESR Group bases its opinions, analyses, estimates, forecasts, and other views on information it considers reliable, it does not guarantee that the information provided in these materials is accurate, current or suitable for any particular purpose. Changes in the assumptions or the information underlying these views could produce materially different results. The analyses, opinions, estimates, forecasts, and other views published by the ESR group represent the views of that group as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.