Economic Developments - February 2024

Economic Growth Remains Robust but Softening Still Anticipated

Real Gross Domestic Product (GDP) increased at a 3.3 percent seasonally adjusted annualized rate (SAAR) in the fourth quarter of 2023, well above both consensus and our expectations. Consumer spending remained strong, rising 2.8 percent annualized and was particularly strong toward the end of the quarter. Strong consumption at the end of 2023 will mathematically carry over into the first quarter’s consumption growth number. Net exports and business inventory investment, which we had expected to drag on GDP, instead boosted growth modestly. Government spending at the state and local level was also above our expectations.

Still, we continue to anticipate growth will decelerate in 2024, albeit more modestly than previously forecast, due to both the lagged effects of higher interest rates weighing on business investment and an expected softening in components that drove strong fourth quarter growth. First, the saving rate moved down to just 3.7 percent in December, its lowest level in a year and roughly half its 2019 average. As such, we believe the surge in consumption in December is unsustainable and consumption growth will soften as the year progresses. Consistent with this expectation, January retail sales fell 0.8 percent over the month, which points to a pullback in consumer spending in the next release. While some of the retail sales softness was due to lower gasoline prices, most spending categories showed weakness, with the “core sales” that feed into the GDP estimates falling 0.4 percent. Furthermore, we expect some reversal in business inventory investment, and, with a weak global economic backdrop, we expect net exports to slow. Finally, state and local government tax receipts are softening, pointing to weaker future direct government spending growth.

Payroll employment surprised to the upside in January, increasing by 353,000, the strongest gain in a year. Following an upward revision of 117,000 jobs to December, nonfarm payroll growth over the past two months looks to have reaccelerated. In contrast, most other labor market measures point to softening. The alternative measure of household employment used to estimate the unemployment rate remains on a much weaker trend than the payroll survey. Additionally, the quits rate is slightly below the pre-pandemic rate, and the job openings rate continues to gradually decline. Broad measures of compensation growth, including the fourth quarter Employment Compensation Index (ECI) and the Atlanta Fed Wage Tracker, indicate that wage growth has also slowed. As such, we continue to expect slowing payroll growth as the year progresses and for the unemployment rate to gradually drift upwards.

Based on a reassessment of an assortment of population and immigration measures, we have upwardly revised our underlying projection of working-age population growth over our forecast horizon, driven primarily by the view of continued heightened net-immigration flows. While the trajectory of immigration going forward is heavily dependent on a mix of economic conditions and public policy decisions both here and abroad, we are setting as a baseline to our forecast a similar implied pace of net immigration through 2025 as was experienced in 2023. This led to a modest upward revision to our payroll and GDP forecasts, and if the trend is sustained, would imply a stronger pace of household formation and housing construction over the long run.

Home Sales and Single-Family Housing Starts Expected to Rise

Existing home sales dipped slightly in December by one percent to a SAAR pace of 3.78 million units, the slowest pace since 2010. While this was a little lower than we had expected, more recent data on mortgage applications, as well as December pending homes sales, which lead closings on average by 30-45 days, show a modest rebound in sales is underway. Combined with a modest change in our mortgage rate forecast, we have made a moderate change to our existing home sales outlook.

The January 2024 Fannie Mae Home Purchase Sentiment Index® (HPSI) rose 3.5 points to 70.7, the strongest level since March 2022. Driving much of this change was the anticipation that mortgage rates will decline, as the survey reported the highest net share of consumers expecting mortgage rates to decline since its inception in 2011. Consumers appear to be increasingly absorbing the idea that interest rates are in the process of easing. While both constrained affordability and the “lock-in” effect, which is limiting the selling incentive of current homeowners, will likely remain prevalent for the foreseeable future, more potential homebuyers and home-sellers may be preparing to move. The level of inventory remains low, according to Realtor.com, but recent listings are up 9.5 percent from a year prior as of the week of February 10.

The pace of single-family housing starts fell in January; however, this was expected given the surge in November and the unseasonably warm weather in December. The pace of single-family starts had recently disconnected from the underlying housing permit series. Single-family permits in contrast edged up 1.6 percent in January, back in line with the overall starts series. With single-family permits and starts now back in alignment, we expect new single-family construction to continue to drift upward in coming months. With a low supply of existing homes for sale, demand for new homes is likely to remain strong, and the limit on new home sales will be determined by homebuilder production capacity.

Economic & Strategic Research (ESR) Group
February 16, 2024
For a snapshot of macroeconomic and housing data between the monthly forecasts, please read ESR's Economic and Housing Weekly Notes.

Data sources for charts: Bureau of Economic Analysis, Bureau of Labor Statistics, Census Bureau, National Association of REALTORS, Freddie Mac, Fannie Mae

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, 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.