Economic Developments - July 2024

Incoming Data Point to Below-Trend Growth, Cooling Inflation

Recent data releases indicate that economic growth is decelerating, principally due to softening consumer spending growth, which was largely in line with our previous forecast. The third release of Q1 2024 GDP showed another downgrade to personal consumption expenditures (PCE) to 1.5 percent annualized; a full percentage point lower than originally reported. Additionally, monthly personal consumption data shows spending has not picked up much in the second quarter, suggesting consumers may finally be retrenching toward a more historically typical saving rate, a dynamic we have long expected. Spending growth in recent years has eclipsed growth in incomes, which we’ve believed was unsustainable. Business surveys, including contractionary June readings in the Institute of Supply Management’s (ISM) manufacturing and services indices, also point to below-trend growth in the near term. As such, we have left our forecast for 2024 Q4/Q4 GDP unchanged at 1.6 percent, a pace below what is believed to be the long-run growth trend.

June employment data has also shown signs of softening. While nonfarm payrolls increased by a relatively solid 206,000, the two prior months were revised downward by a combined 111,000 jobs. This brought the three-month moving average to 177,000, the slowest pace in about three and a half years. The unemployment rate also ticked up another one-tenth to 4.1 percent, four-tenths higher than where it started the year. Measures of unemployment duration are also pointing to labor market softening. While we aren’t yet concerned about significant labor market deterioration, as household balance sheets are solid in aggregate, incomes continue to grow, and unemployment claims remain in a normal range, historically, rises in the unemployment rate of the magnitude observed over the past year have often predated economic contractions and, therefore, merit monitoring.

The June print of the CPI was well below consensus expectations and led to a downward revision to our near-term inflation outlook. While the 0.1 percent month-over-month decline in headline inflation was helped by falling energy, vehicle, and airline ticket prices, disinflation was relatively broad-based. Core CPI rose just 0.1 percent over the month and fell to 3.3 percent compared to a year ago, the lowest annual inflation rate in more than three years. The long-awaited slowing in shelter prices also materialized in June, with both rent of primary residence and owners’ equivalent rent (OER) registering their smallest monthly gains since 2021. Other core services that were elevated in the first quarter, such as medical care services and motor vehicle insurance, also slowed in the second quarter. While two reports do not definitively establish a trend, recent inflation data have been encouraging and suggest further sustained progress is likely. We have reinstated our expectation for Federal Reserve rate cuts in both September and December (previously just December), as we believe the combination of slowing labor market conditions and encouraging inflation data will be sufficient for the Fed to begin easing policy soon.

Home Prices Come in Stronger than Expected, Regional Slowing Likely

Home prices rose 3.0 percent in the second quarter on a non-seasonally adjusted basis, as measured by the Fannie Mae Home Price Index, and were up 6.9 percent from a year earlier. While this was stronger appreciation than we had previously forecast, it still represents a deceleration from 7.3 percent annual growth in Q1. We have modestly upgraded our home price outlook for 2024 largely based on these stronger incoming data for the first half of the year, but we continue to expect deceleration going forward as affordability constraints weigh on home purchase demand.

For-sale active listings continue to rise on a year-over-year basis and are now up 37 percent as of June, according to Realtor.com. Despite the rise in listings, the pace of sales remains subdued. Existing home sales are down 2.8 percent from a year ago in May. This growing gap between listings and sales growth is leading to comparative loosening in the housing market as affordability appears to be holding many buyers back. Redfin’s demand index, which measures requests for showings and listing views, is down 17 percent from a year ago, while the weekly share of listings experiencing a price cut was 6.5 percent as of the week ending July 7, up from 5.5 percent over the corresponding week a year prior.

The trend of active listings has varied significantly by region. Sun Belt metros, particularly in Florida and Texas, have experienced larger inventory growth compared to the national average. Total inventories of for-sale homes in these states are at or even a bit above 2018-2019 numbers. While 2018-2019 was still a relatively tight market, the trend in the Sun Belt region continues toward an overall loosening, and buyer demand is softer now compared to before the pandemic. In contrast, most Northeast and Midwest metro areas continue to experience for-sale inventories near recent lows and remain very supply constrained. What can be seen in recent historical data already is that metro areas with the greatest for-sale inventories relative to their pre-pandemic baseline have experienced softer home price growth over the second quarter.

At least some of this regional listing and price divergence is likely due to variations in homebuilding activity over recent years. Many of these sunbelt metros have experienced a comparative boom in building post-pandemic, and this added supply is likely easing some of the price pressures. We also suspect some of the softening demand in Sunbelt areas is due to demand previously being pulled forward following the pandemic, as many households accelerated their retirement move plans and second home purchases.

While metro-area single-family construction permitting data does not yet show a meaningful slowdown in new construction in the regions with the greatest growing supply of existing listings, historically, a looser resale market leads to a slowdown in new construction. We have therefore modestly moved downward our single-family starts and new home sales forecasts to reflect comparative weakening in some of the top-building metros. Still, homebuilders' margins have been strong enough that they appear willing to help drive sales by offering consumers more incentives, so we are still expecting comparatively robust new construction over our forecast horizon – but more modest than previously forecast. We now project total new home sales to be 639,000 in 2024, compared to 667,000 previously, and 716,000 in 2025, compared to 752,000 previously.

Economic & Strategic Research (ESR) Group
July 15, 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 Labor Statistics, Realtor.com, Zillow, Fed Reserve Bank of Cleveland

Opinions, analyses, estimates, forecasts, beliefs, 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, beliefs, 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.