Economic Developments - June 2024

Near-Term Growth Outlook Softens

The second estimate of Q1 2024 GDP growth was revised downward three-tenths to a 1.3 percent annualized rate. The most significant revision was to personal consumption, which was revised downward five-tenths to 2.0 percent annualized, a significantly weaker picture of personal consumption spending than in the initial release. Combined with a weak April personal consumption report, in which real spending declined by 0.6 percent annualized over the month, it is now evident that consumer spending momentum was weaker entering the second quarter than previously thought. The earlier-than-normal timing of Easter this year, along with some March sales events at major retailers, helps to explain some of the weakness in the April number. However, given that the personal saving rate is at a very low level of 3.6 percent and personal consumption growth has outpaced income growth in recent years, we continue to see the consumer retrenching somewhat going forward. Some major fast food and retail firms have also pointed to softening consumer demand in earnings reports.

Unlike consumer spending, the May payroll employment report surprised to the upside, with 272,000 net jobs added. This figure stood in sharp contrast to the household survey measure of employment from which the unemployment rate is derived. The household survey indicated an outright decline of 408,000 employed persons and showed the unemployment rate ticking up one-tenth to 4.0 percent, the highest since January 2022.

We have previously discussed how we (along with many other economic commentators) now believe that the household survey is under-reporting total employment gains due to the underlying older Census Bureau projections for population growth used in the survey, which is likely not capturing the full extent of the recently high immigration flows. Simultaneously, there is now evidence suggesting that the establishment payroll survey may be over-stating recent employment gains due to the way the survey models the “birth” and “death” of firms. An alternative, more comprehensive employment measure, known as the Quarterly Census of Employment and Workers (QCEW), points to a significant slowdown in firm growth in Q4 2023. We believe this trend likely continued into the start of 2024, consistent with recent bankruptcy filings data. This suggests that when the Bureau of Labor Statistics releases its next annual benchmark revision (the preliminary benchmark will be released in August and will affect data through December 2023), reported payroll employment gains since the start of the year are likely to revised downward significantly. Therefore, our best estimate at this time is that the true underlying employment growth trend is likely somewhere between what is being measured by the household and establishment surveys, perhaps somewhere around 150,000 per month on average for 2024 to date, compared to the reported average payroll numbers of 248,000 currently. We view this as more consistent with an economy that is continuing to grow but decelerating relative to the past couple years, as suggested by various other data.

Encouraging May Inflation Reports, But More Data Needed to Confirm Trend

The Consumer Price Index (CPI) came in cooler in May than recent months, with the headline flat over the month and the core index rising only 0.2 percent month over month. On a year-over-year basis, the topline and core indices rose 3.3 percent and 3.4 percent, respectively, with both decelerating from the prior reading.  The May Producer Price Index (PPI) was also encouraging, with headline PPI falling 0.2 percent over the month and decelerating on a year-over-year basis. This welcome news on the inflation front led to a significant drop in the 10-year Treasury rate and an increase in the odds of rate cuts this year. That said, the inflation data was only one month, and these series have been noisy as of late. We are looking for confirmation of additional deceleration in inflation reports before concluding that inflation is fully on track toward normalizing at the Fed's 2 percent target. We currently expect the Fed to make a rate cut in December, partly based on recent Fed guidance from its June meeting and the release of its Summary of Economic Projections (SEP). However, additional soft inflation reports, especially if combined with a growing acceptance that payroll employment is perhaps overstated, makes a September cut still a real possibility. One more point to note is that in its most recent SEP release, the FOMC upwardly raised what it expects the long-run equilibrium fed funds rate to be to 2.8 percent, up from 2.6 percent. While this has little bearing on the near term, it suggests that the ultimate resting place of interest rates, and thus mortgage rates, may be a touch higher than a lot of market participants have previously assumed.

Home Sales Soften More Than Previously Expected

Existing home sales fell 1.9 percent in April to an annualized pace of 4.14 million. This was somewhat weaker than we had anticipated, and recent purchase mortgage application data also point to near-term weakness. As such, we have downwardly revised our existing home sales outlook and now project 2024 existing sales to total 4.15 million (previously 4.20 million). This now represents only a minor increase of 1.5 percent from 2023 total year existing sales.

This sales softness is happening while listings continuing to rise. We read this divergence to mean more homeowners are no longer putting off their decision to sell, despite the so-called "lock-in effect," perhaps out of a belief that mortgage rates will remain higher for longer. However, affordability constraints are limiting the number of buyers willing and able to purchase these homes. Sellers have not been too quick to cut listing prices, but there is some evidence of this gradually occurring as Redfin reports the share of for-sale listings with price drops rising modestly, now at 6.5 percent in the most recent weekly data, up from about 4.5 percent this time last year. While home prices tend to be sticky downward, and overall the market still remains tight by historical standards, this gradual loosening of the months' supply of inventory is consistent with a deceleration in home price growth going forward. As of April, the months' supply as measured by the National Association of REALTORS® was 3.5, up from 3.0 a year prior.

It should also be noted that the growth in listings has a strong geographic skew. Many of the previously hot Sun Belt markets are where listings are disproportionally rising. These metros also tend to be markets with a higher degree of new construction in recent years, and now some of them have for-sale inventory levels similar to 2019. Florida and Texas, for example, account for just under half of the total listings growth compared to a year ago. This suggests that these markets will experience comparative price softness going forward while supply remains comparatively tight in many of the northeast and midwestern markets.

We continue to anticipate that new home construction and sales will remain comparatively strong going forward. Even in markets with growing existing home inventories, overall supply is still limited by historical comparison, and homebuilders generally continue to have adequate margins to make concessions to move inventory. The months' supply of new homes is at 9.1 as of April, the highest since November 2022. However, if existing inventory growth in the Sun Belt markets, where a disproportionate share of new sales occur, continues to rise, there could be downside risk to our new home sales and construction forecasts.

We expect Multifamily construction starts to remain modest for the foreseeable future as rent growth in many of the larger markets is soft and construction financing relatively tight. However, looking beyond 2025, when the current construction pipeline has likely been worked through, we believe an underlaying lack of housing supply relative to demographic trends should continue to support multifamily home construction.

Economic & Strategic Research (ESR) Group
June 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

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.