Economic Developments - March 2024

Job Growth Expected to Slow

Establishment (payroll) employment posted a solid gain of 275,000 jobs in February, but many of the underlying details in the report paint a much weaker picture of the job market. Net revisions to the prior two months showed 167,000 fewer jobs added than previously reported, including a downward revision of 124,000 in January that reversed much of the previous upward surprise. The household employment report showed a net loss of 184,000 jobs, and the unemployment rate moved up two-tenths to 3.9 percent, its highest level since January 2022. While monthly volatility is expected in the smaller household employment survey, the divergence between it and the establishment survey has been persistent over several months and is not accounted for by definitional differences in the two surveys; in fact, when adjusting the definition of the household survey to match that of the establishment survey, household employment looks even weaker since November.

We think the true strength of the labor market is somewhere in between the still-relatively robust establishment survey and the near-recessionary job declines in the household survey. This is consistent with a slowing economy. Data from the Institute for Supply Management (ISM) indices and the National Federation of Independent Business’s (NFIB) survey of small businesses, as well as measures of aggregate hours worked, suggest labor demand is likely softening. However, we do not see widespread evidence of job cuts. Layoffs and discharges from the Job Openings and Labor Turnover Survey (JOLTS) remain near historically low levels, and both initial and continuing unemployment claims are roughly at the same level as in early November when the household employment survey began deteriorating. As such, our forecast continues to call for slower job growth and a gradual upward drift in the unemployment rate, but for our base case forecast we do not expect outright job declines.

Core Inflation Beats Expectations, but Disinflation is in the Pipeline

Headline Consumer Price Index (CPI), which was released following the conclusion of our forecast, rose 0.4 percent over the month in February, pushing the year-over-year comparison up one-tenth to 3.2 percent. While part of the strength was due to a 3.8 percent jump in volatile gasoline prices, the larger story was the beat on core inflation, which also rose 0.4 percent over the month and was up 3.8 percent compared to a year earlier. Still, the underlying details were a bit more encouraging than the topline figure. The 0.5 percent increase in used auto prices is likely more noise than signal after a 3.4 percent drop the month prior, and we continue to expect deflation in core goods to resume in future months as used autos auction data continues to show price contraction. Furthermore, the 3.6 percent rise in airline fares is related to a similar-sized increase in oil prices. Owners’ equivalent rent (OER) slowed to a 0.4 percent month-over-month gain after a surprising 0.6 percent increase in January. We continue to see disinflationary forces related to shelter in the pipeline, as 2.0 percentage points of the 3.2 percent year-over-year gain in the CPI was due to lagged shelter data and the Bureau of Labor Statistics’ (BLS) own measure of new tenant rent was sharply negative in Q4 of last year. Over time, this should translate into lower measures of CPI shelter costs. Still, we believe this CPI report is unlikely to provide the “greater confidence” the Fed and Chair Powell are looking for to begin cutting interest rates. For now, we continue to expect the first rate cut to occur in June. If inflation data continue to surprise to the upside in coming months, however, the Fed may not begin cutting until later in 2024.

In our view, whether the Fed begins cutting interest rates in June or later in the year is likely to have only a small impact on the macroeconomy and mortgage rates. In contrast, we believe the market’s expectations of the cumulative change in the fed funds rate over the next two to three years will likely have a more meaningful impact on mortgage rates. At the beginning of 2024, futures markets were pricing in about 150 basis points of cuts for 2024, but as of this writing futures suggest only about 75 basis points. If inflation prints continue to come in hot (even if they can be explained away by oddities) and payroll employment growth remains as strong as the last report (even if other labor market metrics show weaker conditions), then we suspect the odds of comparative large Fed easing will continue to diminish. We think the Fed is likely to be more cautious if the hard data are not conclusively pointing to a slowing pace of employment gains and inflation given the risk of a resurgence in inflation if they move too early.

One thing we, and the market, expect at the March Federal Open Market Committee (FOMC) meeting is some discussion of the policy regarding their balance sheet. The Chair noted at the last press conference that it would be a topic of discussion at the March meeting.

Existing Home Sales Likely to Pull Back but Trend Upward Over 2024 as Listings Rise

We have revised downward our outlook for home sales this month largely due to the higher interest rate outlook. However, we still expect an upward path in sales over the year even if there are some bumps along the way.

Mortgage rates rising off their end-of-2023 lows has led to a slowdown in home purchase activity. While existing sales rose 3.1 percent in January to an annualized pace of 4.0 million, these increases reflected mortgage rates in November and December. Pending sales, which lead closings on average by a month or two, fell in January by 4.9 percent, pointing to a likely pullback in February. We have modestly revised downward our view of existing home sales in the near term based on this data; however, we continue to expect a generally upward trend in sales as the year unfolds. We believe an increasing number of transactions will be driven by households who can no longer put off their moves simply due to interest rate lock-in effects because they need to move for life event reasons. Notably, new sales listings for existing homes have continued to rise in recent months even as pending home sales pulled back. According to Realtor.com, the flow of new listings in February was up 11.3 percent from a year prior. This also aligns with the Fannie Mae Home Purchase Sentiment Index® (HPSI), which has showed comparative strength over the past two months, with the "good time to sell" component acting as one of the main drivers. We are expecting existing sales to drift upward to a pace of near 4.40 million annualized units by the end of 2024 (compared to the 4.00 million shown in the January release from the National Association of REALTORS®), even though we are anticipating the February sales pace to pull back.

While we do not explicitly forecast new home listings, a future rise in listings is also expected to outpace the growth in sales, leading to a gradual loosening of the currently very tight housing market. An increase in the months' supply of homes for sales should also lead to some deceleration in home price growth over the next several years, even if a general lack of supply keeps home price appreciation positive despite affordability measures being stretched.

Economic & Strategic Research (ESR) Group
March 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 Economic Analysis, Bureau of Labor Statistics, Census Bureau, Realtor.com, 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.