Economic Developments - November 2024

Growth Outlook Sees Little Change, While Interest Rate Outlook Jumps

Third-quarter GDP grew at a 2.8 percent annualized rate, broadly in line with our expectations. Consumption growth was particularly robust, accelerating from a 2.8 percent annualized growth rate in the second quarter to 3.7 percent in the third quarter. This somewhat stronger-than-expected consumption in Q3 has pushed up our forecast for consumer spending over the next couple of quarters. Over the longer term, though, our view that consumption growth will decelerate to a pace consistent with our long-run estimates of sustainable income and population growth is unchanged. Notably, real disposable personal income grew at a much slower 1.6 percent annualized rate in Q3. We forecast GDP growth to decelerate from an estimated 2.4 percent in 2024 to 2.1 percent in 2025 and 2.2 percent in 2026, in part due to an expectation of moderating consumer spending.

The October employment report showed a nonfarm payroll gain of just 12,000 in October, though the weakness was mostly due to significant disruptions stemming from strike activity and hurricanes Helene and Milton. While we expect November’s report will reverse this weakness, our estimate for nonfarm payroll employment growth for the fourth quarter has been revised downward to incorporate the October data. Still, our longer-run view of the labor market is also relatively unchanged. A broad spectrum of labor market indicators, such as job openings and quits, suggest that labor market conditions have softened meaningfully but have not deteriorated. We continue to expect a modest slowing in job growth through our forecast horizon, consistent with an economy near full employment.

Recent inflation data has come in stickier than we previously expected. Core CPI rose 0.3 percent for the third consecutive month in October, leaving the year-over-year comparison elevated at 3.3 percent. While lagged shelter costs continue to dominate core CPI, further progress in the core PCE price index, which puts less weight on shelter and is the Fed’s preferred inflation gauge, has also stalled, with September posting the third-consecutive 2.7 percent-year-over-year gain. Based on the incoming data, we have upgraded our 2024 inflation outlook, particularly for core CPI, with smaller upgrades for topline CPI and core PCE due to the weighting of categories that remain elevated. However, we have downgraded our oil price forecast through our forecast horizon due to recent movements in prices and softer global demand projections. We expect this will keep topline inflation readings below core inflation readings through 2025, though an expected stabilization in oil prices by 2026 will cause the topline inflation readings to rise without a corresponding increase in core inflation.

Our mortgage rate outlook has been revised upward significantly this month, consistent with recent movement in long-duration bonds. As we stated in our October commentary, we attribute some of the movement in the 10-year Treasury — from a recent low near 3.6 percent in the middle of September to about 4.4 percent as of this writing — to incoming strong consumer spending and hotter inflation data that signal the economy remains on strong footing, as well as a related expectation of less monetary policy easing over the next several quarters. More recently, we believe some of the upward movement may also be due to market expectations of more expansive fiscal policy following the results of the 2024 election, as well as general heightened policy uncertainty.

Existing Home Sales Outlook Downgraded amid Higher Mortgage Rates

Existing home sales fell in September by 1.0 percent to an annualized pace of 3.84 million, a new cycle low. Based on the 7.4 percent rise in pending sales in September, which lead closings on average by 30-45 days, and purchase mortgage application data, we expect a bump in sales in October. However, with the more recent rise in mortgage rates over the past two months (the 30-year fixed rate mortgage is now at 6.78 percent for the week ending November 14, according to Freddie Mac), any near-term resurgence in home sales looks unlikely. Mortgage applications over the last month have fallen back to their recent lows, pointing to lower home sales to close out the year.

A combination of weak purchase activity in recent months and our upwardly revised outlook on mortgage rates led to a downward revision to our existing home sales outlook for the remainder of 2024 and into 2025. We now expect existing home sales will be 4.01 million in 2024 (4.06 million previously), which would represent a nearly 30-year low, and 4.18 million in 2025 (4.52 million previously). For our inaugural 2026 forecast, we project some recovery, with existing home sales rising to 4.89 million — reflecting waning lock-in effects, modest affordability improvements as house price growth decelerates, and growing pent-up demand to move.

Single-family housing starts rose 2.7 percent in September. While new home construction data is likely to remain volatile in coming releases due to hurricane disruptions, new home sales and construction remain solid despite the interest rate environment. Contingent on our macroeconomic outlook, we anticipate the general trend to continue through our forecast horizon, as homebuilders continue to indicate a willingness to use rate buydowns and other incentives to move sales even amid higher mortgage rates. With lock-in effects still strong for existing home sales, thus keeping inventories of for-sale homes constrained in many metros, many potential homebuyers will likely continue to shift to the new home sales market. We forecast new home sales will total 704,000 in 2024, before rising 7.2 percent in 2025 to 754,000 and a further 4.0 percent in 2026 to 784,000.