Economic Growth Beat Expectations to End 2023; Home Sales Poised to Trend Upward

Key Takeaways:

• Gross domestic product (GDP), adjusted for inflation, increased at a 3.3 percent seasonally adjusted annualized rate (SAAR) in Q4 2023, a deceleration from the 4.9 percent growth rate in Q3 but still above the long-term trend average, according to the Bureau of Economic Analysis (BEA). For 2023 as a whole, the economy grew 3.1 percent, a sharp acceleration from the 0.7 percent Q4/Q4 growth rate in 2022. In the fourth quarter, real personal consumption expenditures rose at a SAAR of 2.8 percent, a modest deceleration from the 3.1 percent pace in Q3. Business fixed investment rose at a 1.9 percent SAAR, while residential fixed investment grew for a second straight quarter, rising at a SAAR of 1.0 percent. The recently volatile net exports and private inventory investment categories added a combined 0.5 percentage points. Real private sales to private domestic purchasers, which is the combination of private consumption and fixed investment and is sometimes considered “core GDP,” grew at a 2.6 percent annualized rate, down modestly from the 3.0 percent rate in Q3.
• Personal income, adjusted for inflation, rose 0.1 percent in December, slowing from the 0.5 percent growth rate in November, according to the BEA. Disposable personal income also rose 0.1 percent. Personal consumption expenditures jumped 0.5 percent for the second consecutive month. The personal consumption expenditures price index rose 0.2 percent over the month, holding the year-over-year comparison flat at 2.6 percent. Core inflation also rose by 0.2 percent, bringing the year-over-year rate to 2.9 percent, the lowest since early 2021.
• The National Association of REALTORS® Pending Home Sales Index, which records contract signings of existing homes and typically leads closed sales by one to two months, jumped 8.3 percent to 77.3 in December.
• New single-family home sales increased 8.0 percent from an upwardly revised November figure to a SAAR of 664,000 in December, according to the Census Bureau. The months’ supply declined six-tenths to 8.2 as the sales rate outpaced the 0.9 percent increase in new homes available for sale.

Forecast Impact:

GDP beat both consensus and our expectations. Consumption was stronger than we had forecast, though this was unsurprising following last week’s beat on the retail sales report. Unexpected was the positive contribution from both private inventory investment and net exports, both of which we had forecast to drag on GDP. Government spending was also considerably stronger than we had expected, though this is likely to slow in 2024 due to more modest growth in local and state government tax receipts. Looking forward, we continue to expect economic growth will slow in 2024. Some of the end-of-quarter momentum in personal consumption will likely flow through to an upward revision to our Q1 2024 consumption growth expectations, but this may be partially offset by the unexpected strength in private investment and net exports reversing next quarter. On balance, while the economy has remained resilient, core Personal Consumption Expenditures (PCE) inflation has achieved an annualized rate of 2.1 percent or lower in six of the past seven months. This is supportive of an expectation of easing monetary policy later this year.

In housing, a combination of declining mortgage rates and unseasonably warm weather in December likely contributed to the increase in new home sales, though the underlying supply and demand dynamics in the new home market also remain strong. The tight inventory of existing homes available for sale continues to push prospective buyers to the new home market, and the December uptick in the sales rate is consistent with strong starts activity and a recent jump in homebuilder confidence. Moving into 2024, while affordability will remain a constraint, we expect new home sales to trend upward as lower mortgage rates help spur demand. Similarly, the December 2023 increase in pending sales supports our forecast that existing sales will begin a slow recovery upward in 2024.

Nathaniel Drake
Economic and Strategic Research Group
January 26, 2024

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