Economy Expands at Healthy Pace in Q2 while New Home Sales Decline and Existing Home Market Remains Sluggish

Key Takeaways:

• Gross domestic product (GDP), adjusted for inflation, increased at a 2.4 percent seasonally adjusted annualized rate (SAAR) in Q2 2023, an acceleration of four-tenths from the first quarter, according to the Bureau of Economic Analysis (BEA). Personal consumption expenditures (PCE) grew at a 1.6 percent annualized rate, a slowdown from Q1. Business fixed investment surged at a 7.7 percent annualized rate while residential fixed investment declined at a 4.1 percent SAAR, continuing a 9-quarter slide. Real final sales to private domestic purchasers, which is the sum of personal consumption and private fixed investment and is sometimes thought of as “core” GDP, increased at a healthy 2.3 percent annualized rate.
• The Federal Open Market Committee (FOMC) raised the federal funds rate by 25 basis points to a target range of 5.25 – 5.50 percent at its July 25-26 meeting. The Fed has now raised the policy rate by a cumulative 525 basis points since March 2022, an unusually rapid pace that has brought the fed funds rate to a 22-year high. During his press conference, Chair Powell noted that forward guidance would be minimal and future rate hikes would depend on the path of incoming data.
• Personal income, adjusted for inflation, rose 0.1 percent in June, according to the BEA. Real disposable personal income was up 0.2 percent. Real personal consumption expenditures increased 0.4 percent, the largest increase since January. The PCE price index rose 0.2 percent over the month while decelerating eight-tenths to 3.0 percent on an annual basis. Core PCE prices also rose 0.2 percent over the month and decelerated five-tenths to an annual rate of 4.1 percent, the lowest rate since September 2021.
• The Employment Cost Index (ECI), a measure of labor compensation, increased 1.0 percent in Q2 2023, a deceleration of two-tenths from the prior quarter and the slowest rate of increase in two years, according to the Bureau of Labor Statistics. On an annualized basis, the ECI rose 4.1 percent.
• The Conference Board Consumer Confidence Index rose 6.9 points in July following a 7.6-point gain in June, bringing the index to 117.0, its highest level in two years. The index for confidence in the present situation rose 4.7 points to 160.0, the highest level since before the pandemic. The consumer expectations for the future index rose 8.3 points to 88.3.
• New single-family home sales declined 2.5 percent to a SAAR of 697,000 in June, according to the Census Bureau. The May figure was also revised downward by 6 percent. The months’ supply rose two-tenths to 7.4 due to the slower sales pace as the number of new homes for sale rose by a modest 0.7 percent to 432,000.
• 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, increased 0.3 percent to 76.8 in June.
• The FHFA Purchase-Only House Price Index rose a seasonally adjusted 0.7 percent in May, identical to the gain in April. Compared to a year ago, home prices increased a non-seasonally adjusted 2.9 percent, a deceleration of three-tenths compared to April.

Forecast Impact:

GDP came in above our Q2 expectations. This was due in part to stronger-than-expected personal consumption, which, despite decelerating quarter over quarter, has averaged a healthy annualized growth rate of 2.9 percent over the first half of the year. Given that consumption gained momentum during the quarter, we will likely be upgrading our Q3 consumption and thus growth expectations. Large improvements in consumer confidence and slightly weaker-than-expected inventory building, when combined with stronger sales, also point to an upgrade to Q3 growth. The details of the GDP report have increased the likelihood of a “soft landing,” though we continue to believe there are multiple headwinds facing the economy that will likely act to slow growth through the second half of the year.

The Fed raised rates in line with market expectations. Both the core and headline PCE price index showed continued signs of cooling, largely in line with our expectations, and the ECI also showed signs of deceleration. Still, the ECI continues to show a level of wage growth that is likely too high to be consistent with the Fed’s 2 percent inflation target, especially given recent low productivity growth. Therefore, we continue to expect the Fed to maintain a higher-for-longer policy stance through the end of the year.

Given the decline in new home sales in June and the downward revision to May, second quarter actuals came in below our expectations, which will likely lead us to tamp down our third quarter outlook for new home sales. Still, new home sales remain elevated relative to existing sales, which continued to show sluggishness with the weak pending sales read. The lack of supply of inventory of existing homes also continues to boost prices, demonstrated by the nearly 9 percent annualized gain in May in the FHFA home price index.

Nathaniel Drake
Economic and Strategic Research Group
July 28, 2023

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