Economy, Inflation Continue Hot Streak in January as New Home Sales Receive Boost from Temporarily Lower Mortgage Rates

Key Takeaways:

• Gross domestic product (GDP), adjusted for inflation, increased at a 2.7 percent annualized rate in Q4 2022, according to the second estimate from the Bureau of Economic Analysis (BEA), a downgrade of two-tenths from the advance estimate. The update was due largely to a downward revision to consumer spending that was partially offset by an upward revision to business fixed investment.
• Personal income, adjusted for inflation, was flat in January, according to the BEA. However, due to updated inflation-adjusted tax brackets at the beginning of the year causing a lower effective tax rate compared to December, real disposable personal income rose 1.4 percent. Real personal consumption expenditures were up 1.1 percent. The saving rate moved up two-tenths to 4.7 percent, its highest level in a year, though it remains suppressed compared to pre-COVID levels. The PCE price index rose 0.6 percent in January, a sharp acceleration from the upwardly revised 0.2 percent gain in December. Core PCE and core services less housing also increased 0.6 percent over the month and were up 4.7 percent and 4.6 percent over the year, respectively.
• Existing home sales declined 0.7 percent in January to a seasonally adjusted annualized rate (SAAR) of 4.0 million, the lowest level since 2010, according to the National Association of REALTORS®. The inventory of existing homes for sale rose 2.1 percent to 980,000. The months’ supply was flat at 2.9 and the median sales price of existing homes sold was up 0.7 percent from a year ago, the slowest annual growth rate since 2012.
• New single-family home sales rose 7.2 percent to a seasonally adjusted annualized rate of 670,000, the highest rate since March 2022, according to the Census Bureau. We believe the jump likely reflects the temporary decline in mortgage rates and general volatility in the series. New homes for sales dipped 2.9 percent to 439,000, though the number of new homes for sale that are completed rose slightly. The months’ supply declined eight-tenths to 7.9.
• The minutes from the Federal Open Market Committee (FOMC) January 31-February 1 meeting showed that committee members viewed economic conditions as generally slowing, and inflationary pressures as moderating but remaining too high. As such, “almost all” participants supported slowing the pace of rate hikes to 25 basis points, though a few participants favored a larger rate hike.

Forecast Impact:

Real disposable income had a strong gain in January as updated inflation-adjusted tax brackets effectively gave wage earners a tax cut compared to December. Part of this translated into additional spending which, when combined with the earlier retail sales report, suggest Q1 consumption will be higher than our forecast. Still, we remain skeptical of the seasonal adjustments surrounding the holiday season. The saving rate was also a bit higher and has increased for four consecutive months after hitting 3.0 percent in September. Even still, consumption remains elevated relative to income and will likely need to return to historically normal levels this year, causing a slowdown in consumer spending in our forecast. Additionally, the PCE price index came in modestly hotter than what was implied by the January CPI report, likely further pushing up our near-term inflationary forecast revisions. Importantly, the FOMC minutes reflect a time period before recent weeks’ upward revisions to CPI and PCE showed inflationary pressures looking stickier than previously thought, an exceptionally strong labor report, and growing evidence of strong consumer spending to start 2023. We currently expect the Fed to hike by 25 basis points at both of its March and May meetings, though market expectations and stronger-than-expected incoming data currently point to the possibility of a 50-basis point hike at one of the upcoming meetings.

Existing home sales continued to fall to start the year, though the January decline was the smallest over the past 12-month streak. The January figure was somewhat below our Q1 assumption based on the corresponding trend in weekly mortgage applications. A bump in February sales could therefore still occur. However, with mortgage rates rebounding recently (up to 6.5 percent as of the most recent Freddie Mac reading) and a substantial decline in mortgage applications this past week, we would expect any February bump to be short-lived. On the new home side, sales continue to comparatively outperform existing sales, likely due in part to extremely tight existing sales inventory and ongoing incentive offers from builders. The January figure is higher than our Q1 expectation, as we expect some pullback in coming months.

Nathaniel Drake
Economic and Strategic Research Group
February 24, 2023

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