Economy Picks Up Modestly in April, While New Home Market Continues to Benefit from Low Inventory of Existing Homes

Key Takeaways:

• Retail sales and food services rose 0.4 percent in April after declining for each of the two prior months, according to the Census Bureau. Strong categories included general merchandise stores, nonstore retailers (mostly online sales), and restaurant and bar sales, rising 0.9 percent, 1.2 percent, and 0.6 percent, respectively. Furniture, electronics, and appliance store sales were down 0.6 percent and gas station sales were down a price-related 0.8 percent, their sixth consecutive monthly decline. Core retail sales, which exclude food services, autos, building supplies, and gas stations, were up 0.7 percent.
• Industrial production, a gauge of output in the manufacturing, utility, and mining sectors, increased 0.5 percent in April, though March’s previously reported 0.4 percent gain was completely revised away. Manufacturing output rose 0.9 percent on the strength of a 9.3 percent surge in motor vehicle and parts manufacturing. Excluding autos, manufacturing activity was up 0.3 percent. Mining output increased 0.6 percent, while utilities output fell 3.1 percent.
• Existing home sales declined 3.4 percent to a seasonally adjusted annualized rate (SAAR) of 4.28 million, according to the National Association of REALTORS® (NAR). The inventory of homes for sales rose 7.2 percent to 1.04 million, bringing the months’ supply to 2.9, an improvement of three-tenths. Compared to a year ago, the median sales price of an existing home declined 1.7 percent, according to NAR.
• Housing starts increased 2.2 percent in April to a SAAR of 1.40 million in April, though March’s figure was revised downward. Single-family starts rose 1.6 percent to a SAAR of 846,000 (again following a downward revision to March) and multifamily starts increased 3.2 percent to a SAAR of 555,000. Single-family permits rose 3.1 percent to a SAAR of 855,000, though the permits and starts series have been unusually diverged over the past several months and the gain in permits mostly represents a convergence of the two. Multifamily permits dropped 7.7 percent after an 11.4 percent pullback the month prior, hitting a SAAR of 561,000, the lowest since July 2021.
• The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index increased 5 points to 50 in May, its first time at or above the “neutral” rating of 50 since July 2022. The index for single-family sales in the present rose 5 points to 56 and the index for single-family sales in the next six months was up 7 points to 57. The foot traffic of prospective buyers’ index rose 2 points to 33. The press release notes that “limited existing inventory…resulted in a solid gain for builder confidence.”

Forecast Impact:

Incoming economic data suggests the economy accelerated a bit in April after a slowdown in February and March. Even after adjusting for inflation, core retail sales suggest at least some personal consumption growth in Q2, though we still expect it to grow at a below-trend rate. Still, there is some upside risk as prices for food and gas have been generally flat-to-slightly declining over the past several months, potentially boosting consumers’ ability to spend elsewhere. Additionally, auto manufacturing, which is benefitting from improved supply chain conditions, hit its highest level on record in April. While this is a touch misleading because some of the production is reflective of a “catch-up” period after two years of below-normal output, it is still indicative of strong pent-up consumer demand for autos despite the rising interest rate environment. We are maintaining our call for a recession in the second half of 2023, though the immediate Q2 2023 outlook remains one of slow, but positive, economic growth.

The existing sales pace in April was almost identical to that of our second quarter estimate. We are unlikely to make many revisions here as the gain in inventories should help to keep sales around their current pace despite affordability constraints. Despite the increase in inventory, though, the absolute level remains extremely low, especially for the spring. This is continuing to boost demand for new homes, which is reflected in both starts and builder confidence. We may upgrade our near-term single-family starts forecast as the steady upward trend in permits since January is consistent with improved optimism in public builders’ earnings calls. Downside risk remains, though, as we continue to expect the economic backdrop to weaken, and many smaller homebuilders are likely facing tighter construction loan credit amid the fallout from recent banking turmoil.

Nathaniel Drake
Economic and Strategic Research Group
May 19, 2023

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