Fed Cuts Interest Rates Amid Sluggish Existing Sales but a Rebound in Starts Activity

Key Takeaways:

• The Federal Open Market Committee (FOMC) cut the target federal funds rate by 50 basis points at its September 17-18 meeting, bringing the new target range to 4.75-5 percent. This represents the first change in the federal funds rate since July 2023. Governor Bowman, who favored a 25-basis point cut, was the sole dissent. The newly released summary of economic projections (SEP) implies another 50 basis points in cuts by the end of 2024, 100 basis points in cuts in 2025, and 50 basis points in cuts in 2026 before reaching a terminal target rate of 2.75-3 percent. Compared to the June SEP, the updated projections show a higher unemployment rate and a lower inflation rate through the forecast horizon.
• Retail sales and food services increased 0.1 percent in August following a strong 1.1 percent gain in July, according to the Census Bureau. Miscellaneous store retailers (+1.7 percent) and nonstore retailers (+1.4 percent), the latter of which represents primarily online sales, logged strong increases. These were offset somewhat by a price-related decline in gasoline station sales (-1.2 percent), furniture and home furnishing stores sales (-0.7 percent), and sales at clothing and accessory stores (-0.7 percent). Restaurant and bar sales were flat over the month. Control group retail sales (excluding food service, auto, building supplies, and gas station sales) rose 0.3 percent following an upwardly revised gain of 0.4 percent in July.
• Industrial production, a gauge of output in the manufacturing, utility, and mining sectors, rose 0.8 percent in August but was downwardly revised in July, according to the Federal Reserve Board. Manufacturing activity rose 0.9 percent to 99.6, a three-month high, due largely to a rebound in auto manufacturing. Mining activity rose 0.8 percent to 120.1, the highest level in 6 months, while utilities output declined 0.1 percent.
• Existing home sales declined 2.5 percent to a seasonally adjusted annualized rate (SAAR) of 3.86 million in August, the lowest sales pace since October 2023 and the second slowest pace since 2010, according to the National Association of REALTORS®. The number of homes available on the market was essentially flat, but the lower sales rate pushed the months’ supply up one-tenth to 4.2, the highest since the onset of the pandemic.
• Housing starts increased 9.6 percent to a SAAR of 1.4 million in August, according to the Census Bureau. Single-family starts jumped 15.8 percent to a SAAR of 992,000, reversing last month’s decline that was due to hurricane-related disruptions. Multifamily starts declined 4.2 percent to a SAAR of 364,000. Single-family permits rose 2.8 percent to a SAAR of 967,000, the second consecutive monthly gain, while multifamily permits were up 9.2 percent to a SAAR of 508,000.
• The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index increased 2 points to 41 in September, reversing last month’s decline but remaining well below the neutral level of 50. The index for single-family sales in the present rose 1 point to 45, while the index for sales in the next six months was up 4 points to 53, its highest level since April. The index for the foot traffic of prospective buyers increased 2 points to 27.

Forecast Impact:

Control group retail sales, which feed directly into the Bureau of Economic Analysis’s estimate of personal consumption expenditures (PCE), has PCE tracking a bit above our Q3 estimate. Looking beyond the third quarter, we continue to expect some slowing in consumption growth to better align with the current rate of real income growth. Still, there may be some upside risk to this forecast as the Fed cut interest rates by more than we had expected. While most monetary policy works with long lags, interest rates for auto loans and other durable goods categories have already come down in expectation of an easing in monetary policy, which could spur some additional consumption in those categories by the end of the year.

Ongoing weakness in existing home sales is in line with our most recent forecast, which called for the lowest annual level of existing sales since 1995. It’s worth noting that August sales, which were mostly closed in June and July when rates were still around 6.9 percent, don’t reflect most of the recent decline in mortgage rates. However, most real-time indicators have continued to show sluggish demand at current affordability levels even recently, when rates fell below 6.5 percent. The one exception is the most recent reading of weekly mortgage purchase applications, which rose 5.4 percent from a week prior. If sustained, this presents some upside risk to our year-end forecast, but we continue to believe there is little demand at current affordability levels. On the new home side, the jump in single-family starts confirms our theory that last month’s decline was due to the effects of Hurricane Beryl. Additionally, after steadily declining from January through June of this year, single-family permits have now increased for the second consecutive month, perhaps indicating that homebuilders are again willing to ramp up activity, presenting some upside risk to our forecast.

Nathaniel Drake
Economic and Strategic Research Group
September 20, 2024

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