GDI Continues to Suggest Weaker Growth than GDP, while New and Pending Home Sales Pull Back Amid Higher Mortgage Rates

Key Takeaways:

• Gross domestic product (GDP), adjusted for inflation, increased at a 5.2 percent seasonally adjusted annualized rate (SAAR) in Q3 2023, according to the second estimate from the Bureau of Economic Analysis (BEA), an upgrade of three-tenths compared to the advance estimate. Notably, nonresidential fixed investment, which was previously reported to have contracted at a 0.1 percent annualized rate, is now reported to have grown at a 1.3 percent annualized rate. Gross domestic income (GDI), which is a theoretically equivalent measure to GDP, grew at a 1.5 percent annualized rate.
• Personal income, adjusted for inflation, rose 0.2 percent in October, an improvement from mostly flat readings since June, according to the BEA. Real disposable personal income was up 0.3 percent, the first increase since May. Real personal consumption expenditures grew 0.2 percent, causing the saving rate to tick up one-tenth to 3.8 percent, still well below the recent historical average. The personal consumption expenditures (PCE) price index was flat over the month and was up 3.0 percent compared to a year ago, the slowest annual growth rate since March 2021. Core PCE prices rose 0.2 percent in October in part because core services ex-housing costs were up just 0.1 percent over the month. Compared to a year ago, core PCE prices rose 3.5 percent, a slowdown of two-tenths compared to September.
• The Conference Board Consumer Confidence Index increased 2.9 points to 102.0 in November, ending a 3-month streak of declines. Consumer confidence in the present situation was down four-tenths to 138.2, while expectations for the future jumped 5.1 points to a still-low level of 77.8.
• 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, declined 1.5 percent in October to 71.4, the lowest level since the index’s creation in 2001.
• New single-family home sales declined 5.6 percent to a SAAR of 679,000 in October and were downwardly revised in September, according to the Census Bureau. The number of new homes available for sale rose 1.4 percent to 439,000, causing the months’ supply to increase six-tenths to 7.8.
• The FHFA Purchase-Only House Price Index increased a seasonally adjusted 0.6 percent in September. Over the third quarter, home prices rose a seasonally adjusted 2.1 percent, translating to an 8.8 percent annualized rate, the fastest since the second quarter of 2022. On a not seasonally adjusted basis, home prices rose 6.0 percent compared to a year ago in September.

Forecast Impact:

GDP and GDI continued to paint two different pictures of the economy in the third quarter. While GDP pointed to a boom in growth, Q3 GDI suggests the economy grew at a below-trend rate and, in real terms, shows the economy contracted over the past year (in contrast, real GDP is 3.0 percent higher compared to a year ago). The true answer is likely somewhere in between: The average of real GDP and GDI show the economy grew 1.4 over the past year, which is below the long-term trend. Below-trend growth would be far more consistent with the cooling inflation and weak consumer confidence we’ve seen over the past year and is also consistent with our forecast for a continued slowdown in economic growth in Q4 and into next year. Additionally, the slowdown in real consumption growth in October compared to the average of the past several months suggests consumers may be retrenching somewhat in response to weak real income growth since May. We continue to believe real spending growth will slow in the fourth quarter.

Both new and pending home sales showed a slowdown in housing activity in response to near-8 percent mortgage rates, broadly in line with our expectations. Still, with mortgage rates pulling back in recent weeks, sales may bounce, as purchase mortgage applications have risen from lows in recent weeks. While sales are still expected to be sluggish going forward, we believe existing home sales are likely near their cycle trough. Meanwhile, we believe the ongoing lack of existing homes available for sale will continue to support demand for new homes, which will remain comparatively strong.

Nathaniel Drake
Economic and Strategic Research Group
December 1, 2023

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