GDP and GDI Continue to Conflict, While Real Spending Jumps in July

Key Takeaways:

• Gross domestic product (GDP), adjusted for inflation, increased at a 2.1 percent seasonally adjusted annualized rate (SAAR) in Q2 2023, according to the second estimate from the Bureau of Economic Analysis (BEA), a downgrade of three-tenths compared to the advance estimate. The revision was due primarily to lower business fixed investment and private inventory investment than initially estimated. Gross domestic income (GDI), which is a theoretically equivalent measure to GDP, increased at a 0.5 percent annualized rate, an improvement compared to the negative growth rate in each of the prior two quarters but still well below the GDP figure.
• Personal income, adjusted for inflation, was flat in July, according to the BEA. Real disposable personal income declined 0.2 percent. Despite the weak income numbers, real personal consumption growth jumped 0.6 percent, though this was due in part to increased spending on utilities during the July heatwave. The Personal Consumption Expenditures (PCE) price index increased 0.2 percent for the second consecutive month in July, pushing the year-over-year rate up slightly to 3.3 percent due to unfavorable base effects. Excluding food and energy, core PCE also rose 0.2 percent over the month and were up 4.2 percent compared to a year ago.
• The Job Openings and Labor Turnover Survey (JOLTS) showed job openings declined by 338,000 in July, according to the Bureau of Labor Statistics. Compared to their peak in March 2022, job openings are down by 3.2 million. The quits rate declined one-tenth to 2.3 percent, the same level it was just before the pandemic. Layoffs and discharges were flat at 1.6 million, approximately 200,000 below the average 2019 level.
• The Conference Board Consumer Confidence Index declined 7.9 points to 106.1 in August and was downwardly revised in July. The index for confidence in the present situation declined 8.2 points to 144.8, while the index for consumer expectations was down 7.8 points to 80.2.
• 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 0.9 percent to 77.6 in July, its second consecutive monthly gain.
• The FHFA Purchase-Only House Price Index rose a seasonally adjusted 0.3 percent in June, a slowdown of four-tenths compared to May. Compared to a year ago, home prices increased a non-seasonally adjusted 3.2 percent in June, an acceleration of two-tenths compared to May.

Forecast Impact:

GDP and GDI, which should theoretically equal one another but sometimes differ due to measurement error, have now been significantly diverged for each of the past three quarters. Whereas GDP indicates the economy continues to grow at a healthy long-term trend rate, the average annualized growth rate of GDI from Q4 2022 to Q2 2023 is negative 1.5 percent. While GDI doesn’t directly feed into our forecast, it does provide additional uncertainty about the true strength of economic growth through the first half of the year and the direction growth is headed. In contrast, the strong personal consumption figure in July will likely cause a near-term upgrade to our forecast, though we think the strength is likely to prove temporary due to unusually high spending on utilities and weak real income growth rendering the current consumption trend unsustainable. Additionally, the labor market showed continued signs of normalization, as job openings have been declining rapidly and the quits rate has returned to its pre-pandemic level. The lower quits rate, in particular, suggests wage growth will continue to slow, supporting our forecast that the Fed is likely done hiking rates in this cycle.

The pending home sales index supports our forecast that existing home sales are already near their “floor,” though admittedly the reporting period doesn’t capture the recent run-up in mortgage rates. More timely weekly mortgage application data suggests that over-7 percent mortgage rates are further slowing activity, presenting some downside risk to our near-term home sales forecast.

Nathaniel Drake
Economic and Strategic Research Group
August 31, 2023

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