GDP Details Continue to Signal a Strong Economy as New and Pending Home Sales Rise

Key Takeaways:

• Gross domestic product (GDP), adjusted for inflation, increased at a 1.6 percent seasonally adjusted annualized rate (SAAR) in Q1 2024, a deceleration from the 3.4 percent annualized growth rate in the prior quarter, according to the Bureau of Economic Analysis (BEA). While real personal consumption expenditures (PCE) remained strong at a SAAR of 2.5 percent and business fixed investment rose at a robust 4.4 percent annualized growth rate, the headline GDP number was dragged down by the volatile net exports and inventory investment categories. Real final sales to private domestic purchasers, which is the sum of private consumption and investment and is sometimes referred to as core GDP, increased at a solid 3.1 percent annualized rate. We also note that residential fixed investment surged at a 13.9 percent annualized rate as commissions increased from stronger home sales figures and single-family construction remained robust.
• Personal income, adjusted for inflation, increased 0.2 percent in March, according to the BEA. Real disposable personal income was also up 0.2 percent. Real personal consumption outpaced income gains, rising 0.5 percent over the month. This pushed the saving rate down four-tenths to 3.2 percent, the lowest since October 2022. The PCE price index rose 0.3 percent over the month and 2.7 percent over the year. Core PCE prices also rose 0.3 percent in March and were up 2.8 percent compared to a year ago.
• 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 3.4 percent to 78.2 in March, its highest level in a year.
• New single-family home sales rose 8.8 percent to a SAAR of 693,000 in March, the fastest sales rate since September, according to the Census Bureau. However, the February figure was revised downward sharply. The months’ supply declined five-tenths to 8.3 as the faster sales pace offset the 2.6 percent rise in new homes available for sale.

Forecast Impact:

Real GDP was below consensus and our expectations, but the miss was primarily due to the volatile net exports and inventory investment categories that are less indicative of the underlying growth trend. Real PCE was in line with our forecast and both residential and business fixed investment were somewhat higher than we had expected. So-called “core GDP” grew at a solid 3.1 percent annualized rate, which we believe is more indicative of the actual strength of the economy in Q1. We continue to believe growth is likely to slow this year as consumers return to a more typical saving rate and both businesses and consumers respond to a higher-for-longer interest rate environment.

PCE inflation was above both consensus and our expectations. Core services excluding housing, a closely watched measure of wage pressures, rose at an annualized rate of 4.8 percent. While we continue to see some easing in core price inflation this year in line with our forecast for a generally slowing economy and weaker labor demand, incoming data supports our forecast for a higher-for-longer monetary policy stance.

The rise in pending home sales presents a bit of upside risk to our near-term existing home sales forecast. Still, pending sales recorded in March occurred before rates jumped back above 7 percent, so we continue to expect a small pullback in existing sales in Q2 as the higher rates weigh on demand. On the new sales side, after revisions, the Q1 quarterly sales pace was in line with our forecast. At 8.3, the months’ supply is consistent with ongoing use of incentives, which we believe will help new homes sales rise as the year progresses.

Nathaniel Drake
Economic and Strategic Research Group
April 26, 2024

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