GDP Growth Slows Amid Inventory Pullback, While New Home Sales Continue to Surprise to the Upside

Key Takeaways:

• Gross domestic product (GDP), adjusted for inflation, increased at a 1.1 percent seasonally adjusted annualized rate (SAAR) in Q1 2023, according to the Bureau of Economic Analysis (BEA). Personal consumption expenditures (PCE) were robust, rising at a 3.7 percent annualized rate, the strongest growth rate since the second quarter of 2021. Nonresidential fixed investment rose at a 0.7 percent annualized rate as investments in structures and intellectual property offset a 7.3 percent annualized slide in equipment investment. Residential fixed investment declined at a SAAR of 4.2 percent, leveling off somewhat from back-to-back 25-plus percent annualized declines. Inventory investment was weak, dragging 2.3 percentage points on topline GDP, while the impact of net trade was negligible. Real final sales to private domestic purchasers, which is the sum of personal consumption and private fixed investment and is sometimes thought of as “core” GDP, increased at a 2.9 percent SAAR, rebounding from a flat reading in Q4.
• Personal income, adjusted for inflation, rose 0.2 percent in March, according to the BEA. Real disposable personal income was up 0.3 percent but didn’t translate into higher spending as real personal consumption expenditures were flat after rounding. The PCE price index ticked up 0.1 percent in March, slowing the annual rate to 4.2 percent (compared to 5.1 percent last month). Core PCE was stronger, rising 0.3 percent over the month and 4.6 percent over the year.
• The Employment Cost Index (ECI), a measure of labor compensation, increased 1.2 percent in Q1 2023, a slight acceleration from the 1.1 percent growth rate in the prior quarter, according to the Bureau of Labor Statistics.
• The Conference Board Consumer Confidence Index declined 2.7 points to 101.3 in April, its lowest level since July 2022. Despite the headline drop, confidence in the present situation improved, rising 2.2 points to 151.1. However, consumers’ expectations for the future dropped 5.9 points to 68.1.
• New single-family home sales jumped 9.6 percent in March to a seasonally adjusted annualized rate (SAAR) of 683,000, the strongest level in a year, according to the Census Bureau. The months’ supply of units for sale declined eight-tenths to 7.6 as the stronger pace of sales confronted a 0.5 percent decline of new homes for sale, which were at 432,000.
• 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 5.2 percent in March to 78.9.
• The FHFA Purchase-Only House Price Index rose 4.0 percent compared to a year ago in February, a deceleration of 1.3 percentage points compared to January. On a seasonally adjusted basis, prices rose 0.5 percent over the month.

Forecast Impact:

GDP growth at only 1.1 percent in Q1 represents a deceleration from 2.6 percent in Q4 2022; however, the topline weakness was pulled down heavily by a decline in the volatile business inventory investment component. In contrast, the nearly 3 percent annualized increase in “core” GDP is the strongest since 2021 Q3 and far from recessionary levels. With that said, monthly data continues to point to a measurable deceleration from the brisk start in January. GDP also still came in below what we had previously forecast, though this was expected following the recent annual revision to retail sales, which showed weaker growth than originally reported throughout the first quarter. Combined with the March personal consumption figure, which showed continued slowing in consumer spending, this implies that Q2 consumption will be subdued as spending levels entered April below their January peak. However, somewhat counterintuitively, the especially sharp decline in inventory investment in the first quarter will probably boost future estimates of GDP due to less need for businesses to draw down inventories moving forward.

Measures of core inflation and wage growth remain above what is consistent with a 2-percent inflation target. We expect some additional financial tightening to occur following the banking turmoil in March, and we continue to think the Fed will maintain a restrictive policy stance through most of 2023, a contributing factor to our ongoing recession call.

Housing data this week was mixed. The strong gain in new home sales (which were above our expectations), coupled with the drop-off in pending sales, continues to highlight the resilience of the new home market despite current affordability challenges, as the extremely tight supply of existing homes has many prospective buyers turning toward new homes instead. Prices were also resilient in February and were likely aided by the same tight inventory of homes for sale. We continue to expect a general decline in home sales activity this year, which is supported by the pending home sales report, though we acknowledge that demand has largely continued to surprise to the upside.

Nathaniel Drake
Economic and Strategic Research Group
April 28, 2023

Opinions, analyses, estimates, forecasts, and other views of Fannie Mae's Economic and Strategic Research (ESR) Group included in these materials should not be construed as indicating Fannie Mae's business prospects or expected results, are based on a number of assumptions, and are subject to change without notice. How this information affects Fannie Mae will depend on many factors. Although the ESR group bases its opinions, analyses, estimates, forecasts, and other views on information it considers reliable, it does not guarantee that the information provided in these materials is accurate, current, or suitable for any particular purpose. Changes in the assumptions or the information underlying these views could produce materially different results. The analyses, opinions, estimates, forecasts, and other views published by the ESR group represent the views of that group as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.