January Consumption Contracts, While Pending Sales Retreat from Higher Mortgage Rates

Key Takeaways:

• Gross domestic product (GDP), adjusted for inflation, increased at a 3.2 percent seasonally adjusted annualized rate (SAAR) in Q4 2023, according to the second estimate from the Bureau of Economic Analysis (BEA), a downgrade of one-tenth compared to the advance estimate. The lower second estimate was due primarily to a downward revision to private inventory investment, though this was partially offset by higher local government and consumer spending. For the fourth quarter only, gross domestic income (GDI) is not available until the third estimate of GDP; however, GDI was revised upward by four-tenths to a SAAR of 1.9 percent for the third quarter of 2023.
• Personal income, adjusted for inflation, jumped 0.7 percent in January due in part to a cost-of-living adjustment of 3.2 percent to Social Security payments. Disposable personal income, however, was flat due to larger tax payments, while real personal consumption expenditures declined 0.1 percent. The saving rate ticked up one-tenth to 3.8 percent. The personal consumption expenditures price index rose 0.3 percent over the month, slowing the year-over-year rate to 2.4 percent, the lowest since February 2021. Excluding food and energy, core PCE prices increased 0.4 percent over the month, but the annual rate ticked down to 2.8 percent.
• Durable goods orders declined 6.1 percent in January due in large part to a sharp fall in nondefense aircraft orders, according to the Census Bureau. Excluding transportation, durable goods orders were down a more modest 0.3 percent. Shipments of core capital goods excluding aircraft, a proxy for business equipment investment, rose 0.8 percent.
• The Conference Board Consumer Confidence Index declined 4.2 points to 106.7, ending a three-month streak of gains. Confidence in the present situation dropped 7.7 points to 147.2, while consumer expectations for the future declined 1.7 points to 79.8.
• New single-family home sales rose 1.5 percent to a SAAR of 661,000, though December’s figure was revised downward, according to the Census Bureau. The months’ supply was flat at 8.3 percent as the number of new homes for sale increased 0.9 percent.
• 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 4.9 percent to 74.3 in January, giving up most of its December gain.
• The FHFA Purchase-Only House Price Index increased a seasonally adjusted 0.1 percent in December. For 2023, home prices rose 6.5 percent on a non-seasonally adjusted basis.

Forecast Impact:

We expected real consumer spending to pull back modesty in January following the surge at the end of 2023. However, the slight decline follows an upward revision to December spending, suggesting some modest upside risk to our Q1 2024 real consumption and GDP forecasts. PCE inflation was roughly in line with our expectations given the hot CPI and PPI reports earlier in the month, though the 12-month rates for both headline and core prices continued to move toward the Fed’s 2-percent target, and we think both measures will continue to cool as housing inflation slows in line with new tenant rent measures. Durable goods orders suggest some further cooling in goods demand, though the strong report on core capital goods shipments may lead to an upgrade to our forecast for Q1 2024 business fixed investment.

January new home sales likely benefited from moderating mortgage rates toward the end of 2023. While we still believe new home sales will continue to increase in 2024, our forecast for a nearly 10 percent gain in new sales year over year faces some downside risk as the 30-year mortgage has trended back up toward 7 percent. Additionally, the sharp pullback in pending sales highlights the downside risk to our existing sales forecast given recent movement in the 30-year mortgage rate; as such, our near-term existing sales forecast is likely to be revised downward.

Nathaniel Drake
Economic and Strategic Research Group
March 1, 2024

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.