Pending Home Sales Pull Back Sharply as Economic Data Slows Amid Still-Sticky Inflation

Key Takeaways:

• Gross domestic product (GDP), adjusted for inflation, increased at a 1.3 percent seasonally adjusted annualized rate (SAAR) in Q1 2024, a downgrade of three-tenths compared to the advance estimate, according to the Bureau of Economic Analysis (BEA). The downward revision primarily reflects lower consumption (2.0 percent) compared to what was previously reported (2.5 percent), particularly in the consumption of goods, which outright contracted. Gross Domestic Income (GDI), a measure that is theoretically equivalent to GDP but can differ due to measurement error, increased at a 1.5 percent annualized rate in Q1, a slowdown from a downwardly revised 3.6 percent rate in Q4.
• Personal income, adjusted for inflation, was flat in April, according to the BEA. Real disposable personal income declined 0.1 percent, leaving it essentially unchanged since January. Real personal consumption expenditures (PCE) declined 0.1 percent amid a 0.4 percent pullback in goods spending; real services spending inched up 0.1 percent. The saving rate was flat at 3.6 percent. The PCE price index increased 0.3 percent for the third consecutive month, though before rounding the figure was a bit softer than prior months (0.26 percent vs. 0.34 percent). Core PCE rose 0.2 percent, a slowdown compared to first quarter data. Compared to a year ago, headline and core PCE prices were up 2.7 percent and 2.8 percent, respectively.
• The Conference Board Consumer Confidence Index increased 4.5 points to 102.0 in May after falling 5.6 points in April. Confidence in the present situation was up 2.5 points to 143.1 while the index for consumer expectations increased 5.8 points to 74.6, a three-month high.
• The National Association of REALTORS® Pending Home Sales Index, which record contract signings of existing homes and typically leads closed sales by one to two months, declined 7.7 percent to 72.3 in April.
• The FHFA Purchase-Only House Price Index increased a seasonally adjusted 0.1 percent in March after a 1.2 percent jump in February. Compared to a year ago, prices rose 6.8 percent on a non-seasonally adjusted basis, a slowdown of three-tenths compared to February.

Forecast Impact:

The downward revision to consumption in the first quarter will likely flow through to a downward revision to our second quarter consumption, and thus GDP, forecast. This is especially true given the pullback in April consumption and a small downward revision to March’s data. Our fundamental view that growth is likely to slow as the year progresses is unchanged and is in part supported by the now-weaker Q1 and April spending data. On the inflation front, price pressures remain above target, though April’s report was a bit better than first quarter inflation data. Given that other data releases have suggested economic growth is indeed slowing in line with our forecast, we continue to believe that a Federal Reserve rate cut in September remains the most likely scenario.

The sharp fall in the pending home sales index presents some downside risk to our second quarter existing home sales forecast, which already calls for a small decline in sales compared to Q1. Still, we continue to believe existing home sales are near their “floor” and are unlikely to fall much below their current levels before beginning a slow recovery in the second half of the year.

Nathaniel Drake
Economic and Strategic Research Group
May 31, 2024

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