Retail Sales Imply More Consumer Resilience as New Home Construction Continues to Benefit from Tight Inventories of Existing Homes

Key Takeaways:

• Retail sales and food services increased 0.2 percent in June following an upward revision to May’s data, according to the Census Bureau. Sales at furniture, electronics, and appliances stores rose 1.3 percent and nonstore retailers, which represent mostly online sales, saw a 1.9 percent increase in sales. Negative categories included building materials, garden equipment and supply dealers (-1.2 percent), and grocery stores (-0.7 percent), the latter of which was likely price related. Control group retail sales, which exclude food services, autos, building supplies, and gas stations, increased 0.6 percent and were revised upward in May.
• Industrial production, a gauge of output in the manufacturing, utility, and mining sector, declined 0.6 percent in June after a 0.5 percent drop in May, according to the Federal Reserve Board. Manufacturing output was down 0.3 percent while mining output declined 0.2 percent. Utilities output, which is highly dependent on the weather, dropped 2.5 percent.
• Existing home sales declined 3.3 percent to a seasonally adjusted annualized rate (SAAR) of 4.16 million in June, according to the National Associations of REALTORS®. The inventory of homes available for sale was flat at 1.08 million, causing the months’ supply to tick up one-tenth to 3.1 on the slower sales rate. Compared to a year ago, the median sales price of an existing home, which does not adjust for the mix of homes sold, declined 1.2 percent.
• Housing starts declined 8.0 percent to a SAAR of 1.43 million in June, giving back part of the 15.7 percent jump the month prior, according to the Census Bureau. Single-family starts were down 7.0 percent to a SAAR of 935,000 and multifamily starts fell 9.9 percent to a SAAR of 499,000. Single-family permits continued a five-month rise with a 2.2 percent increase to a SAAR of 922,000 while multifamily permits dropped 12.8 percent to a SAAR of 518,000.
• The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index increased 1 point to 56 in July. The index for single-family sales in the present rose 1 point to 62 as the index for foot traffic of prospective buyers was up 3 points to 40, a 13-month high. The index for single-family sales in the next six months declined 2 points to 60.

Forecast Impact:

Control group retail sales, which feed into the personal consumption expenditures component of GDP, had a strong gain in June and were upwardly revised in May. Taken together, consumption growth is likely on track to be stronger in Q2 than we had forecast, though it is still growing modestly below trend. Industrial production was weaker, though manufacturing activity looks to have largely stabilized over the first six months of the year. While it’s certainly not strong, hard measures of manufacturing activity look significantly better than PMI surveys, such as the ISM index, suggest. Still, we believe the economy is near its “stall speed” and remains highly susceptible to small external shocks. We continue to forecast as our baseline scenario a recession to begin in either the fourth quarter of 2023 or the first quarter of 2024.

Housing indicators came in largely in line with our expectations. Existing sales pulled back amid ongoing inventory constraints and now enter the third quarter at about the same level as our forecast. Tight inventories of existing homes continue to boost new construction. Signs continue to point to a clearing of previous backlogs caused by material and labor shortages, as the number of single-family units under construction has fallen 17.0 percent over the past year and the rate of permits and starts are continuing to converge with completions. While we continue to expect some pullback in starts by the end of the year, this is contingent on broader economic conditions weakening. If the economy continues to expand in the coming quarters, we think starts are capable of moving toward an annualized pace of 1 million units. The rate of multifamily starts, on the other hand, is expected to continue to slow as national rent growth is sluggish and tighter bank lending conditions will likely weigh on future projects.

Nathaniel Drake
Economic and Strategic Research Group
July 21, 2023

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