Retail Sales Point to Resilient Consumers, while Existing Home Sales Fall Again to End 2023

Key Takeaways:

• Retail sales and food services increased 0.6 percent in December and were up 5.6 percent compared to a year earlier, according to the Census Bureau. Sales at motor vehicle and parts dealers rose 1.1 percent, and spending at clothing and accessory stores was up 1.5 percent. Control group retail sales (excluding auto, building supplies, and gas station sales), jumped 0.8 percent, the strongest monthly gain since July.
• Industrial production, a gauge of output in the manufacturing, utility, and mining sectors, rose 0.1 percent to 102.5 in December, following a modest downward revision to November, according to the Federal Reserve. Manufacturing activity rose 0.1 percent to 99.1 due primarily to a 1.6 percent gain in motor vehicle and parts manufacturing. Mining output increased 0.9 percent, while utilities output declined 1.0 percent.
• Existing home sales declined 1.0 percent in December to a seasonally adjusted annualized rate (SAAR) of 3.78 million, according to the National Association of REALTORS®, a new cycle low. For the year, 4.09 million existing homes were sold, a slower annual pace than during the Great Financial Crisis. The number of homes available on the market declined 11.5 percent, causing the months’ supply to fall three-tenths to 3.2.
• Housing starts declined 4.3 percent to a SAAR of 1.46 million in December, giving up about half of the 10.8 percent jump in November, according to the Census Bureau. Single-family starts were down 8.6 percent to a SAAR of 1.03 million, which, despite the decline, is still the second strongest level since May 2022. Multifamily starts rose 8.0 percent to a SAAR of 433,000, the fastest pace since July. Single-family permits were up 1.7 percent to a SAAR of 994,000, while multifamily permits were up 2.2 percent to a SAAR of 501,000.
• The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index jumped 7 points to 44 in January, its highest level since September 2023. The index for single-family sales in the present rose 7 points to 48, while the index for single-family sales in the next six months surged 12 points to 57, its highest level since July 2023. The index for foot traffic of prospective buyers increased 5 points to 29.

Forecast Impact:

December retail sales beat our expectations and confirm that consumers continued to increase spending during the holiday season. The significant gain in control group sales, in particular, which feed directly into the personal consumption expenditures component of GDP, imply stronger Q4 2023 consumption than we had predicted and will likely also lead to an upward revision to our first quarter spending and growth expectations. Industrial production, however, remained weak as manufacturing output in December was slightly below where it began 2023. We believe this is consistent with our expectation for below-trend growth in 2024, though if consumption growth remains strong it presents some upside risk to this forecast.

Existing home sales in December were a bit below our expectations, though it’s important to note that the recent decline in mortgage rates is most likely to begin to positively affect home sales activity starting in January. We expect that the pullback in mortgage rates will help existing sales begin a slow recovery in 2024. Still, mortgage rates remain comparatively high and affordability measures are stretched. On the new home side, while both the November and December reports likely benefitted from unseasonably warm weather allowing more construction than usual (a trend that is likely to reverse in January), we think the strong pace of starts, despite the December pullback from an unsustainably high November pace, nonetheless is consistent with continued demand for new housing amid a tight inventory of existing homes available for sale. Additionally, the 7-point jump in homebuilder confidence, and especially the surge in the component for sales in the next six months, points to continued strength in the new home market in 2024 as mortgage rates have pulled back from their nearly 8 percent peak in October.

Nathaniel Drake
Economic and Strategic Research Group
January 19, 2024

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