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Economic & Housing Weekly Note

Weak February Data Continue with Falling Incomes and Home Sales

March 26, 2021

Key Takeaways:

  • Personal income, adjusted for inflation, plummeted 7.3 percent in February and real disposable income fell 8.2 percent, according to the Bureau of Economic Analysis. These were both the largest declines ever posted since the series began in 1959. Personal consumption expenditures (PCE) also declined, falling 1.2 percent, the largest drop since last April. After a spike in January, the saving rate fell 6.2 percentage points to 13.6 percent. The PCE deflator rose 0.2 percent from January and 1.6 percent from a year prior. The core deflator (excluding food and energy prices) increased 1.4 percent year-over-year, a deceleration of one-tenth from the prior month.
  • Durable goods orders fell 1.1 percent in February, the first decline in 10 months, according to the Census Bureau. The decline was broad-based with drops in every major category except for nondefense aircraft and parts. Durable goods shipments dropped 3.5 percent and core capital goods (nondefense excluding aircraft) shipments fell 1.0 percent, also the first decline since April 2020.
  • Gross domestic product (GDP), adjusted for inflation, grew 4.3 percent annualized in Q4 2020, according to the third estimate from the Bureau of Economic Analysis. Private inventory investment, the only sizable change, was revised upward $14 billion to $62 billion. Corporate profits, the new piece of data in the report, fell 1.4 percent (not annualized) over the quarter. A decline in profits for domestic nonfinancial corporations outweighed a rise in domestic financial corporate profits, while foreign profits were flat.
  • New single-family home sales dropped sharply in February, falling 18.2 percent to a seasonally adjusted annualized rate (SAAR) of 775,000, according to the Census Bureau. New home sales over the prior 3 months were revised upward by 77,000, on net. Despite the monthly decline, sales were up 1.6 percent on a year-over-year basis. The number of new homes for sale (seasonally adjusted) improved 2.6 percent from January but worsened on a year-over-year basis for the 18th consecutive month. The months’ supply rose by a full month to 4.8 months. The median sales price, unadjusted for the composition of sales, rose 5.3 percent from a year ago.
  • Existing home sales fell 6.6 percent in February to 6.22 million units (SAAR), according to the National Association of REALTORS®. This represented the largest drop since May, though the level remained elevated. From a year ago, total existing home sales rose 9.1 percent. The number of homes for sale (not seasonally adjusted) fell 29.5 percent year-over-year, the largest drop ever recorded in the series’ 21-year history. The months’ supply edged up to 2.0 months, 1.1 months lower than in February 2020. The median sales price rose 15.8 percent on an annual basis, a pace of price appreciation last seen in October 2005.
Forecast Impact:

The drop in personal income and the saving rate in February was a result of the decline in economic impact payments sent out over the month, as well as lower unemployment benefits. We expect income and spending measures to rebound sharply in March as the American Rescue Plan was passed and stimulus payments began to be sent out. Stimulus payments were distributed more quickly than our March forecast implied, so we may need to shift a portion of our consumer spending rebound into the first quarter. PCE headline inflation accelerated in February, driven by an increase in energy prices, but core inflation remained muted. Core capital goods shipments, which are an input used to estimate business equipment spending in GDP, and core capital goods orders, the leading indicator, both fell more than expected in February, likely due to abnormally cold weather. We may have to revise downward our Q1 investment estimate to reflect the disrupted month. While we expect a reversal in the coming months as weather improves and the economy continues to push toward a reopening, ongoing supply disruptions, including a shortage of semiconductors, remain key obstacles that could linger for some time. In housing, the drop in home sales activity was also likely impacted by the February weather. While we expect the decline in new home sales to be temporary, with a sharp rebound in March projected, we think existing homes sales could show more weakness in the near term. The lag between signing and closing for existing homes could mean February’s cold weather will be reflected in March sales; additionally, extremely tight supply continues to limit sales. While Freddie Mac’s 30-year fixed mortgage rate rose to 3.17 percent this week, the highest since June 2020, constrained supply leading to pent-up demand remains a key reason why we forecast that rising mortgage rates (in line with our forecast) will likely have a minimal impact on home sales.


Rebecca Meeker
Economic and Strategic Research Group
March 26, 2021

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