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Economic & Housing Weekly Note

Business Investment Boosts Q4 GDP, While New Home Sales Are Weak at Year-End

January 29, 2021

Key Takeaways:

  • The statement released after the Federal Open Market Committee’s (FOMC) January 26-27 meeting showed that the FOMC decided to continue to increase its holdings of Treasuries and MBS at the current pace. It also maintained the federal funds rate at a target range of 0 to 0.25 percent.
  • Gross domestic product (GDP), adjusted for inflation, increased at a 4.0 percent annualized rate in Q4 2020, according to the preliminary estimate from the Bureau of Economic Analysis. However, the level of real GDP remained 2.5 percent below the peak seen in Q4 2019. GDP growth was predominantly driven by strength in business fixed investment and personal consumption expenditures, which rose 13.8 percent annualized and 2.5 percent annualized, respectively. Residential fixed investment also posted a strong gain of 33.5 percent, while government spending fell 1.2 percent annualized.
  • Personal income, adjusted for inflation, grew 0.2 percent in December, according to the Bureau of Economic Analysis, though the measure fell 0.2 percent when transfer payment receipts were excluded. Real personal consumption expenditures fell 0.6 percent, the second straight month of declines. The saving rate rose 0.8 percentage points to 13.7 percent, as the December stimulus bill helped push government transfer payments upward by $85 billion (not adjusted for inflation). Annual growth in both the PCE deflator and the core PCE price index (excluding food and energy prices) accelerated in December to 1.3 percent and 1.5 percent, respectively.
  • The Conference Board Consumer Confidence Index rose 2.2 points in January to 89.3. Consumer confidence in the present situation fell for the third straight month to 84.4, the lowest reading since May. However, the consumer expectations index increased 5.5 points to 92.5 and included an increase in the share of consumers who intend to buy a home in the next six months.
  • The National Association of REALTORS® Pending Home Sales Index, which records contract signings of existing homes and typically leads closings by one to two months, fell 0.3 percent in December. Despite the month-over-month drop, the index was at the highest December reading on record. Regionally, sales rose in the Northeast and fell in the Midwest, while sales in the South and West were flat.
  • New single-family home sales increased 1.6 percent to a seasonally adjusted annualized rate of 842,000 in December after falling 12.6 percent in November, according to the Census Bureau. In 2020, new home sales rose 18.7 percent above 2019 levels. The number of homes for sale rose 4.1 percent from November, the largest monthly increase since September 2013, but were 5.8 percent lower than a year prior. While inventories of new homes for sale remain tight, the months’ supply rose for the second straight month to 4.3, up from the summer’s low of 3.5.
  • The FHFA Purchase-Only House Price Index, reported on a seasonally adjusted basis, rose 11.0 percent from a year ago in November, the fastest growth pace since the series began in 1992. Similarly, the S&P CoreLogic Case-Shiller National Home Price Index (not seasonally adjusted) grew 9.5 percent from a year ago in November, the fastest pace of growth since February 2014.
Forecast Impact:

The increase in Q4 2020 GDP was stronger than we expected due to greater business investment and government consumption, though it matched our expectation for personal consumption. The strength in business investment suggests to us that the production side of the business sector, though not yet fully recovered, was less affected than we’d anticipated by the rise in COVID-19 cases at the end of 2020, and will likely help support growth in Q1 2021. Despite this, we still believe that Q1 2021 GDP will be comparatively weak, as consumer spending remains sluggish due to COVID-related restrictions, an outlook supported by the drop in December personal consumption expenditures. However, the increase in the December saving rate, along with the rise in consumer expectations, supports our outlook for stronger consumption later in 2021 as many consumers still have a significant amount of spending power. In housing, while we had expected an increase in new home sales, the gain was smaller than we anticipated. Combined with a downward revision to the prior month, the fourth quarter total was somewhat below our forecast. Still, the decelerating trend in sales over the final months of the year is consistent with what we view as being necessary to bring the pace of sales in line with the pace of new construction. Home price growth continued to accelerate as inventories remained low; though as new construction comes online, we believe the pace will begin to slow.

Ricky Goyette
Economic and Strategic Research Group
January 29, 2021

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.