Consumers Continue to Drive Economic Growth as Employment Report Sends Mixed Signals

Due to the Thanksgiving holiday, indicators from last week are included in this update

Key Takeaways:

• Nonfarm payroll employment rose 210,000 in November, according to the Bureau of Labor Statistics. Leisure and hospitality employment increased by 23,000, a far slower pace than earlier in the year, while payrolls in transportation and warehousing increased by an impressive 49,700 workers. The household survey diverged far more significantly from the establishment survey than usual as it showed 1.1 million jobs added, causing the unemployment rate to decline four-tenths to 4.2 percent. The labor force participation rate moved up two-tenths to 61.8, a pandemic-era high but still 1.5 percentage points lower than in February 2020. Compared to a year ago, average hourly earnings increased 4.8 percent, the same annual pace as October.
• Gross domestic product (GDP), adjusted for inflation, was revised upward one-tenth to 2.1 percent annualized growth in Q3 2021, according to the second estimate from the Bureau of Economic Analysis (BEA). The increase was due primarily to upward revisions to personal consumption and private inventory investment.
• The minutes from the Federal Open Market Committee’s (FOMC) November 2-3 meeting showed some officials pushing for a faster pace of asset purchase tapering than the announced $15 billion per month in November and December. Participants generally saw inflation as transitory in nature, but “judged that inflation pressures could take longer to subside than they had previously assessed.”
• Personal income, adjusted for inflation, declined 0.2 percent in October and real disposable personal income fell 0.3 percent, according to the BEA. Excluding transfer payments, real income was flat. Real personal consumption expenditures rose 0.7 percent. The PCE inflation measure rose 5.0 percent from a year ago, while the core PCE deflator increased 4.1 percent, both the fastest rates since the early 1990s.
• Durable goods orders fell 0.5 percent in October, according to the Census Bureau, though this was due mostly to a 14.5 percent decline in the volatile orders of nondefense aircraft and parts. Core capital goods orders (nondefense excluding aircraft) increased 0.6 percent, the eighth consecutive monthly increase. Shipments of core capital goods rose by 0.3 percent.
• The ISM Manufacturing Index rose 0.3 points to 61.1 in November. The new orders and production indices were both 61.5, increasing 1.7 points and 2.2 points, respectively. The prices paid index declined 3.3 points to 82.4.
• Light vehicle sales were flat at a seasonally adjusted annualized rate (SAAR) of 13.1 million units in November.
• New single-family home sales increased 0.4 percent in October to a SAAR of 745,000 units, though September’s figure was revised downward by 58,000 to an annual pace of 742,000, according to the Census Bureau. The number of new homes for sale increased 1.6 percent and the months’ supply rose two-tenths to 6.3.
• Private residential construction spending declined 0.5 percent in October, according to the Census Bureau. Spending on single-family and multifamily construction fell 0.8 percent and 0.1 percent, respectively, while spending on improvements was down 0.2 percent.
• Existing home sales rose 0.8 percent in October to a SAAR of 6.3 million, the highest level since January but 5.8 percent lower than a year ago, according to the National Association of REALTORS®.
• 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, jumped 7.5 percent in October to 125.2.
• The FHFA Purchase-Only House Price Index, reported on a seasonally adjusted basis, rose in September 17.7 percent from a year ago, the second straight month of deceleration.

Forecast Impact:

Personal consumption growth appears poised to rebound more strongly in Q4 than we had previously expected, and thus we are likely to upgrade our near-term GDP growth forecast. However, we continue to expect consumption growth to slow moving through 2022 as the saving rate has returned to 2019 levels, though there is some upside risk if consumers tap more heavily into past accumulated savings than we are anticipating. It’s difficult to interpret how the job growth number, which was less than half of our expectation, fits into the consumption equation as the household survey report was far more optimistic with a declining unemployment rate and increasing labor force participation rate. Further, abnormal seasonal patterns may have disrupted the payroll gain calculation. We believe wage growth, which remained solid in November, still has room to increase further as the labor market remains tight, potentially powering more demand. Further, both an expanding manufacturing sector and healthy core durable goods orders are consistent with our forecast for continued business investment in inventories. Inflation remains a principal concern, as the PCE price index was consistent with the higher-than-expected October CPI reading. The FOMC minutes, as well as comments made by Chairman Powell at a Senate panel, suggested there is support for quickening the pace of the taper to asset purchases, potentially setting the stage for an interest rate hike earlier than our current expectation of the first hike occurring in Q4 2022. A big uncertainty, however, is what effects the Omicron variant will have moving forward. We expect to have a better view of likely impacts over the coming days and weeks.

Given the typically high volatility of the housing starts number and the increase to the more stable permits number for both single-family and multifamily units, we view the overall starts report to be largely in line with our current near-term forecast of a modest increase in starts over Q4. This is further supported by the third consecutive increase in the Housing Market Index. We continue to view supply chain bottlenecks and labor shortages as the primary constraints slowing the completion rate of construction projects. We expect these to gradually resolve and support more building in 2022; however, lot availability is also a constraint, limiting upside to the pace of construction even if these issues are resolved. Therefore, our forecast for housing will likely remain unchanged.

Nathaniel Drake and Rebekah Gutierrez
Economic and Strategic Research Group
December 3, 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.