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Economic & Housing Weekly Note

Consumers Continue to Spend, Even with Less Disposable Income

November 25, 2020

Key Takeaways:

  • The second estimate of gross domestic product growth in Q3 2020, adjusted for inflation, was unchanged from the preliminary estimate at 33.1 percent annualized, according to the Bureau of Economic Analysis. Minor downward revisions to personal consumption expenditure (PCE), government spending, net exports, and business inventories offset upward revisions to nonresidential and residential fixed investments. Corporate profits rose a record 27.1 percent in the third quarter, fully recovering from the declines in the first half of this year, on a nominal basis.
  • Disposable personal income, adjusted for inflation, fell 0.8 percent in October, according to the Bureau of Economic Analysis. However, consumers continued to spend, with real PCE growing 0.5 percent, the sixth straight month of increase. Declining income and continued spending pushed the saving rate down to 13.6 percent, a full percentage point lower than September. Annual growth in both the PCE deflator and the core PCE price index (excluding food and energy prices) decelerated two-tenths in October to 1.2 percent and 1.4 percent, respectively.
  • Durable goods orders rose 1.3 percent in October, a deceleration from September, according to the Census Bureau. A large gain in defense goods orders drove the increase, while a decline in motor vehicle and parts orders dragged on the headline. Shipments also rose 1.3 percent, driven by the largest increase in aircraft shipments (both defense and nondefense) in two years. Core orders and core shipments (nondefense capital goods excluding aircraft) both rose to new all-time highs.
  • The Conference Board Consumer Confidence Index fell 5.3 points in November to 96.1, the lowest level since August. The present situation component edged down only slightly, but the expectations component posted the largest drop since July. The University of Michigan Consumer Sentiment Index posted a similar decline of 4.9 points in November to the lowest level in three months. A modest increase in the current economic conditions component only partially offset the large 8.7 point drop in the consumer expectations component.
  • New single-family home sales edged down 0.3 percent to a 999,000 seasonally adjusted annualized rate in October, according to the Census Bureau. Sales in the prior three months were revised up a significant 64,000. Through the first ten months of the year, new home sales were 20.6 percent higher than the same period a year ago. Homes sold but not yet started continued to climb, rising to the highest level since early 2006. The number of homes for sale was flat from September but down 14.2 percent from a year ago. The months’ supply remained at 3.3, tied with September’s all-time low.
  • The FHFA Purchase-Only House Price Index, reported on a seasonally adjusted basis, rose 1.7 percent in September. From a year ago, the index increased 9.1 percent, a full percentage point higher than August’s growth and the fastest pace of growth since early 2006. The annual growth in the S&P/Case-Schiller National Home Price Index also posted a significant acceleration in September to 7.0 percent from 5.8 percent.


Forecast Impact:

While third quarter PCE growth showed a modest downward revision, October spending suggests continued PCE growth in the fourth quarter, albeit at a decelerating pace. However, we believe declining disposable incomes and confidence levels could be problematic moving forward. With no additional stimulus likely to be passed this year and COVID-19 cases on the rise, consumer spending remains buffeted by downside risks. Meanwhile, the manufacturing sector is making a solid recovery from the COVID-related declines earlier this year. Durable goods orders and shipments in October were both on the rise, sending positive signals for Q4 business fixed investment. Housing continued to impress with upward revisions to Q3 residential fixed investment and new home sales. While October new home sales edged down slightly, they remained elevated at close to 1 million units. While we were expecting the slight plateau in sales, with the revisions they came in at a higher level than expected, indicating our forecast for new home sales will likely be revised upward next month and, with it, the pace of construction.

Rebecca Meeker
Economic and Strategic Research Group
November 25, 2020

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