COVID, Inflation Weighing on Consumer Spending Though Housing Demand Remains Robust

Key Takeaways:

• Gross domestic product (GDP), adjusted for inflation, was revised up one-tenth to 6.7 percent annualized growth in Q2 2021, according to the third estimate from the Bureau of Economic Analysis (BEA). The upgrade is a result of upward revisions to personal consumption expenditures, net exports, and private inventory investments coming from nonresidential fixed investments.
• Personal income, adjusted for inflation, declined 0.2 percent in August, according to the BEA. Both real personal income excluding transfer payments and real disposable personal income fell 0.3 percent. The saving rate dropped seven-tenths to 9.4 percent, though it is still 1.6 percentage points higher than the rate in January 2020. Real personal consumption expenditures (PCE) increased 0.4 percent, though the July reading was revised further downward four-tenths to a 0.5 percent decline. The PCE inflation measure increased 4.3 percent from a year prior while the core PCE deflator (core excludes food and energy prices) rose 3.6 percent. Both figures mark the fastest annual growth rate since 1991.
• The Conference Board Consumer Confidence Index fell 5.9 points to 109.3 in September after declines of 3.8 and 9.9 points in July and August, respectively, bringing the index to its lowest level since February. Confidence in the present situation dropped 5.5 points to 143.4 and consumer expectations fell 6.2 points to 86.6, the latter of which is at its lowest level since November 2020. According to the press release, the spread of the Delta variant is the primary reason for the decline.
• Durable goods orders rose 1.8 percent in August, the 15th increase out of the past 16 months, as the July estimate was revised upward from a 0.1 percent decline to a 0.5 percent increase, according to the Census Bureau. Nondefense aircraft and parts orders reached their highest level since October 2019, though motor vehicles and parts orders fell 3.1 percent. Shipments of durable goods declined 0.5 percent, the first monthly decline since April. Core capital goods orders (nondefense excluding aircraft) and shipments rose 0.5 percent and 0.7 percent, respectively, the sixth straight monthly increase of shipments. Inventories of durable goods and core capital goods increased 0.8 percent and 0.5 percent, respectively.
• 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 8.1 percent to 119.5 in August, recovering from two consecutive monthly declines.
• New single-family home sales increased 1.5 percent in August to a SAAR of 740,000. In addition, the July sales number was meaningfully revised upward by about 3.0 percent. With the annual comparison reflecting the past summer’s sales surge, new home sales were down 23.5 percent from a year prior but around 8.8 percent above the pace seen in August 2019. At the current pace of sales, the months’ supply was 6.1, an increase of one-tenth from July. The non-seasonally adjusted number of homes for sale at the end of the month hit the highest level since October 2008. However, the increase was partially driven by a record number of homes for which construction had not yet started. The median sales price for new houses sold rose 20.1 percent from a year prior.
• The FHFA Purchase-Only House Price Index, reported on a seasonally adjusted basis, increased 19.2 percent from a year ago in July, an acceleration of three-tenths from June, breaking the annual growth record for the ninth consecutive month.

Forecast Impact:

Consumer confidence fell for the third straight month amid significant concerns regarding the Delta variant and inflation. While real personal consumption for both goods and services increased, this followed a significant downward revision in July. Real consumer spending has trended only modestly higher since the Spring, with services spending increasing and goods spending pulling back somewhat. Real consumption of durable goods fell for the fifth straight month, while spending on services grew 0.3 percent. This report supports our forecast of a significant slowdown in consumption growth in Q3 as consumer spending returns to a more normal level given the absence of a stimulus-related boost. However, due to July’s downward revision, ongoing Covid concerns among consumers, and continued supply chain difficulties, we are likely to modestly downgrade our growth outlook for the remainder of the year. Still, we expect growth to continue as firms work to rebuild inventories and business investment remains solid. Durable goods orders and shipments had a strong showing in August, the latter of which suggests strength in Q3 business investment with the caveat that recent high readings in the producer price index imply that businesses simply may be having to pay higher prices. Regardless, commercial aircraft orders nearly doubled, suggesting the airline industry is anticipating the recent travel slowdown to be temporary.

The jump in pending home sales was larger than we had expected and continues to highlight the robust strength in housing demand despite new record home price growth. This will likely lead to an upgrade to our near-term existing sales forecast, though we continue to expect a lack of homes available for sale and affordability concerns to weigh on existing home sales. Further, this data does not capture any effect from recent upward movement in mortgage rates, which could dampen homebuying demand in coming months as affordability decreases. Last week, new single-family sales also rose in line with expectations, though the large share of new homes sold and for sale but not yet started continues to highlight the ongoing difficulties that homebuilders are facing as they attempt to work through their current construction backlog. Scarcity of labor (particularly in the skilled trades) and elevated material costs or even outright shortages continue to drag on housing construction. We currently expect new home sales to move upward into 2022, as homebuilders ramp up construction while demand remains robust.

Nathaniel Drake
Economic and Strategic Research Group
October 1, 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.