Economic Data Points to Stagnation as Housing Continues Slide

Key Takeaways:

• The Producer Price Index (PPI) increased 0.2 percent in October and was revised downward in September, according to the Bureau of Labor Statistics. On an annual basis, prices rose 8.0 percent, a deceleration of four-tenths from September. Final demand for energy prices rose 2.7 percent after dragging on headline PPI for much of the summer. Core PPI (less food, energy, and trade services) increased 0.2 percent over the month and 5.4 percent over the year, decelerations of one-tenth and two-tenths, respectively.
• Retail sales and food services increased 1.3 percent in October after a flat month in September, according to the Census Bureau. Part of the increase was due to a price-related 4.1 percent gain in gas station sales, though furniture and electronics stores, building materials and supply dealers, and online stores also posted gains, rising 0.6 percent, 1.1 percent, and 1.2 percent, respectively. Sales at restaurants and bars were also relatively robust, increasing 1.6 percent over the month. General merchandise stores were one of the few major negative categories as sales declined 0.2 percent.
• Industrial production, a gauge of output in the manufacturing, utility, and manufacturing sectors, declined 0.1 percent in October and was revised downward over the past three months, according to the Federal Reserve Board. Still, some of the decline was due to a 1.5 percent drop in utilities output, which is largely dependent on the weather. Mining output was down 0.4 percent, while manufacturing rose 0.2 percent, boosted by a 2.1 percent gain in motor vehicle and parts manufacturing.
• The Conference Board Leading Economic Index® (LEI) declined 0.8 percent in October to 114.9. Over the past six-month period, the index is down 3.2 percent.
• Existing home sales fell 5.9 percent in October to a seasonally adjusted annualized rate (SAAR) of 4.43 million in October, according to the National Association of REALTORS®. The inventory of existing homes for sale declined 0.8 percent to 1.22 million, though the months’ supply moved up two-tenths to 3.3 on the slower sales rate. The median price of existing homes sold, which is not adjusted for home characteristics or location, increased 6.6 percent compared to a year ago, a deceleration of 1.4 percentage points from the month before.
• Housing starts declined 4.2 percent in October to a SAAR of 4.2 million, according to the Census Bureau. Single-family starts led the decline, falling 6.1 percent over the month to a SAAR of 855,000, while multifamily starts were down 1.2 percent to a SAAR of 570,000. Single-family permits fell 3.6 percent to a SAAR of 839,000, their eighth consecutive decline, while multifamily permits were down 1.0 percent to a still-robust SAAR of 687,000.
• The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index declined 5 points to 33 in November, its eleventh consecutive monthly decline. The index for single-family sales in the present was down 6 points to 39, and the index for single-family sales in the next six months declined 4 points to 31. The traffic of prospective buyers index fell 5 points to 20. All major indices are at their lowest levels since 2012, when excluding the initial COVID shock.

Forecast Impact:

Retail sales were surprisingly strong in October, though some of this strength likely reflects a temporary boost from stimulus checks sent out in California and a few other states. Still, even accounting for price increases, some of the boost in sales was in discretionary areas, such as bars and restaurants, suggesting many consumers still feel comfortable spending on non-essentials. While we continue to expect a slowdown in personal consumption due in part to increased borrowing costs and declining wealth effects, this report may cause a small upgrade to our near-term consumption forecast.

The LEI and industrial production were far less optimistic, however, and are supportive of our forecast for a stagnating economy that will tip into a recession in Q1 2023. The manufacturing index (especially excluding autos) was revised downward to be essentially flat to declining slightly over the past several months. Given the global economic slowdown, we expect this index to weaken further in coming months. Lower demand does look to be improving the inflation picture, at least, as the PPI slowed again in October. We expect this dynamic to generally persist as the economy continues to slow.

Housing showed additional weakness as the general trend of single-family starts continues to be downward and existing sales declined for the ninth consecutive month, largely in line with our expectations. We also expect new home construction to continue to decline as the effects of rising mortgage rates continue to weaken homebuying demand, which was made evident by this week’s survey from the NAHB and the existing sales figure at the slowest pace since 2012, when excluding the initial COVID shock. Multifamily starts remain relatively resilient, however, which will likely lead to an upgrade to our near-term forecast. However, private incoming data shows moderating rent growth and modestly higher vacancy rates, suggesting to us that multifamily construction will begin to slow as well. Historically, changes in the direction of multifamily construction tend to lag movements in the single-family market.

Nathaniel Drake
Economic and Strategic Research Group
November 18, 2022

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.