Economy Grows at Fastest Rate Since 1984 but Is Likely to Slow Moving Forward as Inflation Looms Large in 2022

Key Takeaways:

• At its January 25-26 meeting, the Federal Open Market Committee (FOMC) kept the target range for the federal funds rate unchanged at 0.0-to-0.25 percent while also maintaining its current pace of asset purchase tapering, meaning the final asset purchases will occur in early March. The FOMC statement said it “expects it will soon be appropriate to raise the target range for the federal funds rate.” In a separate statement the FOMC stated it expects to begin reducing the Fed’s balance sheet primarily by adjusting the reinvestment of principal payments, sometime after increasing the federal funds rate. Further, the FOMC stated its intention to hold primarily Treasury securities moving forward as opposed to MBS.
• Gross domestic product (GDP), adjusted for inflation, increased at a 6.9 percent seasonally adjusted annualized rate (SAAR) in Q4 2021, a sharp acceleration from the 2.3 percent SAAR in Q3, according to the Bureau of Economic Analysis (BEA). Real GDP grew 5.7 percent in 2021, the fastest annual growth rate since 1984. However, 4.9 percentage points of the Q4 headline growth was driven by a likely temporary surge in inventory investment, suggesting the first quarter 2022 growth may be substantially slower. Personal consumption expenditures grew at a slower 3.3 percent annualized rate, led by a 4.7 percent annualized increase in services consumption, though the latter remains at a level below the pre-COVID trend.
• Personal income, adjusted for inflation, declined 0.1 percent in December, the fifth consecutive monthly decline, according to the BEA. Excluding transfer payments, real personal income was essentially flat. The saving rate moved up seven-tenths to 7.9 percent as real consumption pulled back 1.0 percent, the largest monthly decline since February 2021. Real disposable personal income was down 0.2 percent. The PCE price index increased 0.4 percent over the month, a slowdown of two-tenths from November, but was up 5.8 percent over the year, the fastest annual rate since 1982. Core PCE increased 0.5 percent in December and 4.9 percent on an annual basis, the fastest pace since 1983.
• Durable goods orders fell 0.9 percent in December, the largest monthly decline since April 2020, according to the Census Bureau. Excluding orders for transportation equipment, new orders were up 0.4 percent, though core capital goods orders (nondefense excluding aircraft) were flat.
• New single-family home sales jumped 11.9 percent to a SAAR of 811,000 in December, the highest since March 2021, according to the Census Bureau. New home sales in 2021 fell 7.3 percent year-over-year to 762,000. The number of new homes sold-but-not-started jumped 35.1 percent to a SAAR of 231,000, after remaining under 180,000 for the prior three months. The number of not-started homes for sale remained at a SAAR of 101,000, just below the record set in October, while the number of homes for sale that are under construction hit its highest level since 2007 at 263,000. The months’ supply of new homes for sale fell six-tenths to 6.0 due to the spike in sales but remains in line with its historical average.
• 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, dropped 3.8 percent to 117.7 in December.
• The FHFA Purchase-Only House Price Index, reported on a seasonally adjusted basis, increased 17.5 percent from a year ago in November, an acceleration of one-tenth from October.

Forecast Impact:

The headline GDP number was in line with our expectations, but the components surprised on several fronts. The huge surge in inventories suggests that much of the inventory investment we had expected to occur during the first two quarters of 2022 was pulled forward into 2021. Further, while we expected soft personal consumption in December due to an earlier-than-normal holiday shopping season, it was below our expectations and appears to be weakening further. The miss on consumption will likely be partially made up in the future as the saving rate rose significantly and appears to coincide with the jump in inventory investment. We are likely to revise both components downward meaningfully in the near-term, leading to a significantly weaker than previously forecast Q1 GDP expectation. Net inventory investment may flip from a driver of growth to a drag in 2022 Q1.

Real incomes will likely be weak again in January due to recent energy price increases and the rolling-off of the extended child tax credit. When combined with recent Omicron-related disruptions, we believe this is likely to delay any near-term rebound in consumption. On the positive side, however, higher inventory levels could ease some near-term inflationary pressures, especially given that inventory investment by motor vehicle dealers was the leading contributor to retail inventory investment. However, wage pressures and shelter costs are likely to keep inflation readings elevated even as some temporary factors pull back.

The high PCE reading, which was in line with our expectations, along with recent FOMC statements makes a March rate hike all but certain. We also expect the Fed to begin running off their balance sheet sometime in 2022. This will likely put upward pressure on mortgage rates, worsening affordability pressure in a housing market that may be showing signs of slowing already. We have forecast a slowdown in existing sales in Q1 2022, though the combination of weak pending sales and anticipated higher interest rates will likely lead to an additional modest downward revision. We believe the surge in not-yet-started new home sales may be partially a pulling-forward of demand in anticipation of higher interest rates. It also suggests builders are anticipating that their current backlogs will soon ease and are thus accepting new orders at an increased rate, supporting our forecast for strong new home sales in 2022. We believe that as more new homes are completed, the inventory of existing homes for sale will also increase as buyers move to new homes, supporting our forecast of moderating home price growth this year.

Nathaniel Drake
Economic and Strategic Research Group
January 28, 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..