Fed Remains on Hold as 2019 Growth Comes in Solid
- The Federal Open Market Committee (FOMC) decided this week to keep the federal funds target rate unchanged at 1.625 percent. In both its post-meeting statement and its press conference the Fed seemed to express some frustration at consistently low inflation and alluded to downside risks, including weaker household spending and the coronavirus.
- Real GDP growth in the fourth quarter was 2.1 percent annualized, with a large gain from net exports somewhat offset by a slowdown in inventory investment. The gain in net exports masked expected weakness in business investment and some softness in consumer spending; final sales to domestic purchasers (GDP minus trade and inventories) grew only 1.4 percent annualized, the slowest pace in four years. For all of 2019, the economy grew 2.3 percent (Q4/Q4), the second consecutive year of slowing growth.
- New single-family home sales fell for the third straight month in December to the lowest level since July. Inventories ticked up on a monthly basis, although the year-over-year decline was the largest in seven years.
- Pending home sales, which records contract signings of existing homes and typically leads closings by one to two months, fell sharply in December, declining to the lowest level in ten months. Pending sales fell across all four regions.
- The fourth quarter Housing Vacancy Survey showed that the homeownership rate rose to the highest level since Q4 2013 with the rate for people under 35 rising to the highest level in eight years. Household formation slowed in 2019, driven by the slowest growth in owner-occupied households since 2016.
While the Fed kept rates unchanged in January, the tone of the meeting was less optimistic than anticipated; equity markets responded negatively, and the fed funds futures market reversed from a stance of no rate movements this year to pricing in an 85 percent chance of at least one cut by the end of 2020. While we maintain our view of no rate cuts this year, that may change if data softens and/or more downside risks emerge. The advance estimate of full-year growth in 2019 was a tenth lower than we expected at 2.3 percent, but this week’s data do not change our outlook for 2020 or beyond. Treasury rates declined, reflecting risks related to the coronavirus, but we do not yet expect coronavirus to affect our forecast. While the decline in December pending home sales suggests a pullback in January existing home sales from the prior month’s unsustainable pace, we maintain our perspective of solid growth in both existing and new home sales in 2020.
Details on Key Takeaways and Other Releases
- GDP, adjusted for inflation, increased 2.1 percent annualized in Q4 2019, unchanged from Q3 2019, according to the advance estimate from the Bureau of Economic Analysis. Real consumer spending increased 1.8 percent and contributed 1.2 percentage points to GDP growth. Real residential investment rose 5.8 percent, the best pace in two years, and real government spending increased 2.7 percent. Real nonresidential investment declined 1.5 percent, falling for the third straight quarter. While net exports contributed 1.5 percentage points to growth, it was partially offset by inventory investment, which subtracted 1.1 percentage points.
- New single-family home sales fell 0.4 percent in December to a seasonally adjusted annualized rate of 694,000, according to the Census Bureau. Sales in the prior three months were revised downward by 32,000, which put sales growth at 10.4 percent for 2019. The for-sale inventory declined 4.9 percent from a year ago and the months’ supply fell sharply from 7.4 to 5.7 months. Regionally, new home sales jumped in the West and Midwest but fell in the South and Northeast.
- The Housing Vacancy Survey for Q4 2019 (not seasonally adjusted) showed that the homeownership rate rose three-tenths to 65.1 percent, according to the Census Bureau. The homeownership rate for people under 35 increased one-tenth to 37.6 percent. The homeowner vacancy rate fell one-tenth from the year prior to 1.4 percent, while the rental vacancy rate fell two-tenths from a year earlier to 6.4 percent.
- 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, fell 4.9 percent in December to 103.2, the largest decrease since the beginning of 2018.
Rebecca Meeker and Ricky Goyette
Economic and Strategic Research Group
January 31, 2020
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.