GDI Surges to End 2023, but Q1 Indicators Continue to Point to Slowing Growth

Key Takeaways:

• Gross domestic product (GDP), adjusted for inflation, increased at a 3.4 percent seasonally adjusted annualized rate (SAAR) in Q4 2023, according to the third estimate from the Bureau of Economic Analysis (BEA), an upward revision of two-tenths compared to the second estimate. The upgrade reflects higher consumer spending and nonresidential fixed investment. Gross domestic income (GDI), which is a theoretically equivalent measure to GDP but can diverge due to measurement differences, surged at a 4.8 percent SAAR. Prior to the fourth quarter, GDI had been significantly weaker than GDP since Q4 2022.
• Personal income, adjusted for inflation, declined 0.1 percent in February following a 0.6 percent gain the month prior, according to the Bureau of Economic Analysis. Real disposable personal income was also down 0.1 percent. Despite the negative income readings, real personal consumption expenditures rose 0.4 percent. This brought the saving rate down to 3.6 percent, a decline of five-tenths and the lowest level since December 2022. The PCE Price Index rose 0.3 percent over the month and 2.5 percent compared to a year ago. Excluding food and energy, core PCE prices rose 0.3 percent in February and were up 2.8 percent compared to a year earlier.
• Durable goods orders rose 1.4 percent in February, partially rebounding from an aircraft-related decline of 6.9 percent in January, according to the Census Bureau. Excluding transportation, durable goods orders increased 0.5 percent. Shipments of core capital goods excluding aircraft, a proxy for business equipment investment, declined 0.4 percent, though orders in the same category were up 0.7 percent.
• The Conference Board Consumer Confidence Index declined one-tenth to 104.7 in March. Confidence in the present situation was up 3.4 points to 151.0, while the index for consumer expectations declined 2.5 points to 73.8.
• New single-family home sales declined 0.3 percent to a SAAR of 662,000 in February, according to the Census Bureau. The months’ supply moved up one-tenth to 8.4 percent as the number of new homes available for sale rose 1.3 percent to 463,000.
• The National Association of REALTORS® Pending Home Sales Index, which records contract signings of existing homes and typically leads closed sales by one to two months, increased 1.6 percent to 75.6.
• The FHFA Purchase-Only House Price Index declined a seasonally adjusted 0.1 percent in January. Compared to a year ago, home prices were up 6.3 percent on a non-seasonally adjusted basis. In contrast to the monthly decline in the FHFA index, the S&P CoreLogic Case-Shiller Home Price Index rose 0.4 percent over the month (seasonally adjusted) and was up 6.0 percent compared to a year prior (non-seasonally adjusted).

Forecast Impact:

Prior to the fourth quarter surge in GDI, we had noted that the significantly weaker figures relative to the theoretically equivalent GDP numbers added uncertainty and downside risk to our forecast. Both GDP and GDI now point to an economy that grew well above trend in the fourth quarter. Still, we continue to expect a slowing in economic growth in 2024 as higher interest rates weigh on spending and investment. Consistent with this view, shipments in core capital goods, a proxy for business investment, contracted in February. Real personal consumption expenditures showed some unexpected strength in February given the earlier soft reading of control group retail sales, but they followed a downward revision to January. Further, real disposable income growth remains sluggish, resulting in a likely unsustainably low saving rate, supportive of a slowdown in spending as the year progresses. On the inflation front, the PCE price index is tracking above our Q1 forecast, which will likely lead us to revise upward our forecast.

New home sales are currently tracking modestly below our forecast, which will likely lead us to revise downward our forecast in the near term. Still, we continue to expect new home sales to generally drift upward this year as homebuilder confidence is rising and starts activity remains robust. On the existing side, the gain in pending sales suggests that, on the surface, existing home sales should rise in March. However, the nearly 5 percent drop in pending sales the month prior failed to predict the 9.5 percent jump in existing sales in February, so we continue to believe that some giveback in March is likely.

Nathaniel Drake
Economic and Strategic Research Group
March 29, 2024

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