GDP and GDI Converge Modestly in Benchmark Revisions While Pending Home Sales Drop Sharply
- Gross domestic product (GDP), adjusted for inflation, increased at a 2.1 percent seasonally adjusted annualized rate (SAAR) in Q2 2023, according to the third estimate from the Bureau of Economic Analysis (BEA), unchanged from the second estimate. Personal consumption expenditures were revised downward while nonresidential fixed investment, net exports, and inventory investment were revised upward. As part of this release, the BEA reported on its Comprehensive Update of the National Economic Accounts, which revises GDP data from 2013 Q1 to 2023 Q1. This update had a minimal impact on the recent growth rate of GDP but did show that the economy was approximately 1 percent larger in 2023 Q2 than previously reported. Further, gross domestic income (GDI), which is theoretically equivalent to GDP, was revised upward modestly in recent quarters but the gap between the growth rate in GDP and GDI in recent quarters remains unusually large.
- Personal income, adjusted for inflation, was flat in August, according to the BEA. Real disposable personal income declined 0.2 percent while real personal consumption expenditures (PCE) ticked up 0.1 percent. The saving rate declined 0.2 percentage points to 3.9 percent. All these series were affected by the comprehensive update that also revised GDP. As part of the update, the pre-COVID saving rate was generally revised downward while the saving rate in recent periods was revised upward modestly. The PCE price index rose 0.4 percent in August and accelerated one-tenth on a year-over-year basis to 3.5 percent. Excluding food and energy, the core PCE rose just 0.1 percent over the month and decelerated to 3.9 percent compared to a year ago.
- Durable goods orders rose 0.2 percent in August, according to the Census Bureau. Core capital goods orders (nondefense excluding aircraft) increased by a stronger 0.9 percent following two months of declines while shipments in the same category (a useful proxy for business fixed investment) were up 0.7 percent.
- The Conference Board Consumer Confidence Index declined 5.7 points in September to 103.0, the lowest level since May. The index for confidence in the present situation rose 0.4 points to 147.1 while consumer expectations for the future dropped 9.6 points to 73.7.
- 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, declined 7.1 percent to 71.8 in August, the lowest level since the onset of the pandemic. Compared to a year ago, pending sales are down 18.7 percent.
- New single-family home sales dropped 8.7 percent to a SAAR of 675,000 units in August, though July’s figure was revised up by 25,000 units, according to the Census Bureau. The months’ supply rose eight-tenths to 7.8 as the sales rate slowed and the number of homes for sale increased 1.2 percent.
- The FHFA Purchase-Only House Price Index rose a seasonally adjusted 0.8 percent in July, an acceleration of four-tenths compared to June and its largest one-month gain since May 2022. Compared to a year ago, home prices increased a non-seasonally adjusted 4.6 percent, an acceleration of 1.3 percentage points compared to June.
While the topline GDP figure was unrevised for the second quarter, the downgrade to real personal consumption expenditures will likely cause some downward revisions to the same category for our third quarter forecast. Additionally, the long-awaited comprehensive update to the national accounts, which we had speculated would help close the unusually large gap between GDP and GDI, ultimately did so only modestly. First quarter GDI growth was revised upward significantly, from a -1.8 percent annualized rate to a positive 0.5 percent annualized rate, but that was still well below the 2.2 percent annualized rate GDP grew in the same quarter and the gap was similar in Q2. This divergence continues to add some downside risk to our forecast, though it’s likely a smaller risk than before.
Even after revisions, the personal income report continues to show that recent real spending is outpacing real income gains, though the saving rate has been a bit higher than we previously thought. Still, spending decelerated in August after a strong July, largely in line with our expectations as current consumption trends remain unsustainable relative to incomes. On the inflation front, core PCE was especially cool over the month and was just 2.2 percent in three-month annualized terms, roughly at the Fed’s target. Meanwhile, core durable goods shipments, which are a proxy for business fixed investment, beat expectations in August but likely still leave the quarter on track for relative stagnation given declines in June and July.
The substantial decline in pending home sales challenges our forecast for only limited additional downside risk to existing home sales given our assumption that most home sales were being driven by less-interest-rate-sensitive buyers. While the August pending sales figure may represent some initial shock to 7 percent mortgage rates that will fade over time, if instead it’s sustained, we will likely downgrade our existing sales forecast. New home sales also dropped significantly, though this was offset in part by an upward revision to July. Still, August was the first month in which sales experienced mortgage rates near or above 7 percent since last November. The drop was also consistent with the recent decline in the homebuilders’ sentiment survey. The July and August numbers are in line with our current outlook for Q3, though further increases in mortgage rates point to additional softening and pose downside risk to our outlook.
Economic and Strategic Research Group
September 29, 2023
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