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Economic & Housing Weekly Note

GDP Growth Disappoints and Home Sales Slip in the Face of Higher Prices

July 30, 2021

Key Takeaways:

  • The Federal Open Market Committee (FOMC) kept the target rate for the federal funds rate unchanged at 0.0 to 0.25 percent at its July 27-28 meeting, while also keeping the pace of asset purchases unchanged at $120 billion per month. In their press release, the FOMC indicated that progress toward their maximum employment and price stability goals has been made as the economy recovers, but stopped short of declaring achievement of “substantial further progress,” the target set by Fed officials to begin tapering asset purchases.
  • Gross domestic product (GDP), adjusted for inflation, increased at a 6.5 percent annualized rate in Q2 2021, surpassing the pre-pandemic levels of GDP in real terms, according to the preliminary estimate from the Bureau of Economic Analysis. The gain was fueled by 11.8 percent annualized growth in consumption and an 8.0 annualized percent rise in business fixed investment. Residential fixed investment, which fell 9.8 percent, direct government expenditures, which declined 1.5 percent, and a large decline in real inventories all slowed GDP growth, as did net exports.
  • Personal Income, adjusted for inflation, declined 0.4 percent in June, according to the Bureau of Economic Analysis. Excluding receipts of transfer payments, real personal income increased 0.2 percent. Real disposable personal income fell 0.5 percent. Real personal consumption expenditures (PCE) grew 0.5 percent. The personal saving rate fell nine-tenths of one percent to 9.4 percent in June, the lowest level since February 2020, and was revised downward 2.1 percentage points in May to 10.3 percent. The PCE and core PCE deflator (core excludes food and energy prices) rose 4.0 percent and 3.5 percent from a year prior respectively, virtually the same rate of increase seen in May.
  • New single-family home sales fell 6.6 percent to a seasonally adjusted annualized rate (SAAR) of 676,000 in June, the third straight monthly decline, according to the Census Bureau. Additionally, May’s estimate was revised downward by 45,000 to 724,000. The number of new single-family houses for sale increased 7.0 percent, reaching the highest level since November 2008, though approximately 30 percent of homes for sale were homes that had not yet been started, the largest share in series history. The median sales price for new houses sold fell 5.0 percent, the largest monthly decline since April 2020.
  • 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 1.9 percent to 112.8 in June.
  • Durable goods orders rose 0.8 percent in June, according to the Census Bureau. In addition, May’s estimate was revised upward nine-tenths of one percent to 3.2 percent. Excluding orders for transportation equipment, new orders improved by a more modest 0.3 percent. Core capital goods orders (nondefense excluding aircraft) rose 0.5 percent.
  • The FHFA Purchase-Only House Price Index, reported on a seasonally adjusted basis, increased 18.0 percent from a year ago in May, setting a new annual growth record for the seventh straight month.
  • The Conference Board Consumer Confidence Index remained relatively unchanged in July, increasing 0.2 points to 129.1, the highest level since February 2020. Consumer confidence in the present situation and consumer expectations for the future were also essentially flat, rising by 0.4 and falling 0.1, respectively.
Forecast Impact:

New home sales fell 24.1 percent from a year prior as the annual comparison now reflects last summer’s surge in sales, though they were at a pace similar to the 2019 rate. Combined with the decline in the pending home sales index, we believe demand for homes is likely normalizing somewhat following the pandemic-related surge. High prices may be driving some would-be homebuyers out of the market, and we believe many first-time buyers likely pulled forward their demand during the pandemic, leaving fewer potential first-time homebuyers currently than there would have been otherwise. However, we think ongoing supply constraints are also likely dragging on sales as builders have delayed breaking ground on projects, which is reflected in the share of homes for sale but not yet started hitting a record high at nearly 30 percent. The decline in sales was larger than we had anticipated, meaning our near-term forecast will likely be revised downward; however, we still expect a modest uptick in sales as supply constraints ease. We also expect that the continually low interest rate environment will likely prevent homebuying demand from slipping below pre-pandemic levels, though we continue to expect the dearth of affordable supply to weigh on the pace of sales going forward.

Second quarter GDP came in 1.6 percentage points lower than we had forecast, driven by an unexpected decline in government consumption and investment, in part due to the expiration of the Paycheck Protection Program (PPP) in May, as well as considerably weaker business inventory investment. Due to these factors likely being temporary, the weakness has only minimal impact on our GDP outlook for the remainder of the year. Still, we expect supply chain disruptions to weigh on growth in the third quarter, particularly if the recent increase in COVID-19 cases across Asia leads to further lockdowns, which could exacerbate the current struggle of supply growth to match the strength in global demand. Further, the decline in the saving rate and in real disposable income, combined with the continual increase in prices, suggests that, going forward, consumption may not contribute quite as much to GDP growth, even as consumer confidence and PCE remained high in June and throughout the economic recovery.

Nathaniel Drake
Economic and Strategic Research Group
July 30, 2021

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