Home Sales Generally Trending Downward as Industrial Production Shows Early Signs of Slowing

Key Takeaways:

• Industrial production, a gauge of output in the manufacturing, utility, and mining sector, rose 0.2 percent in May, its fifth consecutive monthly increase, according to the Federal Reserve Board. Manufacturing output dipped 0.1 percent, though the index’s level remains only one-tenth below its highest level since 2008. Mining output increased 1.3 percent and utilities output was up 1.0 percent, due in part to unseasonably warm weather. Motor vehicle assemblies rose 2.0 percent to a seasonally adjusted annualized rate (SAAR) of 10.7 million units, the highest level since January 2021.
• The University of Michigan Consumer Sentiment Index declined 8.4 points to 50.0 in June, its lowest level since the survey began in 1953. The current economic conditions index was down 9.5 points to 53.8, and the consumer expectations index declined 7.7 points to 47.5.
• Existing home sales dropped 3.4 percent in May to a SAAR of 5.4 million, the fourth consecutive monthly decline, according to the National Association of REALTORS®. Year to date, existing home sales are down 6.0 percent. The number of homes available on the market rose a non-seasonally adjusted 12.6 percent to 1.2 million, moving the months’ supply up four-tenths to 2.6, its highest level since August 2021. The median sales price, which does not adjust for the type of home sold, increased 14.6 percent compared to a year ago, an acceleration of three-tenths from April.
• New single-family home sales rose 10.7 percent in May to a SAAR of 696,000, according to the Census Bureau. Additionally, April’s estimate was revised upward by approximately 6.4 percent. Year to date, new home sales are down 10.6 percent. The number of new homes for sale increased 1.6 percent to 444,000, though the months’ supply fell six-tenths to 7.7 given the faster sales rate. However, only 37,000, or 8.3 percent, of those homes for sale are completed, compared to the more typical pre-pandemic ratio of above 20 percent.

Forecast Impact:

The rate of increase for industrial production slowed in May and manufacturing output declined outright, supportive of our view that the economy is slowing. Still, we do not think these measures indicate an imminent recession, as some slowdown was likely given the large 1.3 percent jump in industrial production in April and because capacity utilization is at 79 percent, higher than its recent historical average. Consumer sentiment, which is lower than at any point during the Great Recession or the 1970s’ stagflation period, is also consistent with a slowing economy. However, it is important to note that the Conference Board’s consumer confidence index has held up much better than the sentiment index due to differences in the composition of questions, so we are unlikely to revise our forecast on an indicator that has been significantly more pessimistic than hard consumption data for several months now.

Existing home sales slid again in May but were largely in line with our expectations for the quarter. Though the May sales pace remains slightly above the 2019 average sales pace of 5.3 million, we expect a further decline in sales through the end of the year as higher mortgage rates and historic home price growth keep many would-be buyers on the sideline. On the new home sales front, the April and May average sales pace is in line with our current forecast for Q2. Even with the rebound in May sales and the upward revision to April, we continue to think the general trend for new home sales is down, and we expect some decline to the rate of home sales in June. Given incoming data and no relief on mortgage rates in sight, we are unlikely to significantly revise our expectations at this time.

Nathaniel Drake
Economic and Strategic Research Group
June 24, 2022

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