Labor Market, Consumption Show Q4 Strength, While Manufacturing, Housing Weaken

Key Takeaways:

• Gross domestic product (GDP) adjusted for inflation, increased 2.9 percent annualized in Q3 2022, according to the second estimate from the Bureau of Economic Analysis (BEA), an upgrade of three-tenths compared to the initial estimate. Stronger consumer spending and business investment drove the upward revision. Gross domestic income (GDI) rose a much-weaker 0.3 percent annualized in Q3.
• Nonfarm payroll employment rose by 263,000 in November, putting it approximately in line with the revised three-month moving average of 272,000, according to the Bureau of Labor Statistics (BLS). Gains were relatively broad-based with leisure and hospitality, healthcare, and government all adding more than 40,000 jobs. One notable exception was a decline of 30,000 jobs in retail trade, the third consecutive month that sector has lost jobs. The unemployment rate was flat at 3.7 percent, and the labor force participation rate ticked down one-tenth to 62.1 percent. Average hourly earnings rose 0.6 percent over the month and 5.1 percent on an annual basis, accelerations of one-tenth and two-tenths, respectively, compared to October.
• The Job Openings and Labor Turnover Survey (JOLTS) showed job openings declined by 353,000 to 10.3 million in October, according to the BLS. Quits fell a modest 34,000 to 4.0 million but remain elevated compared to pre-pandemic levels.
• Personal income, adjusted for inflation, rose 0.4 percent in October, according to the BEA. Real disposable personal income was also up 0.4 percent, while real personal income excluding transfer payments increased 0.2 percent. Real personal consumption expenditures increased 0.5 percent, the strongest monthly gain since January. The PCE price index increased 0.3 percent over the month and was up 6.0 percent on an annual basis, a deceleration of three-tenths. Core PCE prices increased 0.2 percent in October and 5.0 percent over the year.
• The ISM Manufacturing Index declined 1.2 points to 49.0 in November, its first time below the expansionary threshold of 50 since May 2020. The new orders index was down 2 points to 47.2, its third consecutive month below 50. The production index was 0.8 points lower at 51.5 and the employment index fell 1.6 points to 48.4. On the more positive side, the supplier deliveries index was below 50 for a second consecutive month, suggesting improving supply chains, and the prices paid index fell 3.6 points to 43.0, demonstrating prices are falling at an even faster rate than last month.
• Light vehicle sales fell 6.1 percent to a seasonally adjusted annualized rate of 14.4 million in November, reversing roughly half of November’s gain, according to Autodata.
• The Conference Board Consumer Confidence Index declined 2 points to 100.2 in November. Confidence in the present situation was down 1.3 points to 137.4, while consumer expectations for the future declined 2.5 points to 75.4.
• 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, declined 4.6 percent to 77.1 in October.
• The FHFA Purchase-Only House Price Index rose 11.0 percent compared to a year ago in September, almost a full percentage point of deceleration from August. On a seasonally adjusted basis, prices rose 0.1 percent over the month and were down 0.6 percent quarter over quarter in Q3.
• Private residential construction spending declined 0.3 percent in October, the fifth consecutive monthly decline, according to the Census Bureau. Single-family spending was especially weak, declining 2.6 percent, while spending on multifamily construction and improvements rose by 0.6 percent and 2.0 percent, respectively.

Forecast Impact:

Employment gains have leveled off at a rate that is stronger than would be required to keep the unemployment rate constant over the past three months. This indicates labor demand remains strong, though, as we’ve noted before, labor is a lagging indicator and is unlikely to turn decisively until a recession begins. Still, strong wage growth in this report conflicts somewhat with signs of cooling inflation elsewhere, illustrating the ongoing risk that core services could keep inflation readings elevated even as goods inflation slows. Therefore, we expect the Fed will continue its hiking cycle, albeit at a slower pace.

Personal consumption expenditures were stronger than expected in October and will likely cause an upgrade to our Q4 PCE forecast. Still, we continue to believe part of this boost likely reflects the impact of stimulus checks in California and a few other states and is thus likely not indicative of a longer-term rebound in consumer spending patterns. This is especially true considering another poor consumer confidence reading this month. Therefore, we continue to believe consumption will weaken considerably next year as the effects of tighter monetary policy reduces purchases of large ticket items and loosens the labor market. Additionally, the ISM survey now shows manufacturing contracting outright, consistent with our view that the economy is weakening. Though manufacturing is a relatively small component of the U.S. economy, it tends to be more cyclical than other sectors and is thus a good indicator of overall economic health.

Housing activity was again weak, with pending sales supportive of our forecast for another decline in existing home sales in Q4. While the recent pullback in mortgage rates may boost near-term sales slightly, affordability remains strained, while most current homeowners have mortgages with rates well below current market rates, a strong disincentive to move. Additionally, home price indices showing flat to declining home prices (the S&P CoreLogic Case-Schiller Home Price Index showed a 0.8 percent decline in October in contrast to the small 0.1 percent increase in the FHFA index) may lead to some buyers waiting. While we expect new home sales to be comparatively strong, these dynamics should weigh on new sales as well, which was supported by October’s weak construction report.

Nathaniel Drake
Economic and Strategic Research Group
December 2, 2022

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.