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Economic & Housing Weekly Note

PCE Inflation Accelerates as Home Sales Continue to Fall

June 25, 2021

Key Takeaways:

  • Gross domestic product, adjusted for inflation, was unchanged from the second estimate at 6.4 percent annualized in Q1 2021, according to the third estimate from the Bureau of Economic Analysis (BEA). The notable upward revisions were to business fixed investment and private inventory investment, though these gains were offset by a larger downward revision to net exports.
  • Personal income, adjusted for inflation, fell 2.4 percent in May, while real disposable income decreased by 2.8 percent, according to the BEA. Excluding receipts of transfer payments, real personal income increased 0.4 percent. Real personal consumption expenditures (PCE) decreased by 0.4 percent, though April real PCE was revised upward by four-tenths to a 0.3 percent gain. Real PCE still sits 1.8 percent higher than the level seen in January 2020. The saving rate fell 2.1 percentage points to 12.4 percent, the lowest reading since February 2020. The PCE and core PCE deflator (core excludes food and energy prices) rose 3.9 percent and 3.4 percent from a year prior, an acceleration of three-tenths from the prior month for both measures, and the fastest annual pace of growth since August 2008 and April 1992, respectively.
  • Durable goods orders rose 2.3 percent in May to the highest level since March 2019, according to the Census Bureau, driven by a 7.6 percent increase in orders for transportation equipment. Excluding orders for transportation equipment, new orders rose just 0.3 percent. Durable good shipments rose 0.4 percent, though nondefense aircraft and parts shipments declined by 13.7 percent. Shipments of core capital goods (nondefense excluding aircraft) rose 0.9 percent, while core orders fell slightly by 0.1 percent.
  • New single-family home sales fell 5.9 percent in May to a seasonally adjusted annualized rate (SAAR) of 769,000, according to the Census Bureau. Additionally, April’s estimate was adjusted downward by 46,000 to 817,000. Regionally, sales were unchanged in the Midwest and rose in both the West and Northeast, though sales fell in the South. New homes for sale increased 4.8 percent from April’s revised level, the largest monthly increase since July 2013. The months’ supply rose five-tenths to 5.1, the highest level in a year. The median sales price increased 18.1 percent from a year ago, a pace of annual increase unseen since April 2013.
  • Existing home sales fell 0.9 percent in May to a SAAR of 5.8 million, the fourth consecutive month of decline, according to the National Association of REALTORS® (NAR). Single-family sales fell 1.0 percent, while sales of condos/co-ops were unchanged from April. The total number of homes for sale fell 20.6 percent from last year’s May level. The months’ supply of total existing homes increased one-tenth to 2.5 months, the highest level since October 2020. The median sales price of single-family homes jumped 24.4 percent from a year prior, the fastest pace of annual growth on record, though this is in part due to base effects from the extremely low May 2020 reading. According to the NAR press release, in May 2021, 89 percent of the homes sold were listed on the market for less than one month.
Forecast Impact:

The decline in real personal income in May was due to a continued pullback in government transfer payments after the large impact of the March stimulus. The decline in personal consumption is not entirely unexpected as consumption continues to return to a more “normal” level as the boost provided by the stimulus checks continues to wane. Overall spending remains elevated above pre-pandemic levels, as does the personal saving rate. Consumption expenditure growth remains on track to exceed 10 percent annualized in Q2. Inflation measures continued to climb well above the Fed’s 2-percent target rate. While the Fed currently maintains that much of this growth is transitory, we believe further sustained inflation may force the Fed to act quicker than anticipated, a downside risk to our outlook.

The increase in core capital goods shipments continues to support our outlook for strong business investment in the second quarter. The jump in motor vehicle shipments reflects the small rebound in car and truck production seen in May, though we believe shortages of semiconductor chips will likely continue to weigh on production and shipments of motor vehicles for the foreseeable future.

In housing, both new and existing home sales declined. Some of this may be due to softening demand as affordability pressures build. However, the slowdown was likely primarily driven by the lack of existing home inventories available for sale and continued supply constraints facing homebuilders with regards to new home sales. The increase in new homes for sale however suggests that builders will be able to generate higher sales going forward if these construction bottlenecks are resolved.  

Ricky Goyette and Ryan Gavin
Economic and Strategic Research Group
June 25, 2021

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.