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Weekly Update 12/23/2022: U.S. Economy Continues to Show Signs of Strength & Cooling Inflation

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Domestic Economic News

 

In a bit of positive pre-Christmas good news this week, US consumer confidence rose by more than forecast to the highest since April as inflation eased and gasoline prices dropped. The Conference Board’s index increased to 108.3 this month from an upwardly revised 101.4 reading in November, data out Wednesday showed. The median forecast in a Bloomberg survey of economists was 101. A measure of expectations — which reflects consumers’ six-month outlook — climbed to 82.4, the highest since January. The group’s gauge of current conditions advanced to 147.2, a three-month high.

 

New US home construction continued to decline in November and permits plunged as high borrowing costs paired with widespread inflation eroded housing affordability and demand. Residential starts decreased 0.5% last month to a 1.43 million annualized rate, according to government data released Tuesday. Single-family homebuilding dropped to an annualized 828,000 rate, the lowest since May 2020. Applications to build, a proxy for future construction, decreased 11.2% to an annualized 1.34 million units. Permits for construction of single family homes fell 7.1% to the lowest since May 2020. The median estimates in a Bloomberg survey of economists called for a 1.4 million pace of residential starts and 1.48 million pace for total permits.

Sales of previously owned US homes fell for a 10th-straight month in November, extending a record decline as high mortgage rates continue to stifle affordability. Contract closings decreased 7.7%, the most since February, to an annualized pace of 4.09 million last month, according to data from the National Association of Realtors on Wednesday. The pace of purchases, the second-weakest since 2010, was below the median projection of 4.2 million in a Bloomberg survey of economists. The drop in sales, which extended the longest string of declines in data back to 1999, underscores how high mortgage rates continue to crimp demand. The ensuing pullback in home prices in some areas paired with high borrowing costs have also kept many Americans from listing their homes, further limiting sales. “The residential real estate market was frozen in November, resembling the sales activity seen during the Covid-19 economic lockdowns in 2020,” Lawrence Yun, NAR’s chief economist, said in a statement. “The principal factor was the rapid increase in mortgage rates, which hurt housing affordability and reduced incentives for homeowners to list their homes.” Mortgage rates have since eased from their highs, but they remain roughly double what they were last year. And with more interest-rate hikes from the Federal Reserve expected to be on the way, though, the housing sector will likely remain weak into 2023. Sales are down more than 35% over the past year on an unadjusted basis, the sharpest annual pullback on record.

Separate data out earlier this week showed the pace of homebuilding is also slowing. New construction of single-family homes dropped to the lowest since May 2020, as did applications to build. In addition, homebuilder sentiment has fallen every month this year. The number of homes for sale fell to 1.14 million in the month, the NAR data showed. While there tends to be fewer listings of homes in November and through the winter months, Yun said inventory remains near historic lows. Given the slower sales pace, it would take 3.3 months to sell all the homes on the market, up from 2.1 months a year earlier. Realtors see anything below five months of supply as indicative of a tight market. The median selling price was up 3.5% from a year earlier to $370,700. That’s the weakest appreciation since 2020. Properties are remaining on the market for longer — 24 days in November compared with 21 days in October and 18 days a year ago. Some 61% of homes sold were on the market for less than a month.

 

Applications for US unemployment benefits were little changed last week, remaining near a historically low level, underscoring businesses’ reluctance to lay off workers in a supply-constrained labor market. Initial unemployment claims increased by 2,000 to 216,000 in the week ended Dec. 17, Labor Department data showed Thursday. The median forecast was for 222,000 applications. Continuing claims, or the number of people who have already filed an initial application and are now claiming unemployment benefits, edged down to 1.67 million in the week ended Dec. 10. It marked the first decline since the period ended Oct. 1. The measure has been slowly climbing, a potential indication that it’s been more difficult for out-of-work individuals to find new jobs. The four-week moving average in initial claims, which smooths out some of the week-to-week volatility, slipped to a one-month low of 221,750. The data can be particularly difficult to seasonally adjust around the holidays. The job market remains extremely tight, and while there have been some signs of cooling, the ongoing imbalance between supply and demand for labor continues to put upward pressure on wages. It’s also made many employers more reluctant to reduce headcount, given the challenges in attracting and retaining employees. Separate data from the Conference Board Wednesday showed more consumers viewed jobs as “plentiful” in December than in the prior month, while fewer people perceived jobs as “hard to get.” On an unadjusted basis, initial claims fell with California, Indiana and Ohio posting the biggest declines.

 

A separate report showed that US gross domestic product expanded at a 3.2% annual pace in the third quarter, higher than previously estimated and driven by an upward revision to consumer spending. US economic growth in the third quarter was firmer than previously estimated, reflecting upward revisions to consumer spending and business investment. Inflation-adjusted gross domestic product, or the total value of all goods and services produced in the economy, increased at a 3.2% annualized rate during the period, Commerce Department data showed Thursday. That compares with a previously reported 2.9% advance. Personal consumption was revised significantly higher, advancing 2.3% in the latest report compared to 1.7% in an earlier estimate and reflecting stronger services spending. The figures highlight how despite rising interest rates and rapid inflation, consumer and business demand remains solid. A strong labor market and wage growth has underpinned household spending, but it’s unclear whether Americans will be able to maintain that spending momentum into 2023. Meanwhile, a key inflation gauge — the personal consumption expenditures price index excluding food and energy — rose an annualized 4.7% in the third quarter, up slightly from the previous estimate. Another key official gauge of activity — known as gross domestic income — rose at a 0.8% rate. When averaged with GDP, a measure watched closely by those who determine the timing of recessions, it climbed a firmer 2%.

 

A key gauge of US inflation continued to moderate last month while spending stagnated, extending a welcome easing in price pressures but far short of the moderation the Federal Reserve is seeking to pause interest-rate hikes. The personal consumption expenditures price index excluding food and energy, which Fed Chair Jerome Powell has stressed is a more accurate measure of where inflation is heading, rose 0.2% in November from a month earlier, Commerce Department data showed Friday. From a year earlier, the gauge was up 4.7%, a step down from a 5% gain in October. The overall PCE price index increased 0.1% and was up 5.5% from a year ago, still well above the central bank’s 2% goal. Personal spending, adjusted for changes in prices, stalled in November, the weakest since July and below forecast. The median estimates in a Bloomberg survey of economists were for a 0.2% advance in the core PCE price index and a 0.1% gain in inflation-adjusted spending. It was good to see inflation trending in the direction the Fed wants to see it, which is lower.

 

Interest Rate Insight and the Fed

 

US mortgage rates declined last week to a three-month low, though a slight easing in home-purchase applications underscores a still-challenged housing market. The contract rate on a 30-year fixed mortgage decreased to 6.34% in the week ended Dec. 16 from 6.42%, according to Mortgage Bankers Association data released Wednesday. Rates are down 82 basis points since reaching a more than two-decade high of 7.16% in late October. The group’s index of mortgage applications for home purchases slipped 0.1% from an almost three-month high the prior week. Housing demand has collapsed since the start of the year as rapid inflation prompted aggressive interest-rate increases by the Federal Reserve, though home prices have been slow to settle back. Nonetheless, the worst of the spike in mortgage rates may be over as central bankers dial back the pace of interest rate increases and ultimately move toward a pause in their hiking cycle. MBA’s overall measure of mortgage applications, which includes those for refinancing, rose 0.9%. The index of refinancing activity climbed 6%, the largest advance in three months. The MBA survey, which has been conducted weekly since 1990, uses responses from mortgage bankers, commercial banks and thrifts. The data cover more than 75% of all retail residential mortgage applications in the US.

 

Impactful International News

 

On a positive note, Germany’s business outlook improved for a third month amid signs that double-digit inflation may be peaking and a deep recession over the winter can be avoided. A gauge of expectations released Monday by the Ifo institute increased to 83.2 in December from a revised 80.2 the previous month, beating expectations by economists in a Bloomberg survey. An index of current conditions also edged higher. “Sentiment in the German economy has brightened considerably,” Ifo President Clemens Fuest said in a statement. “German business is entering the holiday season with a sense of hope.” Germany was among countries reporting slower inflation in November as pressure from surging energy costs receded. Well-filled gas-storage facilities have also lowered the likelihood that Russia’s war in Ukraine will lead to disruptive shortages in the coming months. While the Bundesbank still expects output to shrink through the first half of next year, the recession may turn out to be shallower than many had initially feared. Surveys of purchasing managers released Friday showed the downturn easing as price pressures cooled, leading firms to be less pessimistic than last month. Uncertainty remains high. Continued cold weather could reignite concerns about energy supplies in Europe’s largest economy, and companies are set to be squeezed by higher borrowing costs as the European Central Bank continues to hike interest rates to stamp out inflation.

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