Inflation slows as income growth outpaces forecasts, boosting housing prospects
Revisions to recent inflation figures reveal stronger income growth than previously thought, helping to explain the robust consumer spending observed this year, according to Fannie Mae's Economic and Strategic Research (ESR) Group.
The Bureau of Economic Analysis (BEA) announced that gross domestic income (GDI), a key measure of economic performance, grew at a revised annualized rate of 3.4% in the second quarter of 2024, up significantly from an earlier estimate of 1.3%.
The ESR group said upward revision coincided with a stronger-than-expected increase in real disposable personal income, helping to explain why consumer spending has remained high despite earlier concerns about slowing growth.
“A fundamental assumption in our forecast had been that the personal savings rate had been unsustainably low as income growth meaningfully lagged consumer spending in recent quarter,” said Nathaniel Drake, associate at Fannie Mae’s Economic and Strategic Research Group.
Personal income, adjusted for inflation, rose by 0.1% in August, according to the BEA, and real disposable income saw a similarly modest 0.1% increase. The revisions also pushed the personal saving rate up to 5.2% for the second quarter, compared to a previously reported 3.3%. However, the savings rate declined slightly to 4.8% in the latest monthly data.
“These revisions thus present some upside risk to our growth forecast through the end of 2024 and into 2025,” Drake said. “While we had previously called for slowing growth in part due to believing consumers would need to retrench to allow incomes to catch up with spending, we will be reassessing this view in our next update.”
Drake noted that inflation pressures have continued to ease, largely in line with the group’s expectations.
The Personal Consumption Expenditures (PCE) price index rose just 0.1% in August. Year over year, the PCE index grew by 2.2%, a new cycle low. Core PCE inflation, which excludes volatile food and energy prices, also increased by 0.1% but reached 2.7% annually due to base effects.
“Core PCE inflation remains on track to reach the Fed’s target by the second quarter of next year,” Drake added.
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On the housing front, the Census Bureau reported a 4.7% decline in new single-family home sales for August, following a significant 10.3% surge in July. Despite this dip, the months’ supply of new homes rose to 7.8, reflecting an increase in homes for sale.
Meanwhile, the National Association of REALTORS (NAR) reported a 0.6% rise in its Pending Home Sales Index in August, though overall activity remains sluggish.
Drake said that while new home sales are tracking slightly ahead of Fannie Mae's third-quarter forecast, the housing market continued to face challenges.
“Our forecast continues to be one of relative strength in new home sales as builders use a number of incentives, including rate buydowns, to move inventories,” he said in a report. “Despite potential headwinds from poor builder confidence and a growing inventory of existing homes for sale in the Sunbelt, new sales have remained a bright spot in an otherwise slow housing market.
“On the existing home side, pending sales remained anemic. While more timely purchase application data suggest some pick-up in activity in recent weeks, the pending sales report is in line with our forecast for continued weakness in existing home sales through the end of the year.”
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