Monday Economic Report

Higher Mortgage Rates Have Dampened New Home Sales

•  New single-family home sales tumbled 16.6% to 591,000 units at the annual rate in April, declining sharply for the fourth straight month and dropping to a post-pandemic low. The steep hike in mortgage rates and affordability issues have dampened enthusiasm for new home sales. At the same time, the median sales price for new homes was $450,600 in April, a new record.

• The personal consumption expenditures deflator (the preferred measure of inflation for the Federal Reserve) rose 0.2% in April, slowing from the 0.9% gain in March. Energy prices fell 2.8%, falling for the first time in 11 months, helping to keep the headline number in check. At the same time, food prices continued to rise solidly, up 1.0% in April. 

• Excluding food and energy prices, the PCE deflator increased 0.3% in April, the same pace as in February and March. Overall, the PCE deflator has risen 6.3% year-over-year, pulling back from 6.6% in March, which was the strongest increase since January 1982. Core inflation has increased 4.9% over the past 12 months, down from 5.2% in the prior release. 

• These data will put continued pressure on the Federal Reserve to tackle inflation. The Federal Open Market Committee is likely to increase the federal funds rate by 50 basis points at each of its next two meetings (June 14–15 and July 26–27), and it will also start to reduce the size of its balance sheet on June 1. 

• New orders for durable goods rose 0.4% to a record $265.3 billion in April. As such, these data continue to reflect resilience in the manufacturing sector despite supply chain bottlenecks, global uncertainties, workforce shortages and soaring costs. With that said, this was slower than the expected gain of 0.7% among forecasters. Nonetheless, new orders have jumped 12.2% over the past 12 months, or 7.6% with transportation equipment excluded.

• Core capital goods—a proxy for capital spending in the U.S. economy—rose 0.3% to a record $73.1 billion in April, with 7.5% growth year-over-year. 

• The S&P Global Flash U.S. Manufacturing PMI declined from 59.2 in April to 57.5 in May, a three-month low but continuing to expand modestly despite numerous challenges. New orders, output and exports slowed in May, but respondents remained optimistic in their outlook.

• The two regional manufacturing surveys moved in opposite directions in May. The Kansas City Federal Reserve Bank reported solid expansions in activity, with hiring rising at a record pace but other data mixed. However, manufacturing activity contracted in the Richmond Fed survey in May for the first time since September. Inflation remained a significant challenge, as were other factors. 

• Personal spending rose 0.9% in April, a solid pace despite slowing from the 1.4% gain in March, with 9.2% growth year-over-year. Personal income increased 0.4% in April, and manufacturing wages and salaries increased 0.6% for the month, or 10.3% year-over-year. 

• With spending growth outpacing income, the personal saving rate fell from 5.0% to 4.4%, the lowest since September 2008. This suggests that, while consumer spending remains strong, Americans are dipping heavily into their savings to finance those purchases. 

• The Index of Consumer Sentiment fell from 65.2 in April to 58.4 in May, according to preliminary data from the University of Michigan and Thomson Reuters.

• In revised data, the U.S. economy shrank 1.5% at the annual rate in the first quarter, contracting for the first time since the second quarter of 2020. Overall, real GDP growth contracted on reduced government spending, inventories, net exports and nondurable goods spending, offsetting stronger data for durable goods purchases, service-sector consumer spending and nonresidential fixed investment. 

• Overall, the current forecast is for 2.7% growth in real GDP in 2022, with the economy rebounding in the second quarter. With that said, the growth outlook has been dampened by uncertainties surrounding the situation in Ukraine, the shutdowns in China related to COVID-19 and attempts to slow pricing pressures. Indeed, there are notable downside risks to the forecast, and consumers and businesses openly worry about a slowdown, especially in 2023.

Written by:  Chad Moutray, Chief Economist, for NAM.