December Data Shows Economic and Housing Activity Slowing

Key Takeaways:

• Retail sales and food services declined 1.1 percent in December from November's downwardly revised figure, according to the Census Bureau. Part of the drop was due to a price-related 4.6 percent decline in gas station sales and a 1.2 percent decline in sales at motor vehicle and parts dealers, which was influenced partly by ongoing supply challenges. Still, weakness was evident in most major retail categories. Core retail sales, which exclude food services, autos, building supplies, and gas stations, declined 0.7 percent with general merchandise sales (-0.8 percent) and sales at nonstore retailers (-1.1 percent) among the weaker categories, though online sales rose 0.5 percent. Sales at restaurants and bars were down 0.9 percent, the second consecutive monthly decline.
• The Producer Price Index (PPI) declined 0.5 percent in December, according to the Bureau of Labor Statistics. On an annual basis, prices were up 6.2 percent, a 1.1 percentage point deceleration from last month and the slowest annual rate since March 2021. Final demand for goods prices dropped 1.6 percent due to a 7.9 percent fall in energy prices, while final demand for services ticked up 0.1 percent, the slowest monthly increase since April 2022. Core PPI (less food, energy, and trade services) increased 0.1 percent over the month and 4.6 percent over the year.
• Industrial production, a gauge of output in the manufacturing, utility, and mining sectors, fell 0.8 percent in December to reach the lowest level since February 2022, according to the Federal Reserve Board. The drop was despite a 3.8 percent surge in utility production due to abnormally cold weather. Manufacturing output fell 1.3 percent to its lowest level since October 2021, and mining output was down 0.9 percent.
• Existing home sales declined 1.5 percent in December to a seasonally adjusted annualized rate (SAAR) of 4.02 million, according to the National Association of REALTORS®. The inventory of existing homes for sale was down 13.4 percent to 970,000, though that's about 10 percent higher than the level in December 2021. The months' supply was down four-tenths to 2.9 percent and the median price of existing homes sold increased 2.0 percent from a year ago, the slowest annual growth rate since May 2020.
• Housing starts declined 1.4 percent to a SAAR of 1.38 million in December, according to the Census Bureau. In 2022, total housing starts were 1.55 million, a 3.0 percent decline from 2021 but still the second highest annual total since 2006. Single-family housing starts rose 11.3 percent in December to a SAAR of 909,000, while multi-family starts declined 19.0 percent to a SAAR of 473,000. Over the year, single-family starts totaled 1.01 million, while multifamily starts were 545,000, the highest annual mark since 1986. Single-family permits declined 6.5 percent in December to a SAAR of 730,000, while multifamily permits rose 5.3 percent to a SAAR of 600,000.
• The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index rose 4 points to 35 in January. The index for single-family sales in the present rose 4 points to 40, while the index for single-family sales in the next six months was up 2 points to 37. The index for foot traffic of prospective buyers increased 3 points to 23. According to the press release, while "many builders continue to use a variety of incentives" to prop up sales, "a rebound for home building could be underway later in 2023."

Forecast Impact:

Retail sales were weaker than we anticipated. When combined with a downward revision to November, we expect our Q4 estimate for personal consumption was a touch high and also implies a weaker starting point for Q1 2023. We generally view the report as supportive of our 2023 forecast for a slowdown in consumption and broader economic activity, ultimately culminating in a mild recession in the first half of 2023. Spending outpaced disposable income growth in 2022, suggesting that consumers would eventually retrench and return to a more historically normal saving rate. The December retail sales report supports this theory, as even with a likely boost to disposable incomes due to a pullback in gas prices, spending in other categories was weak. Weakness was also evident in the industrial production report, which showed manufacturing activity erasing all of its gains over the past year. This points to further softness in demand for goods moving forward and provides additional support for our forecasted recession. The PPI report provided even further evidence that weakening demand is at least easing inflationary pressures, though, and we believe the Fed is nearing an end to its rate increases.

Single-family construction ended the year on a stronger-than-expected footing, but we note that the surge in starts was due almost entirely to a whopping 96.9 percent jump in single-family construction in the Northeast to a SAAR of 128,000 units, which would be the strongest pace since 2006 by a wide margin. We believe that this jump is likely an anomaly and that the simultaneously reported decline in single-family permits is more indicative of the broader trend in new home construction. Therefore, while Q4 came in higher than expected, we continue to forecast a decline in starts over the coming quarters as elevated mortgage rates and a broader economic slowdown weigh on demand. Similarly, existing home sales were a bit higher than we had forecast for Q4, but we generally believe the trend is still slowing and that existing sales have not yet reached their trough as affordability remains a major concern. Still, there is some upside risk to our forecast for both construction and existing sales as mortgage rates have pulled back in recent weeks, providing modest relief to the affordability picture.

Nathaniel Drake
Economic and Strategic Research Group
January 20, 2023

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