01/20/2023 | Press release | Distributed by Public on 01/20/2023 12:56
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.
Economic and Strategic Research Group
January 20, 2023
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