Last week, retail sales data confirmed that the financial condition of most households may have somewhat stabilized. Strong wage growth and a sharp decline in energy prices are supporting household consumption. Retail sales exceeded expectations, rising 0.4% in September, up from 0.1% in August, while core retail sales increased by 0.7%. Housing market data also revealed higher-than-expected activity last month, driven largely by a significant drop in mortgage rates in September.
The Federal Reserve Bank of Atlanta’s GDPNow estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2024 increased to 3.4% last week, up from 3.2% the previous week and 2.5% the month prior.
The good news is that the surge in household and government spending, which has boosted demand, has so far been matched by rising productivity on the supply side. But can productivity continue to surprise on the upside? Without persistently higher productivity, higher spending could reignite inflation concerns.
It will be interesting to see how the federal government’s decision to forgo critical investments in favor of financing current spending will impact inflation and interest rates in the year ahead. I’d love to hear your thoughts – connect with me on LinkedIn and ask me anything. The U.S. fiscal deficit is the highest outside of COVID, exceeding 6% of GDP for two consecutive years as social security and defense spending continue to climb. The Economist magazine called the U.S. economy ‘The Envy Of The World’. But could this be short lived?
This week, we’ll get the Fed Beige Book and an update on home sales. The Beige Book compiles anecdotal information on current economic conditions from each of the 12 Federal Reserve districts. The previous report offered a pessimistic outlook, with economic activity growing only slightly in three districts, while the number of districts reporting flat or declining activity rose from five to nine compared to the previous period. These recession fears prompted the Fed’s 50 basis point rate cut.
While the consensus anticipates another decline in existing home sales last month, the drop should be smaller than expected for this time of year. Lower mortgage rates last month and the steady increase in the supply of newly built single-family homes could lead to another rise in newly built home sales.
Single-family residential construction has rebounded this year. In most permit-issuing areas, the total number of authorized single-family constructions from January to August was higher than year-ago levels. As of August 2024, the markets with the most single-family permits compared to last year were Indianapolis, Phoenix, San Diego, San Antonio, and Milwaukee. New home sales in these markets are likely to outpace those in other large metros in the months ahead.
