Robust economic growth driven by consumer spending

Weekly Economic Review: November 18, 2024

Still-high CPI, accelerating PPI, higher-than-expected retail sales with resilient consumer spending, and post-election uncertainty combine to reduce rate-cut expectations.

Last week, three important economic data points were announced: the Consumer Price Index (CPI), the Producer Price Index (PPI), and retail sales.

All headline and core CPI figures came in as expected, but those numbers reveal that progress in reducing inflation stalled in October. The monthly core CPI has been unchanged for the last three months. Moreover, the annual core CPI remained the same for the last two months, which was an increase compared to July and August.
With the exception of the monthly headline PPI, all headline, core, and super core PPI figures rose in October, exceeding both the prior month level and the market expectation. Like the October CPI data, the PPI numbers indicate that progress towards disinflation is losing momentum. The PPI in-crease was driven by higher costs for services like portfolio management and airfares. These components are among the costs used to calculate the personal consumption expenditure (PCE) price index, the Fed’s preferred inflation measure.

Retail sales exceeded expectations in October, and there were significant upward revisions to September’s data as well. The increases were driven by the auto and electronics sectors, indicat-ing resilient consumer demand and economic growth thus far in the fourth quarter. Let’s review the important economic data announced last week.

New Residential Construction: According to the U.S. Census Bureau, new home construction fell 3.1% to a 1.31 million annualized rate in October, which was lower than expected. Single-family housing starts, which traditionally account for most homebuilding, declined 6.9% in October to 970,000 annualized units. In contrast, multi-family housing starts increased 9.8% to 326,000 annu-alized units in October, although they remained below the 367,000-unit average from 1959 to 2024. Housing starts in the Northeast and the South posted declines of 32.9% and 8.8%, respectively, while those in the West increased 21.1%.

Building permits, an indication of likely future construction, decreased 0.6% to a 1.42 million annual-ized rate in October, lower than the expected 0.7% increase. The Northeast was the only region with a positive monthly increase (13.4%) in building permits. Permit activity generally mirrored the data for housing starts. Permits for future construction of single-family homes increased 0.5% to 968,000 annualized units, a six-month high, while multi-family building permits declined 3% to 393,000 annualized units.

Existing Home Sales: According to the National Association of Realtors, sales of existing homes increased by 3.4% to 3.96 million annualized units in October from 3.84 million units in September, higher than the expected gain of 2.9%. On an annual basis, sales advanced 2.9% from 3.85 million units a year ago.

All four major U.S. regions posted sales increases in October. In the West, sales rose 1.3% in Oc-tober to an annual rate of 770,000, which was also up by 8.5% from a year earlier. The median sales price for all four regions increased by 4.0% from a year ago to $407,200, marking the 16th consecutive month of year-over-year price gains. The median price in the West was $627,700, up by 4.4% from a year ago.

The inventory of unsold existing homes for sale increased by 0.7% (or 19.1% from a year earlier) to 1.37 million in October, still well below the 1.9 million pre-pandemic level. The Months Supply of Inventory (MSI), measuring the number of months it would take for the current inventory of homes on the market to sell at the current sales pace, was 4.2 months in October, down from 4.3 months in September but up from 3.6 months year-over-year. A four-to-seven-month supply is considered a healthy balance between supply and demand.

In October, 19% of the homes sold were sold above the listing price. First-time homebuyers ac-counted for 27% of sales, up from 26% in the prior month but down from 28% year-over-year. All-cash sales made up 27% of purchases, a decrease from 30% in September and from 29% a year ago. 59% of the homes sold were on the market for less than a month, compared to 57% in the prior month. Homes stayed on the market for an average of 29 days in October, up from 28 days in September and 23 days a year ago.

On a concluding note, existing home sales increased in October, resulting in the first annual in-crease since July 2021. This was mainly driven by lower mortgage rates in the prior month, a resil-ient labor market, and continued economic growth. According to Freddie Mac, the average 30-year fixed-rate mortgage rate hit a two-year low on September 26, 2024, at 6.08%. This significantly boosted home contract closings in October. Since then, however, the average 30-year fixed-rate mortgage continued to climb to 6.84% as of November 21, 2024. High mortgage rates have dis-couraged many existing homeowners from selling their homes and giving up their low mortgage rate and payment. It now appears that more homeowners expect high mortgage rates to stay for longer, so they’ve been slowly listing their homes for sale. The November 21, 2024, forecast pub-lished by the Mortgage Bankers Association projects a modest decline in the 30-year fixed-rate mortgage, declining to 6.6% by the end of this year and 6.4% by the end of 2025.

Four Fed officials spoke at various events last week, offering mixed views on monetary policy. The market priced in a 50% chance of a 25-basis point rate cut in December, a 74% chance of a 25-basis point rate cut in January, and a 100% chance of a 25-basis point rate cut in March. From this December to next December, the market expects a 100% probability of a 1% rate cut with a low 63% chance of a 25-basis point rate cut. The market expects that the Fed will take a gradual approach to rate cuts due to sticky inflation, strong economic growth, and inflationary fiscal poli-cies.

The Atlanta Fed’s GDPNow model projects GDP growth of 2.6% in the fourth quarter. The two- and ten-year Treasury yields ended at 4.37% and 4.41%, respectively. While the short-end curve was slightly up, the long-end curve was slightly down. As a result, the two-year Treasury yield was up by 6 basis points, but the ten-year Treasury yield was down by 2 basis points compared to their levels a week ago.

Mark Yoon, CFA CPA
EVP & CFO of Commercial Bank of California

Thomas McCullough
EVP of Commercial Bank of California

_______________________________________________________________________

All content available on this material is general in nature, not directed or tailored to any particular person, and is for informational purposes only. Any of its content is not offered as investment advice and should not be deemed as investment advice or a recommendation to purchase or sell any specific security. The information contained herein reflects the opinions and projections of Commercial Bank of California (CBC) as of the date hereof, which are subject to change without notice at any time. CBC does not represent that any opinion or projection will be realized. The information contained herein has been obtained from sources considered reliable, but neither CBC nor any of its advisors, officers, directors, or affiliates represents that the information presented on this material is accurate, current, or complete, and such information is subject to change without notice.