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More Downside Risk? – October 2, 2023

The Fannie Mae Economic and Strategic Research (ESR) Group compared some of the latest reports late last week, and they had some thoughts. The ESR Group noted that second-quarter GDP growth of 2.1% in the Bureau of Economic Analysis’ third estimate was unchanged from its previous estimate.  

Meanwhile, real disposable personal income ticked downward in August while expenditures ticked up a point. Gross domestic income (GDI), which is theoretically equivalent to GDP, was revised upward modestly in recent quarters, “but the gap between the growth rate in GDP and GDI in recent quarters remains unusually large,” according to the ESR Group. 

“While the topline GDP figure was unrevised for the second quarter, the downgrade to real personal consumption expenditures will likely cause some downward revisions to the same category for our third-quarter forecast,” the ESR Group wrote.  

“Additionally, the long-awaited comprehensive update to the national accounts, which we had speculated would help close the unusually large gap between GDP and GDI, ultimately did so only modestly. First quarter GDI growth was revised upward significantly, from a -1.8% annualized rate to a positive 0.5% annualized rate, but that was still well below the 2.2% annualized rate GDP grew in the same quarter and the gap was similar in Q2. This divergence continues to add some downside risk to our forecast, though it’s likely a smaller risk than before.” 

Even after revisions, the ESR Group noted that recent real consumer spending is outpacing real income gains, “though the saving rate has been a bit higher than we previously thought. Still, spending decelerated in August after a strong July, largely in line with our expectations as current consumption trends remain unsustainable relative to incomes.

“On the inflation front, core PCE was especially cool over the month and was just 2.2 % in three-month annualized terms, roughly at the Fed’s target. Meanwhile, core durable goods shipments, which are a proxy for business fixed investment, beat expectations in August but likely still leave the quarter on track for relative stagnation given declines in June and July.” 

Another indicator watched by the group is the National Association of Realtors’ Pending Homes Sale Index, which dropped 7.1% in August. New single-family home sales dropped 8.7%, according to the Census Bureau.  

“The substantial decline in pending home sales challenges our forecast for only limited additional downside risk to existing home sales given our assumption that most home sales were being driven by less-interest-rate-sensitive buyers,” according to the ESR Group. “While the August pending sales figure may represent some initial shock to 7% mortgage rates that will fade over time, if instead it’s sustained, we will likely downgrade our existing sales forecast.” 

The ESR Group has repeatedly gone on record with forecasts of a mild downturn in 2024. These indicators suggest that they’re not about to change their minds.


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About Paul Bubny

Paul Bubny serves as Senior Content Director for Connect Commercial Real Estate, a role to which he brings 16-plus years’ experience covering the commercial real estate industry and 30-plus years in business-to-business journalism. In this capacity, he oversees daily operations while also reporting on both local/regional markets and national trends, covering individual transactions across all property types, as well as delving into broader subject matter. He produces 7-10 daily news stories per day and works with the Connect team and clients to develop longer-form content, ranging from Q&As to thought-leadership pieces. Prior to joining Connect, Paul was Managing Editor for both Real Estate Forum and at American Lawyer Media, where he oversaw operations at both publications while also producing daily news and feature-length articles. His tenure in B2B publishing stretches back into the print era, and he has served as Editor in Chief on four national trade publications. Since 1999, Paul has volunteered as the newsletter editor of passenger rail advocacy groups (one national, one local).