Weekly Economic Digest for 9-29-23: Housing; Consumer Confidence; Durable Goods; PCE Inflation; and 2Q GDP Revision

The views and opinions expressed in this post are solely those of the author and do not necessarily reflect the views of the Georgia Institute of Technology or the Georgia Board of Regents.

There was a lot of economic data released this week, most of it coming on Friday (which is why this article is coming a little late in the day). The data on housing continued to show prices remaining high while sales continue to fall. Consumer confidence in the future of the economy fell sharply, as did new durable orders if you exclude defense spending. The final reading on GDP for the second quarter showed that personal consumption in the second quarter was much slower than originally reported. And the latest reading on PCE inflation indicates that prices are still rising and that the Fed still has a lot of work to do.


It seems that just about every week we get some data on the housing market. In a normal time, we probably wouldn’t spend so much effort to report on it all…but this isn’t a normal time.

The week started with data from Case-Shiller on home prices in 20 major metro areas. According to the data, home prices rose for the 5th consecutive month jumping nearly 1% in July and posting year-over-year growth for the first time since February. 

While the composite index just got back into positive territory on a year-over-year basis, the story is quite varied across the country. For example, home prices in Atlanta, New York, and Chicago have remained strong despite low inventory and high mortgage rates, while other cities like Dallas and San Francisco have seen substantial price declines.

Sales of existing homes declined in August to the lowest level since January. This is the third consecutive month of declines reflecting the limited inventory and historically high mortgage rates. Similarly, sales of new homes plunged in August, dropping 8.7%, nearly 4x the 2.2% drop that experts were expecting. This was the biggest drop since September 2022 and confirms the decline in home builder sentiment that we reported on last week.

However, even with declining sales, the average price of a new home dropped slightly to $430,300. That is still well above pre-pandemic levels, but significantly off the peak of $496,800 from October 2022. However, at more than $430K, if the Fed was looking to increase housing affordability by driving prices down with rising interest rates, they have failed. Rather, existing home owners are choosing to simply stay in their homes turning would-be buyers into renters and driving up the price of the limited inventory.

Finally, on Thursday we learned that pending home sales plunged 7.1% in August, significantly worse than the 1.0% decline experts were expecting. That represents a decline of 18.8% from a year ago, and was the lowest level EVER…exactly equal to its COVID-lockdown lows. Obviously, pending home sales are a leading indicator of existing-home sales, and this reading suggests that until inventory rises and rates decline, there are some tough times ahead in the housing market.

Consumer Confidence

High mortgage rates, rising prices, expensive gas, striking auto workers, a weak stock market, and a looming government shutdown are all taking a toll on consumers. The Consumer Confidence Index dropped 5.7 points in September, nearly twice the drop economists were expecting. This index is a closely watched measure because it tends to be a good gauge as to whether the economy is getting better or worse. While their overall confidence is higher, those with incomes over $125,000 reported the largest drop in confidence in September.

The index that looks at how consumers feel about the economy right now was virtually flat in September. But the index that asks them how they feel about the economy 6 months from now dropped nearly 10 points. That drop puts the consumer expectations index well below 80. Why is that important? Because a reading below 80 tends to signal a recession. As you can see below, the index has spent quite a lot of time below 80 since the spring of last year.

Durable Goods

If consumers are feeling less confident, they probably aren’t going to be spending a lot of money on durable goods. So, it was a slight surprise on Wednesday when the Census Bureau reported that durable goods orders actually grew 0.2% in August. Economists had been expecting a decline of 0.5%. However, as usual, you need to dig a little deeper into the data and not always stop at the “headline number.” If you look further, at the data, you discover that if you exclude defense spending on durable goods, new orders actually declined 0.7%…the second monthly decline in a row. Again, not surprising as high interest rates and the fear of an impending recession naturally reduce consumer demand for big-ticket items. Further, higher financing costs also discourage businesses from spending and investing.

2nd Quarter GDP

The 2nd quarter GDP revision showed personal consumption during the quarter grew less than HALF what was originally reported! That is a significant revision! Rather than the 1.7% growth they reported just one month ago, the revised number shows personal consumption grew only 0.8% in the 2nd quarter. This is the lowest growth rate in personal consumption going back to the beginning of COVID in the 2nd quarter of 2020. In fact, personal consumption contribution to the total change in GDP was just 0.55%, again, down more than half from 1.14% reported last month, and down significantly from 2.54% in the first quarter (graph below). As we have been saying, the consumer is tapped out. And since personal consumption is 70% of the economy, it appears as if the U.S. is about to fall off the recessionary cliff.

The Atlanta Federal Reserve GDPNow model is currently predicting real GDP growth of 4.9% in the third quarter. That seems unrealistically optimistic and much higher than the consensus forecasts of leading economists. There is little doubt that the initial advance estimate to be released on October 26th will be too high, and as has been the case recently, will be revised down as more complete data comes in. Don’t be fooled by the initial reading coming out later this month.

PCE Inflation

Friday morning, the Personal Consumption Expenditures Index (PCE) was released. The PCE measures price changes in consumer goods and services exchanged in the U.S. economy. The PCE differs from CPI in that the CPI measures the price changes in a fixed basket of goods while the PCE measures the changes in the price of goods actually purchased by consumers. This is an important distinction because as consumers change their buying behavior, the inflation that they actually experience changes. Therefore, PCE is considered to be the Federal Reserve’s preferred inflation gauge when evaluating the economy and how inflation is running compared to their policy target.

PCE inflation followed the trend of the CPI released two weeks ago, and ticked UP for the second month in a row in August to 3.5%. It is well below its peak of 6.9% in June of 2022, but still well above the Fed’s policy target of 2% and moving in the wrong direction. Core PCE (i.e., excluding food and energy prices) dropped slightly to 3.9% reflecting the fact that a major driver of current inflation is oil. And the price of oil doesn’t appear to be going down anytime soon.

US consumers purchase a lot of services and the PCE inflation rate for services is running 4.9%. Interestingly after 3 months of “deflation”, goods prices rose sharply in August, up the most since June 2002. Again, oil is an input factor to most every manufactured good, so it isn’t surprising that goods inflation is rising as oil prices approach $100 per barrel.

(Sorry…no graphs for PCE… apparently 6 hours isn’t enough time for my data vendor to get their data updated.)

Government Shutdown?

One final note this week. With congress unable to come to any sort of an agreement on how to fund the government, it is likely that the Federal government will “shutdown” on Sunday morning. Of course the government doesn’t truly “shut down” but it sounds sufficiently ominous and will cause enough people some inconvenience that there will be clamoring for a resolution. One thing that will happen, however, is that if the “shutdown” extends into the week, there will be no economic data released next week. If that happens, there will either be 1) no Weekly Economic Update next Friday or 2) a post about whatever else I may want to talk about!

One thing to think about however….this year the government is on track to spend $1 TRILLION in interest on the federal debt. $1 TRILLION. Most of us can’t wrap our minds around $1 TRILLION. So try this….that means that EVERY SINGLE SECOND this year, the government spends $31,710 on interest. Every second.

Let government shut down. We can’t afford to have government open.