One of the key themes in economics this past year has been how badly economists predicted how 2023 would turn out. That's in large part because Americans didn't act the same way they did in past times when the Federal Reserve raised interest rates. Rather than the economy sputtering and even going into recession, people kept spending more and more money. This occurred even though they said they were unhappy with the economy. The chart above tells the story: After decades of close ties between consumer spending and consumer confidence, there's now a definite split.
Economists' new recommendation: Focus on what people spend, not how they feel about it. They also are spending more time comparing average hourly earnings with consumer prices. Two years ago, inflation was rising much faster than wages. That started to change in 2023, and by year's end earnings gains were over 4% while prices were going up about 2.5%. That means people have more money in their pockets.
So, for your planning, what other reports should you rely on when making your own forecasts? Here are some worth a look.
Atlanta Fed's GDPNow
The Gross Domestic Product is the sum total of the value of goods and services that pass through the U.S. economy. It's compiled by totting up a variety of other reports, including personal consumption expenditures, wages, and import-export numbers. Recently, the Atlanta Federal Reserve Bank has gotten attention for creating GDPNow. It's a forecast of the growth in each quarter over the previous three-month period calculated from the elements that go into the final GDP as they become known.
What raises eyebrows is how the GDPNow forecast has regularly been more accurate than the prediction of 20 prominent economists. It also has been higher; for instance, GDPNow regularly was showing the economy grew by nearly 5% in the third quarter from the second, while the "Blue Chip" economic panel was only around 3%. The actual growth was 4.9%.
For the fourth quarter of 2023, GDPNow again is running ahead of the economists. But this time, the economists' and the Atlanta Fed's growth rates are closer.
The JCHS' LIRA ... with an Asterisk
The Remodeling Futures Program at Harvard University's Joint Center for Housing Studies is home to some of the nation's best statisticians on the remodeling market. The Joint Center's most-watched report is LIRA--the Leading Indicator of Remodeling Activity. LIRA predicts spending on all remodeling work (including improvements by landlords as well as homeowners) on a rolling four-quarter basis.
Recent reports have shown remodeling expenditures dropping, but the latest report, issued yesterday, shows a slight rise in the final four-quarter period. That overall decline in 2024 vs. 2023 compares with a 0.5% decline in Zonda's Residential Remodeling Index.
While LIRA is about remodeling, the algorithm that creates it relies in good part on home sales. That's because--again, speaking historically--there's been a correlation between home sales and remodeling expenditures, because people often spend an outsized amount on making changes in their home after they've purchased it. This has been particularly the case with existing homes.
Some remodeling experts are beginning to wonder if that's as much the case today, because remodeling spending still was pretty good in 2022 and 2023 despite a dramatic drop in sales of existing homes. Expect JCHS to examine this in coming years. In the meantime, LIRA remains one of dealers' most reliable remodeling numbers.
Interest and Mortgage Rates
Everyone agrees that 8% mortgage rates are a drag and we won't be getting back to 3%-and-under mortgages for several years. Realtor.com predicted last month that mortgage rates will average 6.8% for the full year and slip to only 6.5% by next December. (More undue pessimism? Mortgage News Daily says the 30-year rate had fallen from 8% on Oct. 19 down to 6.89% on Jan. 18.)
How low must the mortgage rate go to really stimulate the housing market? JBREC believes the magic number is 5.5%, about 1.3 points lower than the current national rate for 30-year mortgages. The big production builders have been able to win sales by providing financing that cuts 1 to 2 points from the going rate. Smaller builders can't afford to do that, so they've been hurting. Custom builders often work with wealthier individuals who can pay cash and don't need mortgages, so they're at least holding their own.
Opinions are trending increasingly against the Federal Reserve raising its rates at all in 2024. In fact, Bloomberg reports that the Wall Street people it surveyed give at least a 70% probability that the Fed will cut rates in March. But Stifel's chief economist, Lindsey Piegaza, believes that's over-optimistic. She's looking for the first cuts to take place in the second half of the year.
Dealers easily can be so influenced by the national reports that come out seemingly every day that they forget they operate in a local, not a U.S.-wide, economy. Your best numbers always will be the ones that are drawn from your local markets. And the differences can be vast. For instance, here are the changes in state GDP growth for a number of Southeastern states in 2022 from 2021.
Many states have official demographers who provide forecasts of population and other changes. It's worth getting onto their mailing lists. Subscribe as well to any state or local economic reports, which often are published by nearby universities. And state legislatures often have their own staffs doing forecasts, as that helps them plan budgets.
During a presentation yesterday, Mark Zandi of Moody's offered this graph estimating the likelihood and likely impact on the economy from a couple dozen news events. Interestingly, the biggest danger with the biggest impact that he sees isn't political unrest or getting involved in a war, but rather missteps by the Federal Reserve.
Zandi spoke at an event put on by Marcus and Millichap. Speaking of elections, the host offered this comparison of the U.S. economy's performance in election vs. non-election years from 1985 through 2023:
Stock Market Gains