All Things in Moderation

Vital Statistics:

Stocks are higher this morning after the GDP print. Bonds and MBS are up.

GDP rose 2.9% in the fourth quarter, according to the BEA. Consumption rose 2.1%, while investment increased 1.4% and government spending rose 3.7%. Inventory build particularly in the natural resource sector was a driver of the increased GDP print. Housing services (i.e. home price appreciation and owners equivalent rent) pushed up GDP while actual residential construction was a drag.

The PCE price index (the Fed’s preferred measure of inflation) rose 3.2% compared to 4.8% in the prior quarter. Excluding food and energy, the price index rose 3.9% versus 4.7%.

The Atlanta Fed’s GDP Now estimate has been out of step with the Street all quarter and I guess the Street was right. The housing services component will fade into the background as home price appreciation stagnates.

New home sales rose 2.3% MOM to a seasonally-adjusted annual pace of 616,000 last month, according to the Census Bureau. This is down 26.6% on a year-over-year basis. For the year, an estimated 644,000 homes were sold in 2022, which was a 16.4% decline from 2021. There were 461,000 homes for sale at the end of December, which represents a 9 month supply. Generally speaking 6 months is considered a balanced market, so the builders have inventory to go. This makes sense since we have seen a pretty big uptick in the cancellation rate from the builders. They will probably have to cut prices or offer incentives to move the merchandise during the Spring Selling Season which begins in the next few weeks.

Rounding out the economic news of the day, Durable Goods orders rose 5.6% in December, driven primarily by transportation equipment. Excluding transportation durable goods orders fell 0.2%. Initial Jobless Claims fell again to 186,000 an exceptionally low number. Despite the headlines about tech layoffs, we aren’t seeing any increase in the numbers. If anything they are falling. The Chicago Fed National Activity index showed the economy is still growing well below trend, notwithstanding the GDP print.

Goldman Sachs sees a 2008-style decline in 4 major cities, including Phoenix, San Jose, San Diego and Austin, TX. The bank sees declines of around 25% for these MSAs. Note that such a decline would still put them above pre-pandemic levels given the insane appreciation we saw there over the past two years.

“This [national] decline should be small enough as to avoid broad mortgage credit stress, with a sharp increase in foreclosures nationwide seeming unlikely. That said, overheated housing markets in the Southwest and Pacific coast, such as San Jose MSA, Austin MSA, Phoenix MSA, and San Diego MSA will likely grapple with peak-to-trough declines of over 25%, presenting localized risk of higher delinquencies for mortgages originated in 2022 or late 2021,” writes Goldman Sachs.

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