The first estimate of real GDP for the fourth quarter of 2023 will likely show growth moderated after a robust 4.9% annualized increase in the third quarter. For 2023 as a whole, real GDP likely rose 2.4%, much better than expected when the year started. The GDP price deflator, measuring the cost of all goods and services produced in the United States, is expected to moderate in further evidence that inflation is moving back toward the Fed’s target.
The December personal income and expenditures report likely will show another month of strong spending on goods and services, with income growing solidly—though not quite as fast as spending. The personal saving rate likely edged down to a relatively low 4.0% as spending outpaced income. At some point, spending will have to slow and come in line with income growth, which is part of why Comerica Economics (like most other private economic forecasting teams) forecasts for real GDP growth to moderate in 2024.
Inflation likely held steady by the personal consumption expenditures price deflator in December, and slowed by the core PCE deflator, which economists and the Fed use to monitor inflation’s underlying trend. In six-month annualized terms, both total and core PCE inflation were likely within a hairs’ breadth of the Fed’s 2% target for a second consecutive month.
The Week in Review
American households splurged on holiday spending in December. Sales at retail stores and food services establishments rose by 0.6%, above the 0.4% consensus forecast. Core retail sales, used in calculating nominal consumption expenditures in the GDP report, rose by a rock-solid 0.8% and far exceeded the 0.2% consensus. Sales at clothing stores, nonstore retailers, and general merchandise stores rose sharply.
Sales at food services and drinking places, up 11.3% on the year, rose the most among retailer subgroups over the last 12 months. Other retail subsectors with notably strong year-ago sales growth in December included nonstore retail, up 8.0%, and motor vehicle and parts dealers, up 4.2%. Reflecting declines in gasoline prices over most of last year, sales at gasoline stations were down by 11.5%.
Prospects for residential construction and housing affordability are brightening. Building permits rose by 1.9% to an annualized rate of 1.495 million in December and were up 6.1% from a year earlier. Starts eased by 4.3% to an annualized rate of 1.460 million, but were, nonetheless, up 7.6% from a year earlier.
Last month’s decline in starts followed a 10.8% surge in November. The National Association of Home Builders / Wells Fargo Housing Market Index (HMI) jumped by 7 to 44 in January to begin the year on a positive note. All three of the HMI’s constituent components—current sales conditions, sales expectations, and traffic of prospective buyers—rose sharply. NAHB attributed the strong improvement to declining mortgage rates, which have tumbled by 1.1 percentage points since late October to below 7% last month, reaching the lowest since May.
Around a third of home builders continue to reduce prices to boost sales, providing a further tailwind to housing affordability, which deteriorated to a multidecade low last year.
Bill Adams is a senior vice president and chief economist at Comerica. Waran Bhahirethan is a vice president and senior economist at Comerica.
