- Economic growth accelerated to its strongest level at year-end 2021.
- Consumer sentiment declined, but the outlook for car-buying in the future improved.
- Jobless claims rose from their pandemic low.
Economic growth recovered in the fourth quarter, as real GDP growth accelerated to 6.9%, which was the strongest reading for the year. The increase was assisted by large gains in inventories as the worst of the supply chain problems likely was at the end of the third quarter of 2021.
However, consumer spending growth ended and declined in December as the rising omicron cases combined with earlier holiday sales showed up in declining spending on goods. Personal income growth also slowed, but wage growth remained strong. Inflation is running hot.
The housing market saw differing trends in December as new-home sales accelerated but pending home sales declined. The key difference is supply.
January has seen record COVD-19 cases, but thankfully the peak has passed, and cases are declining. However, jobless claims have risen and come off lows recorded in December. Sentiment has also declined, but interesting plans to purchase cars and homes in the next six months have increased.
Economy grew: The first estimate of fourth-quarter 2021 real GDP measured robust 6.9% annualized growth, which was a strong rebound from the 2.3% annualized growth rate in the third quarter.
Personal consumption increased 3.3%, which was up from 2.0% in the prior quarter. Spending on goods increased 1.6% while spending on services increased 4.7%. The biggest contributor to GDP growth in the quarter was growth in inventories.
Gross private investment increased 32% driven by growth in non-farm inventories as well as investment in mining and energy. However, private investment saw declines in residential and nonresidential structures. Government spending declined 2.9% as both federal and state and local expenditures declined. With the growth in the fourth quarter, real GDP was up 5.5% from the year-ago level.
Consumer spending declined: Consumer spending growth reversed in December to a 0.6% decline from an increase of 0.4% in November as COVID-19 took a toll and personal income growth slowed to a gain of 0.3%. The income change had mixed factors with wages growing 0.7%, rent and dividend income growing 0.8%, but government transfer payments unchanged.
Spending on durable goods declined 4.1%, and spending on nondurable goods declined 1.7%, but spending on services increased 0.5%. Spending on motor vehicles and parts declined 1.6% in December following a 1.9% decline in November.
The personal savings rate increased to 7.9% with the reduced spending. The savings rate averaged 7.5% in the 12 months leading to the pandemic but has averaged 14.7% over the last 22 months.
The Personal Consumption Expenditure (PCE) Index, the key gauge of inflation that the Fed follows, increased 0.4% in December, which was a decline from a 0.6% increase in November. Overall price inflation according to the PCE increased to 5.8% from December a year earlier, which was the highest year-over-year change since July 1982.
Home sales mixed: New-home sales, which are based on new contracts signed on newly constructed homes, grew a much better than expected 12% in December. New-home inventory increased 1.5% from November and was up 34.8% from the year earlier. With the higher pace of sales, the new-home supply declined to 6.0 months, which was the lowest level since May.
In December, 28% of the new homes sold were on homes not yet started, while 48% were under construction, and 23% were completed, finished units. Even with the increase in December, new-home sales were down 14% from the year before but were up 11% compared to 2019. Pending home sales, which are new contracts signed on existing homes, declined 3.8% in December from November, leaving pending sales down 6.9% year over year.
The differing trends across new and existing homes are a product of differing supply trends. New supply can increase to meet demand, supply chains willing. Existing supply is likely to be limited for the foreseeable future.
Jobless claims rose: As of January 15, 1.68 million people were on traditional unemployment benefits. Continuing claims increased by 51,000 in the last week and are up 124,000 in January from what had been a new low for the pandemic. Despite the increase, claims are 40,000 lower than the claims level before the pandemic began.
As with continuing claims, new initial claims increased in January, but the latest week showed a decline of 30,000 from what had been a 12-week high of 290,000 in mid-January. Prior to the omicron surge, weekly initial claims had been lower than the 212,000-weekly average for the first 11 weeks of 2020 leading up to the pandemic. At 260,000 last week, new claims are 48,000 higher than the pre-pandemic pace.
Consumer sentiment dropped: Consumer Confidence, according to the Conference Board, declined 1.2% in January, erasing some of December’s 2.9% gain. The increase left confidence down 14.2% compared to February 2020. The underlying measures of the present situation and future expectations moved in opposite directions as the present situation declined but future expectations improved.
Jonathan Smoke is the chief economist of Cox Automotive.