- Consumer spending and personal income growth slowed at year-end.
- Rising mortgage rates caused a decline in construction, especially single-family homes.
- Consumer sentiment by all measures turned up as gas prices dropped before the holidays.
Major economic indicators were negative to close out 2022.
Consumer spending growth slowed substantially in November, with spending on motor vehicles and parts down in November after an October increase. Personal income growth also slowed.
The massive rise in mortgage rates has reduced demand, particularly causing a decline in the construction of single-family homes.
On the bright side, consumer sentiment by all measures was turning up, largely due to lower gas prices. Plans to purchase a vehicle in the next six months improved slightly.
Consumer Spending and Income Growth Slows in November
Consumer spending growth slowed substantially in November, with nominal growth of 0.1% following an increase of 0.9% in October.
Spending on durable goods declined by 2.3% in November, spending on nondurable goods declined by 0.2%, and spending on services increased by 0.7%. Spending on motor vehicles and parts declined 5.1%, following a 4.6% increase in October.
Personal income growth also slowed to 0.4% from 0.7%. Employee compensation growth remained strong and unchanged at 0.5%. Government transfer payments increased by 0.2%, driven by increases in unemployment benefits. Proprietors’ income declined by 0.2%.
The personal savings rate increased to 2.4% from 2.2% in October, which was the lowest level since July 2005. The Personal Consumption Expenditure Index (PCE), the key gauge of inflation that the Fed follows, increased 0.1% in November, which was a substantial deceleration from the 0.4% growth in October.
According to the PCE, overall price inflation was down to 5.5% from a year ago in November, while the core inflation rate declined to 4.7% from 5.0% in October. Factoring in inflation, real spending was unchanged in November.
Residential Construction Declines as Higher Mortgage Rates Reduce Demand
Residential construction continued to decline, especially in single-family. The seasonally adjusted annualized rate of starts fell 0.5%, but the decline was less than expected. The starts decline was only in single family with a 4.1% decline as multi-family starts grew 4.9%. After the November decline in total, starts were down 16.4% from a year ago but up 6.3% compared to November 2019.
Permits declined 11.2% when a smaller decline had been expected. The permits decline was larger in multi-family with a 16.4% decline compared to a 7.1% decline in single family. Permits were down 22.4% from last year and down 10.4% compared to 2019. Permits lead to starts, so the permitting pace at 1.342 million units was lower than the 1.427 million starts pace, which indicates that starts will decline in future months.
The massive move up in mortgage rates experienced this year is clearly reducing demand for single family. Compared to 2019, single-family permits were down 16.2% in November, while multi-family permits were down just 0.7%.
Existing Home Sales Fall More Than Expected; New Sales Increase
Existing home sales declined more than expected in November and extended the decline streak to 10 straight months. The sales pace in November dropped to the slowest since May 2020 and was even slightly slower than in April 2020. Before the COVID lockdowns, the last time we saw existing home sales even lower was December 2011.
The existing home sales SAAR declined 7.7% to 4.09 million from 4.43 million in October. At the November rate, existing home sales were down 35.4% from a year ago and down 22.2% compared to November 2019.
Inventory declined to 1.14 million units, up 2.7% from a year ago. The National Association of Realtors reported that inventory remains near historic lows. Inventory is still moving quickly, as 61% of the homes sold in November were on the market for less than a month, and the typical time on the market was 24 days, up from 21 days in October and up from 18 days in November last year. The months’ supply of homes for sale was unchanged at 3.3 months, which is half of what is considered normal. The median sales price declined to $370,700, up 3.5% from a year ago.
New home sales, based on new contracts signed on newly constructed homes, delivered another surprising increase in November. New home sales at an annualized pace of 640,000 were up 5.8% from the previous month but down 15.3% from a year ago. Compared to November 2019, new home sales were down 7.8%. New home inventory declined 1.7% from October but was up 18.2% from a year ago.
New-home supply declined to 8.6 months, which is about 40% higher than what is considered normal. In November, 29% of the new homes sold were homes not yet started, while 44% were under construction, and 28% were completed units. Even with the increase in new home sales in November, total home sales were down 6.1% for the month and down 33.2% from a year ago because existing home sales declined 7.7%.
Consumer Sentiment Measure Improve in December
Consumer Confidence, according to The Conference Board, increased 6.8% in December, as both present situation and future expectations underlying measures improved. Plans to purchase a vehicle in the next six months improved slightly and remained up year over year.
The Consumer Confidence Index from the Conference Board did not decline as much in 2022 as the consumer sentiment from the University of Michigan, but that series also improved in December. The Michigan index increased 5.1%, driven primarily by improvement in the expectations index, which was up 7.7%. Consumers’ views of buying conditions for vehicles improved to the second-best level this year.
The daily index of consumer sentiment from Morning Consult has also measured improving sentiment in December so far, as that index was up 2.3% for the month as of Friday, Dec. 23.
Sentiment improved in December as the price of gasoline fell to its lowest level in more than a year. The national average price for unleaded gas was $3.10 per gallon as of December 22, according to AAA.
Join us for the 2023 Cox Automotive Industry Insights and Forecast Call hosted by Chief Economist Jonathan Smoke and the Industry Insights team on Thursday, January 12, at 11 a.m. EST. During this 90-minute session, you will hear how the auto industry performed in 2022 and how the Cox Automotive team sees the industry progressing in the new year.
Jonathan Smoke is the chief economist at Cox Automotive.