economic update

Metro’s quarterly economic review and outlook

Metro’s Economists submit an overview of their Quarterly Economic Forecast to HBA’s Building Home Magazine so that members are able to stay up-to-date on economic outlooks at a national and reginal level. Articles are written by Metro staff and do not necessarily represent the opinions of Metro or the Metro Council.

US Real Gross Domestic Product (GDP)

Economic factors including slower global economic growth, elevated inflation rates, rising borrowing costs and exchange rate currency pressures have begun to negatively impact consumer spending and business production. US inflation is still too high and has prompted the Federal Reserve (FED) to further tighten financial conditions. FED rate hikes will start to slow employment growth, but it’s not evident yet, and will eventually lead to inflation lowering. Despite the FED’s determined efforts, US GDP exhibited surprising resiliency, posting a final annualized growth rate of 3.2% in Q3. This implies that GDP growth at the start of Q4 was likely stronger and combined with robust consumer spending for the holiday season, the fourth quarter will likely end on a positive note, perhaps a rate near 2.5%.

Bottom line: Despite an upward push and revision to real GDP growth at the end of the year, it is likely insufficient momentum to carry forward into the next quarter. A mild contraction is expected in Q1 of 2023 and lasting to Q3.

US Inflation (Consumer Price Index –CPI)

Consumer inflation has moderated a bit from its peak, but it remains very high. The headline CPI inflation rate (seasonally adjusted) has eased slowly over 5 consecutive months and now stands at 7.1% as of November. The rate peaked at 9.1% in June. Inflation will likely stay elevated through much of 2023. If a recession does materialize, consumer prices could fall faster than otherwise due to a lack of consumer demand related to higher unemployment and lower consumer income. On the other hand, inflation might not ease as much as expected if supply-chain difficulties don’t ease as much as expected and/or volatile energy prices go higher than expected due to fuel shortages in Europe stemming from the conflict between Russia and Ukraine.

Bottom line: The US inflation rate has been heading in the right direction, but it has not diminished enough for the FED to ease from its tight monetary policy.

Housing and the Construction Industry

Consecutive interest rate hikes from the FED have totaled up to 4.25 percentage points this year and drove 30-year fixed mortgage rates up above 7% by early November until easing to about 6.5% at the end of December (according to data from Mortgage News Daily). The steep run-up in interest rates has made housing less affordable for first-time home buyers and has made existing homeowners less willing to trade up when a new a mortgage could be 4 percentage points higher than their existing mortgage interest rate. Virtually every indicator for the residential home market has turned down since the FED committed to tightening financial conditions.

Here in the Portland region, median sale price for a single-family house has eased since peaking last summer. Other indicators such as “average days on the market” and the ratio of “inventory in months” have also pointed to a reversal in the home real estate market. The S&P/ Case-Shiller housing price index (HPI) for Portland shows home price appreciation is coming down fast, now standing at 5.4% y/y for October.

Nationally, the HPI hasn’t fallen as rapidly as Portland’s HPI value, according to the Case-Shiller 20-city average (8.7% y/y) and the Federal Housing and Finance Administration (FHFA) HPI (9.8% y/y). The decline in HPI suggests prices have topped out in this real estate cycle. Certainly, the National Association of Homebuilders (NAHB) housing market index (HMI) shows builders believe the building cycle is coming down quickly as the index has declined every month this year and is now nearly as pessimistic (31) as the pandemic reading in April 2020 (30).

Bottom line: Considerable angst exists in residential markets and the construction sector because of affordability concerns. Mortgage interest rates will likely be higher in 2023 than it was in 2022, responding to more rate hikes by the FED.

US Labor Markets

Conditions in the US labor market remain tight. The headline US unemployment rate remains fixed near 3.5% while recent unemployment claims have been rooted at very low levels prior to the pandemic. Although there have been announcements of employment layoffs by big-name high-tech employers, these layoffs have done little to dampen a heated labor market. Surveys by job placement firms have indicated laid off high-tech workers have been able to find new jobs within a few months. Official labor market reports by the Census Bureau and the Bureau of Labor Statistics (BLS) reinforce the view of strong labor market demand. Employment has increased steadily and has had moments of very robust growth since the recovery from COVID shutdowns. Month-to-month nonfarm payroll employment has seen an average increase of nearly 400,000 jobs this year. Since the FED’s four consecutive rate increases of 75 basis points, the month-to-month increase to payroll jobs has slowed to about 277,000 jobs per month; still very strong compared to the slow rise in labor force.

Bottom line: Higher unemployment is expected. Job growth will eventually moderate because the FED wants it to bring down inflation. Interest-rate sensitive manufacturers which rely on fixed-investments, consumer financial service sectors and the construction industry are expected to bear the brunt of the rate hikes.

Consumer Sentiment

Facing rising economic uncertainty and a slowdown in growth, consumer spending has shown resiliency up until now. Since spring, nominal retail sales including food service sales had shown strong growth of over 9% y/y. November’s sales were the first sign of a reduction in spending. Nominal sales decelerated to 6.9% y/y growth, but in real terms had declined. Consumer continued on next page