Last week, several encouraging indicators were released that suggest the economy continues to move forward despite various challenges. However, headwinds continue to emerge and although growth continues, it is downshifting. Inflation surprised to the upside, led by core goods showing little signs of slowing. At the same time, consumers have yet to meaningfully pull back on goods spending with real retail sales rising 2.1% in August. With the Fed announcing a .75% increase this week, mortgage rates have continued to increase. Home sales perked back up in August, but affordability will continue to suffer as rates are rising again after a brief reprieve in late July and August.
California existing single-family home sales bounce back amid temporary rate reprieve: August home sales rising back above 300,000 units is significant. Although we do not expect a rapid bounce back due to the Fed continuing to raise rates, the monthly increase in closed and pending sales suggests that the market may have priced in some of the rate increases. Still, buyers will continue to grapple with rising costs of borrowing, which will keep home sales below 350,000 for the remainder of the year.
Retail sales rise above inflation as consumers keep spending: Americans increased spending at stores and restaurants last month, showing persistent demand despite rising prices. The 0.3% gain in retail sales in August outpaced inflation and marked a reversal from July’s 0.4% decline revision. However, most of the recent gains in nominal retail sales is the result of higher consumer prices, and real spending has fallen in the 3 consecutive months preceding August’s slight gain. Looking ahead, savings rates are dwindling, and rising consumer credit suggest that we could see more moderation from this important engine of growth as we enter 2023.
Core inflation still running hot despite lower gas prices: Consumer prices in August grew just 0.1% from July, helping the headline inflation dip to 8.3% above last year. However, this number includes gas prices sliding 10.6% from the previous month. Core inflation, which is used by the Fed because it excludes more volatile energy and food prices, advanced by another 0.6% in August pushing the year-over-year pace upwards to 6.3% - more than triple the Fed’s 2% inflation target. As such, the Fed reaffirmed its commitment to an aggressive policy stance at the FOMC meeting this week.
Mortgage rates surpass 6% mark for first time since 2008: After easing slightly towards the end of July and August, mortgage rates jumped significantly higher last week. The recent CPI release have restoked fears that the Fed will continue to hike rates even beyond the .75% increase announced this weak. According to Freddie Mac’s weekly survey the 30-year fixed-rate mortgage averaged 6.29% as of September 22. That is more than 343 basis points higher than what it was a year ago at this time when it averaged 2.86% - more than double. The increase in rates will continue to weigh on homebuyer demand in coming months, as evidenced by the most recent decline in mortgage applications.
Signs of labor market slack begin to emerge: Although nonfarm payrolls grew modestly in 37 states during August, several states in the nation reported net losses. California was one of the states that continued to expand as employers report adding nearly 20K net new jobs in August across most major industries. However, this increase was significantly lower than the 91.4K jobs added in July and most of the pullback was reported in manufacturing, construction, and information. In the monthly survey of households, a slight contraction in employment combined with a rebound of 32.4K workers re-entering the labor force increased the state’s unemployment rate from 3.9% to 4.1% in August – the first increase in California’s unemployment rate since June 2021.
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