Economists' Outlook

Housing stats and analysis from NAR's research experts.

Instant Reaction: Economy Grows 2.3% in the Third Quarter, but Consumer Spending Faces Headwinds

Gross domestic product (GDP), the primary measure of the size of the economy, rose 2.3% in the third quarter based on the third and final estimate, a little stronger than the second estimate (2.1%). The upward adjustment was based on stronger personal consumption spending of 2% and investment spending of 12.4%. Consumers spent heavily on transportation, travel, and recreation-all indicators that point to consumers getting out of their homes either for leisure or for work even as delta variant cases started to rise in July. However, consumer spending is still very dependent on the course of the COVID-19 pandemic and faces a serious headwind and a potential slowdown if consumers severely cut back on spending for these services.

Residential investment fell 7.7% while nonresidential spending fell 4.1%, with builders facing delays in the deliveries of materials and equipment, and rising materials cost such as lumber, fabricated metal, and air conditioning and refrigeration. Consumer spending for housing and utilities and construction make up nearly 20% of the US economy. NAR also reported today that existing-home sales rose 1.9% to a seasonally adjusted annual rate of 6.46 million. For the first 10 months of the year, existing-home sales were up 9.8% from the same period last year.

One important indicator from today's release is the increase in personal consumption expenditure (PCE) items. While the inflation rate based on the consumer price index (CPI) is the headline figure that makes it as the big news (+6.8% inflation in November), it's the PCE index that the Federal Reserve is using as its measure of inflation. The CPI is based only on out-of-pocket spending by consumers in urban areas, while the PCE is a broader measure of expenditures not paid for out-of-pocket, such as employer-provided insurance. The PCE index rose 5.3% in the third quarter on a seasonally adjusted annual basis, still ahead of the 2% inflation target of the Federal Reserve but a moderate increase from the 6.5% rise in the second quarter.

Today's GDP figures add more support to the Fed's current plan (announced December 15) to end its easy monetary policy to dial back inflation to 2%. For now, all indicators show strong consumer and investment spending accompanied by strong job growth with nearly two job openings per job seeker and a low unemployment rate of 4.2%.

With the Federal Reserve anticipating three rate hikes that will increase the federal funds rate by 0.9% in 2022, the 30-year fixed mortgage rate is expected to come in at 3.7% by the end of 2022. This rate is still low by historic standards and below the pre-pandemic level of 4% in 2018. NAR forecasts existing-home sales to tick down slightly to 5.9 million as the economy continues to expand by 2.6% in 2022.