Pollack: Sure feels like a recession

The Monday Morning Quarterback

A quick analysis of important economic data released over the last week

By Elliot D. Pollack & Co | Rose Law Group Reporter

Two quarters of negative GDP growth in a row is a common definition of a recession. But, the National Bureau of Economic Research (NBER) defines a recession as “a significant decline in economic activity, spread across the economy for more than a few months” and considers other factors like employment which is still growing.

We know this, the debate is all just politics at this point. Whether the NBER declares a recession or not, the economy has decelerated rapidly from the seasonally adjusted rate of 6.9% in the fourth quarter of 2021. The Fed is dead set on curbing inflation, with another 0.75 percent increase to the Fed Funds Rate, which will continue to cool demand.

Here locally, housing prices were reported by Case Shiller and Phoenix lost a modest amount of ground nationally, but that’s a good thing. The Case Shiller Index will also be one of the last indicators to show us the direction of the housing market because it uses sales from the previous three months. The latest report released today still reports substantial home price growth, just at a moderately lower level. And while Phoenix fell out of the top three, we were still a close fourth in the rankings at 29.73% growth year-over-year.

We see continued signs of the housing market cooling. There has been a substantial increase in resale listings from historically low levels, but we’re still not to a level we are used to in a balanced market. There are still sales closing over the listing price, but not nearly as many as we’ve seen over the last 18 months. Home builders are also facing headwinds with increased cancellations from both mortgage rate increases and a decline in consumer confidence with worries about a potential recession. New home permit activity was tracking similar to 2021 earlier in the year but has now dropped off somewhat, mainly attributed to builders stopping construction of homes speculatively without a buyer in place. Prices overall for both new homes and resales are now flat to slightly declining, but still nearly 10% higher than prices from just the beginning of 2022.

Prices moderating or even declining should be a welcome sign to potential buyers and should provide some relief for our region’s growing affordability issues, but mortgage rates are the other piece to that formula. The latest figures show 30-year fixed rate mortgages at 5.05% which is down from the peak at 6.28% but still over 80% higher than what it was just one year ago, which substantially increases the cost to own a home and the required household income to qualify.

U.S. Snapshot:

  • The U.S. economy declined for the second consecutive quarter in 2022. Real GDP dropped by seasonally adjusted rate of 0.9%, following a decline of 1.6% in the first quarter. Two quarters of negative growth in a row is the common definition of a recession. But, the National Bureau of Economic Research (NBER) defines a recession as a significant decline in economic activity, spread across the economy for more than a few months, and considers other factors like employment. Whether the NBER declares a recession or not, the economy has decelerated rapidly from the seasonally adjusted rate of 6.9% in the fourth quarter of 2021. Consumer spending, which is two thirds of the economy, was a bright spot as it grew at a 1% annual rate, down from 1.8% last quarter.
  • Personal income increased 0.6% in June with inflation fueling addition personal consumption expenditures growth of 1.1%. Consumers are spending more for less.
  • The Consumer Confidence Index fell in July, while Consumer Sentiment had a very light bounce back from June’s very low level. Consumer confidence fell 3.0% to 95.7% in July after falling for the third consecutive month. Consumers remain cautious with their present assessment of the business and labor market. On the Consumer Sentiment survey, July’s level remained near historic lows, up from 50 to 51.5. Both surveys continued to show concerns from consumers with inflation and additional costs as the Fed raised rates to fight inflation.

Arizona Snapshot:

  • Lodging activity across the state was up as occupancy reached 68.8% (up 5.0% from a year ago). Occupancy was higher in Greater Phoenix with 69.5% and Greater Tucson outpaced last year by 3.3% to 62.2%.
  • Total passengers declined by 0.6% at Sky Harbor in June, as the number of deplaned dropped by 1.1% from a year earlier. Year-to-date total traffic is up more than 30% but remains 6.9% below 2019.
  • Price appreciation in Greater Phoenix slowed to 29.7% and was below 30% for the first time since June 2021, according to May’s data from the S&P/Case-Shiller Home Price Indices. Tampa, Miami, and Dallas were the top three metro areas (in terms of price appreciation) in May. Greater Phoenix outpaced the nation (19.7%) and the top 20-composite (20.5%).
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