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This week’s release of the PCE data met expectations but has yet to reach the Fed’s 2% target. As a result, they remain cautious regarding potential interest rate cuts.
However, the data also sparked another market concern—consumer spending in January fell by -0.2% m/m and, after adjusting for inflation, declined -0.5% m/m, marking the steepest monthly drop in nearly four years. A closer look reveals that the primary driver was reduced spending on automobiles and other goods.
Examining the underlying causes, this slowdown in consumption may not be entirely alarming. According to Adobe’s data, U.S. e-commerce spending unexpectedly surged 9% y/y during the November-December holiday shopping season, reaching a record-breaking $241 billion, defying Wall Street’s prior pessimistic forecasts. Additionally, January’s severe winter weather, including Winter Storm Blair, affected over 60 million people across 30+ states, leading to road closures, public transportation shutdowns, school and business closures, and government advisories against travel. Given these factors, a temporary pullback in consumer spending for January seems reasonable.
While the PCE data suggests inflation is trending within the Fed’s expectations, the outlook for rate cuts remains uncertain. Policy changes under the Trump administration could introduce upside risks to inflation, and the decline in consumer spending is another factor to watch. If U.S. consumer spending remains weak in February, it may increase pressure on the Fed to lower rates.
According to the latest U.S. Department of Commerce data, new home sales in January fell to 657,000 units, a -10.5% m/m decline, missing market expectations of 671,000 units. Meanwhile, new home inventory rose to 9 months’ worth of supply, up from the previous 8 months, indicating increasing supply amid weak demand.
Despite sluggish sales, new home prices continued to rise, with the median new home price reaching $446,300 in January, reflecting a +7.5% m/m and +3.7% y/y increase. One possible reason is that the rental market has softened since 2023, prompting some potential homebuyers to opt for renting instead. As a result, not all new home supply is serving homeownership demand, contributing to price resilience despite weaker sales.
The existing home market is also struggling. Data from the National Association of Realtors (NAR) shows that existing home sales dropped -4.9% m/m and -5.2% y/y, with only 4.08 million units sold in January. Since the Fed began its rate hike cycle, high mortgage rates have not only dampened buyer demand but also restricted housing inventory due to homeowners' reluctance to sell. Many homeowners with low-interest mortgages are unwilling to sell their properties and take on new, higher-rate loans. This lock-in effect has resulted in persistently high home prices, with the median existing home price reaching $396,900, up +4.8% y/y in January.
With the Fed still taking a wait-and-see approach on rate cuts, interest rate movements will be a key variable for the housing market. If the labor market weakens or economic growth slows, the Fed may cut rates earlier, which could boost homebuying demand. However, given the current high-cost environment, a full recovery in the housing market will require more patience and time.
