Housing Slowdown

• Growth slowed in the late spring, according to the Beige Book, and recession concerns increased.
• The labor market remained tight and inflation remained high. The drags from labor shortages and supply-chain disruptions continued.
• The housing market slowed because of higher interest rates and lower affordability.
• PNC’s forecast is for slowing near-term growth, but not a recession. Recession risks are elevated, however.

According to the latest Federal Reserve Beige Book, covering mid-May through June, economic growth nationally was modest, but several districts reported a slowdown in demand, and there were recession concerns noted in five districts. Higher food and gasoline prices weighted on consumer spending growth. However, leisure travel was strong.

Manufacturing was mixed, with supply-chain difficulties and labor shortages a drag. Energy production strengthened with high demand, but supply chains and labor were constraints. Demand for non-financial services was stable to slightly higher. There was a large weakening in housing activity due to low affordability. There was a slowing in commercial real estate conditions. Loan demand was mixed, with stronger utilization of consumer lines of credit, but reduced residential lending.

Contacts generally expected demand to weaken over the next 6 to 12 months.

Employment growth was “modest to moderate” and the labor market remained tight. However, there were “modest improvements” in the availability of workers in most districts. Wages continued to increase in most districts.

All districts reported “substantial price increases” along the supply chain, although prices were moderating in most districts for construction materials. Price growth was still strong in most districts and for most goods and services, but “there were several reports that price inflation” was slowing for food, commodities, and energy. Pricing power was steady, and firms in leisure/hospitality services were able to pass along higher prices with little pushback. “Most contacts expect pricing pressures to persist at least through the end of the year.”

Growth across districts was generally modest, although there was a contraction in the Cleveland district and growth “slowed to a crawl” in the New York district.

The latest Beige Book indicates slower growth in mid-2022, but no recession in the US economy. Price pressures remained significant and broad-based, although there were indications that inflation might be peaking. Even with some easing labor markets remained tight. The housing market was slowing due to lower affordability, in part because of the big increase in mortgage rates in the first half of the year.

The Beige Book supports PNC’s forecast for a slowing in economic growth in the second half of 2022. High prices are weighing on consumer demand and higher interest rates are taking some of the froth off of the economy, particularly the housing market. The baseline forecast is for a softening in growth in the second half of 2022 and in 2023 as higher interest rates weigh on the economy, but no outright recession. However, recession risks are elevated with the Fed aggressively raising interest rates to combat continued high inflation.

The PNC Financial Services Group, Inc. is one of the largest diversified financial services institutions in the United States, organized around its customers and communities for strong relationships and local delivery of retail and business banking including a full range of lending products; specialized services for corporations and government entities, including corporate banking, real estate finance and asset-based lending; wealth management and asset management. For information about PNC, visit www.pnc.com.