Economic Developments – September 2018

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Consumer and Business Demand Growth Poised to Slow;

Housing Remains a Wet Blanket

The second quarter’s robust economic growth of 4.2 percent annualized will likely mark the expansion’s final peak. 

Incoming data are consistent with a growth slowdown to 3.2 percent annualized in the third quarter, the same pace

projected in our August forecast. We expect consumer spending and business fixed investment growth to moderate but 

remain at a solid pace, and we believe that trade will drag on the economy after adding substantially to growth last quarter 

due to the frontloading of exports ahead of tariffs implemented in July. The July trade data showed that imports rose to a 

record high amid a marked drop in agricultural exports. Further declines in exports, especially for soybeans, likely 

occurred in August. We also expect that residential investment will continue to detach from consumer and other business 

demand, declining slightly this quarter and marking the third consecutive quarter in which housing subtracts from growth, 

the first such occurrence of this expansion. In the positive column, a swing from an inventory drawdown to restocking will 

help boost growth, and increased government spending should add even more fiscal stimulus. All factors considered, our 

overall growth outlook remains unchanged from the August forecast. We expect full-year 2018 growth of 3.0 percent 

before a slowdown to 2.3 percent in 2019 as the fiscal stimulus runs its course.

Trade tensions remain a key downside risk to growth. The U.S. and Mexico struck a tentative trade agreement that

included higher local content for autos and wage requirements. However, Canada has not signed on to this agreement. 

Furthermore, while the Administration can implement tariffs, Congress 

must approve any new trade agreement among the U.S., Canada, 

and Mexico, and thus it is possible that any such agreement 

would not take effect until next year. Meanwhile, trade conflict 

between the U.S. and China is escalating, as the Administration

has threatened to implement tariffs on another $200 billion of 

imports from China, and China has pledged to retaliate. The 

Chinese economy has recently weakened, and additional U.S. 

tariffs would likely worsen its growth prospects. Earlier this 

month, anticipation of additional tariffs on Chinese imports 

boosted the U.S. dollar vis-à -vis the yuan, sending the yuan 

near its low for the year.

Even if the Administration’s new tariff threats turn out to be a 

bargaining chip to achieve a better outcome through negotiation, the 

rising dollar will continue to weigh on the U.S. trade deficit this year. Since January, the value of the dollar has risen more 

than 6 percent, making American-made goods more expensive to our trading partners and imported goods less expensive 

for American consumers.

Financial stress in emerging markets has flared up as another 

downside risk. Emerging markets tend to suffer capital outflows

during periods of U.S. monetary tightening, as rising returns and 

lower risk in the U.S. lure investors. The currencies of many 

countries, including Argentina and Turkey, have depreciated 

significantly, triggering rising inflation and interest rate hikes by 

their central banks. Elsewhere, the South African currency 

plunged to a two-year low as the country reeled from recession 

news, while the Indonesian currency plummeted to a twodecade low as the stock market came under severe pressure.

Our base case anticipates limited contagion from the emergingmarket turmoil, but developments bear close watching. Broadbased strength in the U.S. dollar versus currencies from both 

developed and emerging economies presents downside risk to 

trade and economic growth.

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'07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 Nominal Broad Trade-Weighted Exchange Value of the US$ 

The Dollar Has Strengthened This Year

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Some Emerging Market Currencies Have Weakened Against The Dollar Recently

Argentine Peso

Turkish Lira (Right Axis)
© 2018 Fannie Mae. Trademarks of Fannie Mae. 9.10.2018 2 of 5

The Tax Act Boosts Corporate Profits

Revisions to gross domestic product (GDP) for the second quarter were uneventful. However, corporate profits, a new 

piece of data, revealed the improving underlying health of businesses, even absent the recent tax benefits and despite 

tightening labor markets. Pre-tax profits grew 3.3 percent in the second quarter (not annualized), accelerating from a 1.2 

percent gain in the first quarter and marking the strongest quarterly pace in four years. Domestic profits from both the 

financial and nonfinancial sectors outweighed a decline in overseas profits. On an annual basis, after-tax profits spiked 

during the first half of this year, a testament to the impact of the large corporate tax rate cut included in last year’s tax act.

 

The biggest quarterly increase in productivity growth in three years of 2.9 percent annualized helped keep unit labor costs

contained during the second quarter. However, productivity growth tends to be volatile from quarter to quarter. On an 

annual basis, productivity grew 1.3 percent during the second quarter, remaining within the tight range of 1.0 percent to 

1.4 percent seen since the end of 2016. Going forward, rising labor and material costs, increasing interest rates, and a 

flattening yield curve will likely compress domestic profit margins. At the same time, a strengthening dollar and moderating 

global growth should weigh on overseas profits.

Strong Labor Market Continues to Support 

Consumers

Hiring improved in August, with nonfarm payrolls increasing 

201,000. Despite downward revisions totaling 50,000 in the prior 

two months, the three-month average job gain came in at a solid 

185,000. The big news in the jobs report was the 0.4 percent jump 

in average hourly earnings from July and 2.9 percent from last 

August, the biggest annual rise since June 2009. 

The household survey showed a flat unemployment rate at 3.9 

percent, but the broadest measure of labor underutilization (U6), 

which includes discouraged workers and those working part-time 

for economic reasons, fell one-tenth to 7.4 percent, the lowest 

level since April 2001. Part-time workers for economic reasons as a 

share of total employment fell to 2.8 percent, below the average of 

the prior expansion. In a slight setback, the household survey 

revealed a two-tenths decline in the labor force participation rate, 

which fell to the bottom of the narrow range of 62.7 percent to 

63.0 percent registered since May 2016. While the teenage 

participation rate, which tends to be volatile during the summer 

months, pulled down the overall rate, the rate for prime-age 

workers (25- to 54-year olds) dropped for the first time in three 

months. Overall, the household survey suggests ongoing 

diminished labor market slack.

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'90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 Corporate Profits (SAAR, $, Y-o-Y% Change)

After-Tax Profits Surge To Largest Gain in Six Years

Corporate Profits with IVA and CCAdj Corporate Profits After Tax

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Nonfarm Business Sector (% Change at Annual Rate, SA, 2012=100)

A Pickup in Second Quarter Productivity Growth Pushes Unit Labor Cost Lower

Unit Labor Cost Productivity

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'07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 Average Hourly Earnings (SA, Year-over-Year % Change)

Annual Wage Growth Jumps to the Fastest Pace Of the Expansion

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'60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '15 Part-Time Workers for Economic Reasons Share of All Employed (SA)

Share of Workers Who Are Part-Time for Economic Reasons Returns to Pre-Crisis Level
© 2018 Fannie Mae. Trademarks of Fannie Mae. 9.10.2018 3 of 5

Consumer Spending Growth Is Set to Moderate...

We expect real consumer spending growth to slow to 2.9 percent 

annualized this quarter from 3.8 percent in the second quarter. 

Both real consumer spending and real personal income rose 0.2 

percent in July. The rise in nominal spending slightly outpaced the 

increase in nominal disposable income, pushing the saving rate 

down to 6.7 percent, the lowest level this year. August consumer 

spending likely remained soft, as auto sales fell for the second 

consecutive month to the slowest pace since last August, just 

prior to a hurricane-induced surge in replacement demand. Rising 

interest rates and uncertainty regarding auto tariffs present 

headwinds for the sector.

Consumer sentiment was mixed in August. The Conference Board 

Consumer Confidence Index jumped to the highest level since 

October 2000. Both the present situation and expectations components improved but consumers were much more 

optimistic about the former, which rose to an expansion best while the latter remained well below its recovery high 

reached last March. Notably, the long history of the Conference Board’s survey suggests that a substantial divergence 

between the present situation and the expectations components is a warning sign of a forthcoming slowdown in economic 

activity. The gap between the two components has risen toward its all-time high, reached just before the 2000-01 

recession.

 

In contrast to the rising Conference Board measure, the University of Michigan’s consumer sentiment index fell in August 

for the fourth time in five months to the lowest level since January. A divergence between the two measures is not 

uncommon. The University of Michigan’s measure is more sensitive to financial conditions, which have been volatile,

while the Conference Board’s metric is closely tied to labor market conditions, which have improved over time.

...Along with Business Investment Growth

The pickup in corporate profits this year should provide support for increased business capital expenditures. However,

growth in business equipment spending decelerated in the second quarter to the slowest pace since the final quarter of 

2016, and incoming data on factory orders suggest a further slowdown this quarter. In contrast to the slowdown in 

equipment spending, investment in nonresidential structures was stellar during the first half of the year, with two straight 

quarters of double-digit annualized increases, thanks in part to the rebound in oil prices. In July, the first drop in four 

months in private nonresidential construction spending points to a marked slowdown in nonresidential investment in 

structures this quarter.

Rate Increases Appear Consistent with This Year’s Dot Plot—Next Year Uncertain

The pop in annual wage gains in the August jobs report came on the heels of recent increases in broader measures of 

inflation. The headline personal consumption expenditures (PCE) deflator—the Fed’s preferred measure of inflation—rose 

0.1 percent in July, pushing it up to 2.3 percent on a year-ago basis. Since March, the annual increase in the PCE deflator 

has equaled or exceeded the Fed’s 2-percent target. The annual rise in the core PCE deflator (excluding food and energy)

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'85 '88 '91 '94 '97 '00 '03 '06 '09 '12 '15 '18 Conference Board (SA, 1985=100)

Happy Days Are Here Again, As Confidence Hits a 17-Year High

Consumer Confidence Present Situation Expectations

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'67 '70 '73 '76 '79 '82 '85 '88 '91 '94 '97 '00 '03 '06 '09 '12 '15 '18 Consumer Confidence: Present Situation minus Expectations (SA, 1985=100)

Consumers Are Much More Optimistic About Today Than About the Future

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Total Light Vehicle Retail Sales [Imported+Domestic] (SAAR, Mil. Units)

Auto Sales Decline to the Lowest Level In a Year

HurricaneInduced Surge
© 2018 Fannie Mae. Trademarks of Fannie Mae. 9.10.2018 4 of 5

accelerated one-tenth to 2.0 percent in July. Recent trends in 

wage gains and overall inflation seem to support Fed Chair 

Powell’s argument in Jackson Hole that raising interest rates too

slowly could risk overheating, and are consistent with our call for 

September and December rate hikes. Such moves would bring

the rate hikes total for the year to four, the same as the pace 

implied in the “dot plot,” which shows fed funds rate projections 

by members of the Federal Open Market Committee (FOMC). 

While the dot plot implies three rate increases in 2019, we 

believe such a pace would be too aggressive given our 

expectation of a growth slowdown next year. Over the past 

several months, the fed funds futures market has turned more 

bearish regarding the path of monetary policy, and now implies 

the last rate hike for the cycle will occur in 2019.

Housing Roundup

While the overall economy continues to grow at a solid pace, the 

housing sector has been soft across the board. Single-family 

housing starts increased only slightly in July following a 9.0 

percent drop the prior month, the largest decline this year. 

Multifamily starts also disappointed, eking out only a small gain

after a double-digit drop in June. One positive development is 

that home builders appear to be responding to strong first-time 

buyer demand by constructing smaller homes. The typical new 

single-family home size has been falling since peaking in 2015, 

with the median square footage dropping sharply in the second 

quarter to the smallest reading since the end of 2012. 

New home sales declined in July for the third time in four 

months to the slowest pace since last October. Over two-thirds 

of new home sales were either under construction or not yet 

started, the highest share since the end of 2015, underscoring the need for increased building activity. According to the 

National Association of Home Builders Housing Market Index, builders face headwinds from softening demand, especially 

in the sales expectation and traffic of prospective buyers components. In addition, pricing to cover material and labor cost 

increases has been challenging. Fortunately, some building material prices, such as lumber, have started to ease, which 

should allow builders to offer more favorable pricing, hopefully leading to an improvement in building and sales activity 

going into the fall.

Total existing home sales fared even worse than new sales, falling in July for the fourth consecutive month to the worst 

showing since February 2016. While the for-sale inventory of existing homes finally ended three years of annual declines, 

inventories are still at historic lows. Leading indicators suggest no meaningful improvement in the near term, as pending 

home sales fell in July for the third time in four months, and 

purchase mortgage applications dropped in August for the 

second straight month. 

Home prices have held up well. Continued strong price 

appreciation that has outpaced income growth, along with a rise 

in mortgage rates of nearly 60 basis points since the start of the 

year, have weighed on home purchase affordability and 

depressed home buying sentiment. The Fannie Mae Home 

Purchase Sentiment Index® has trended lower from its record 

high in May, with the net share of consumers saying now is a 

good time to buy a home sliding further in August to the second 

lowest reading in the survey’s eight-year history.

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Housing Starts 1-Unit Structures: Median Floor Area (NSA, Square Feet)

Typical Single-Family Housing Start Size Continues to Shrink

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Net Percent of Respondents Who Say it is a Good Time to Buy (%)

Good Time to Buy Sentiment Slides Further

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Sep-18 Nov-18 Jan-19 Mar-19 May-19 Jul-19 Sep-19 Nov-19 Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21 Mar-21 Path of Fed Funds Rate Implied by Futures (%)

Fed Funds Futures Imply Last Rate Hike For 

the Cycle In 2019

5/16/2018

9/6/2018
© 2018 Fannie Mae. Trademarks of Fannie Mae. 9.10.2018 5 of 5

We lowered our near-term projection of housing starts in 2018, while keeping our home sales forecast essentially 

unchanged from the prior forecast, showing a 6 percent increase in new home sales and a nearly 1 percent drop in 

existing home sales. Our forecasts of purchase and refinance mortgage originations are little changed from August, with 

total single-family mortgage originations projected to fall about 9 percent to $1.67 trillion in 2018 and a refinance share of

28 percent.

For information on multifamily market conditions, read the September 2018 Multifamily Market Commentary.

 

Economic & Strategic Research (ESR) Group

September 10, 2018

For a snapshot of macroeconomic and housing data between the monthly forecasts, please read ESR’s Economic and 

Housing Weekly Notes

Data source for charts: Federal Reserve Board, Bloomberg, Bureau of Economic Analysis, Bureau of Labor Statistics, AutoData, the Conference 

Board, Census Bureau, Fannie Mae ESR

Opinions, analyses, estimates, forecasts and other views of Fannie Mae's Economic & Strategic Research (ESR ) Group included in these materials 

should not be construed as indicating Fannie Mae's business prospects or expected results, are based on a number of assumptions, and are subject to 

change without notice. How this information affects Fannie Mae will depend on many factors. Although the ESR group bases its opinions, analyses, 

estimates, forecasts and other views on information it considers reliable, it does not guarantee that the information provided in these materials is 

accurate, current or suitable for any particular purpose. Changes in the assumptions or the information underlying these views could produce materially 

different results. The analyses, opinions, estimates, forecasts and other views published by the ESR group represent the views of that group as of the 

date indicated and do not necessarily represent the views of Fannie Mae or its management.

ESR Macroeconomic Forecast Team

Doug Duncan, SVP and Chief Economist Mark Palim, VP and Deputy Chief Economist Orawin T. Velz, Director 

Hamilton Fout, Director Michael Neal, Director Eric Brescia, Economist

Rebecca Meeker, Business Analyst