Economic Developments – February 2018

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A More Dovish Fed Helps Improve Economic and Housing 

Market Conditions

Over the full year of 2019 we project economic growth will slow to 2.2 percent from our expectation of 3.1 percent growth 

in 2018. We expect a shrinking benefit from federal fiscal policies, a widening of the trade deficit, and a deceleration in the 

pace of business investment will contribute to the slowdown in economic growth. Key downside risks to our forecast 

include the slowdown in global economic growth and trade uncertainty. The dovish shift by the Federal Reserve, easing 

financial conditions, and an expanding labor pool represent upside risks to our forecast. As a result, the balance of risks 

may have shifted from predominantly downside to closer to neutral.

In the first quarter of 2019 the U.S. economy is expected to grow at a 1.7 percent annualized rate, a 0.1 percent reduction 

from our forecast last month and a notable slowdown from the 2.8 percent annualized rate of growth we expect occurred

during the fourth quarter of 2018. Our forecast of slowdown in economic growth in the first quarter largely reflects our 

expectation that consumer spending has slowed as consumers’ expectations of future economic conditions have 

deteriorated. While the shutdown was a hot topic during the past month, we believe most of the impact should be 

recovered by the end of this quarter. We assume that the federal government debt ceiling will be raised in a manner that 

does not unduly undermine investor, business, or consumer confidence.

We lowered our forecast of home sales in the fourth quarter of 2018 as declines in existing home sales more than offset a 

large increase in new homes sales in November. The December data on new home sales are delayed by the shutdown. 

Forecast home sales over the first quarter of 2019 were also revised lower in response to December pending home sales 

posting the third straight month of declines. Our lower forecast of existing home sales led us to reduce our projection of 

2019 purchase mortgage originations, but falling mortgage rates, strong employment and average hourly earnings growth, 

and slowing house price appreciation suggest that home-buying conditions remain favorable heading into the spring 

buying season.

Lower Auto Sales Weigh on Consumer 

Spending 

Important data on consumer spending have been delayed by the 

shutdown, but spending activity measured by the private sector 

has shed light on recent trends. Retail gasoline prices fell by 5.0 

percent in January to $2.25 per gallon. Falling gas prices should 

support consumer spending growth, though it will be constrained 

by declines in light vehicle sales which fell to a seasonallyadjusted annual rate of 16.7 million in January. Despite a 7.9 

percent decrease in light truck sales during the month, sales of 

light trucks outpaced car sales, a trend that has continued for over 

four years.

Measures of consumer confidence fell in January as headline 

risks appeared to weigh on sentiment in spite of healthy labor 

market conditions and recovering equity prices. The Consumer Sentiment Index fell in January to the lowest level since 

the Presidential election, while the Consumer Confidence Index declined for the third straight month to an 18-month low. 

The shutdown and still-volatile stock market appear to be weighing on confidence. While we believe consumer confidence 

will stage a recovery in coming months, uncertainty over U.S. and Chinese trade negotiations as well as a slowdown in 

global economic growth may continue to weigh on equity markets, even with the expected slowdown in monetary policy 

tightening. In addition, the boost from the Tax Cuts and Jobs Act is expected to wane, lowering the path of consumption 

growth. 

 

Businesses Tapped the Brakes on Investment

Incoming data suggest that business investment growth slowed in the fourth quarter. Private nonresidential construction 

spending fell by 1.2 percent over the month of November to $450.8 billion, its lowest level since January 2018. Both 

shipments and new orders of nondefense capital goods excluding aircraft declined in November, weighing on fourth 

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'07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19

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

Despite a Decline in January, Light Truck Sales Continue to Outpace Car Sales

Car Sales Light Truck Sales
© 2019 Fannie Mae. Trademarks of Fannie Mae. 02.11.2019 2 of 5

quarter equipment spending and suggesting that spending will have had little momentum heading into 2019. On a more 

positive note, the Institute for Supply Management (ISM) Manufacturing Index rebounded to 56.6 in January. Readings 

above 50 indicate that the manufacturing industry is growing. While the gain reversed only about half of the drop in the 

prior month, it demonstrated resilience in the sector amid trade uncertainty and slowing global economic growth. 

 

The Trade Deficit Shrinks in November and Suggests Less Inventory Investment

The U.S. trade deficit narrowed sharply in November to $49.3 billion from $55.7 billion in October. The smaller deficit 

reflected a 2.9 percent decline in imports to $259 billion while exports fell 0.6 percent to $210 billion. The decline in 

imports is the first monthly drop since April 2018 while the decrease in exports over the month is its fifth in the past six 

months and may reflect the slowdown in global economic growth as well as past dollar appreciation. The improved trade 

deficit offset weakness in the November factory orders report and boosted our fourth quarter growth forecast. 

After adding to growth in the third quarter of 2018, private 

inventories are expected to have been a drag on fourth quarter

growth as the decline in imports over the month of November 

points to less inventory-building.

The U.S. trade deficit is expected to widen in the first quarter. The 

drop in the new exports orders and import components of the ISM 

Manufacturing Index suggests that exports growth should 

moderate in the first quarter while import growth should 

accelerate. However, the trade-weighted exchange value of the 

U.S. dollar weakened 1.5 percent in January and should slow the 

pace of the widening in the trade deficit. As the dollar weakens, 

foreign goods and services become more expensive to American 

consumers and U.S. goods and services become less expensive 

to foreigners; however, the responses can lag. 

 

Strong Job Growth Signals a Healthy Labor 

Market

The U.S. economy added 304,000 jobs in January, its largest 

monthly increase since February 2018, despite the shutdown that

covered the first 25 days of the month. Although parts of the 

government had ceased operations during the reference week of 

the Establishment Survey used to calculate job growth, the 

furloughed workers were not considered unemployed because 

Congress passed and the President signed legislation 

guaranteeing back pay for all federal workers when they returned

to work. The January jobs report suggests that the impact on 

federal contractors was likely minor relative to the performance 

across the entire economy.

-4%

-3%

-2%

-1%

0%

1%

2%

3% Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Nondefense Capital Goods ex Aircraft (SA, Month-over-Month % Change)

Core Orders and Shipments Decline for the Third Time in Four Months

New Orders Shipments

32

37

42

47

52

57

62

'00 '02 '04 '06 '08 '10 '12 '14 '16 '18

ISM Manufacturing Index (SA, +50 = Expansion)

Manufacturing Sector Activity Partially Rebounds From a Two-Year Low

80%

81%

82%

83%

84%

85%

62%

63%

64%

65%

66%

67%

'07 '09 '11 '13 '15 '17 '19 Hundreds Civilian Labor Force Participation Rate (SA, %)

The Labor Force Participation Rate of Prime Working Adults Reaches Eight-Year High

16+ Year Olds

25-54 Year Olds (Right Axis)

-60

-55

-50

-45

-40

-35

-30

$160

$180

$200

$220

$240

$260

$280

'14 '15 '16 '17 '18 Trade Balance: Goods and Services (SA, Billions of Dollars)

The U.S. Trade Deficit Narrows Sharply

Imports Exports Trade Balance (Right Axis)
© 2019 Fannie Mae. Trademarks of Fannie Mae. 02.11.2019 3 of 5

The unemployment rate edged up a tenth to 4.0 percent in January, reflecting the government shutdown. In the 

Household Survey, many furloughed workers were counted as temporarily unemployed for the month of January though 

some were misclassified as employed but absent from work, thereby limiting the increase in the unemployment rate. It is 

likely the unemployment rate will be adjusted downward in the February release. Amid a still low unemployment rate and 

strong job growth, the labor force participation rate reached 63.2 percent in January driven by prime age workers, those 

between 25 and 54, whose participation rate climbed to the highest level since April 2010. The rising labor force 

participation rate should help alleviate labor shortages reported by many industries and keep wage pressures contained, 

providing room for increased hiring without adding significant inflationary pressures.

Slowing Global Growth, Trade, and Political Uncertainty Pose Downside Risks

Several factors present downside risk to our baseline forecast. Evidence of a slowdown in foreign economic growth 

continues to mount. Germany’s economy grew by 1.5 percent in 2018 after climbing by 2.2 percent the prior year. China’s 

economic growth slowed to 6.6 percent last year, decelerating from 6.8 percent in 2017 and marking the slowest pace of 

growth in 28 years. The International Monetary Fund (IMF) expects global economic growth to weaken to 3.5 percent in 

2019 from an estimated 3.7 percent in 2018. A slowdown in foreign economic growth could dampen foreign demand for 

U.S. goods and services, widening the U.S. trade deficit. With the U.S. economy also expected to slow this year, the 

deceleration in global economic growth may result in less international trade overall, which would lower our estimate of 

the U.S. economy’s sustainable rate of growth. 

After agreeing to a 90-day truce beginning on December 1, a resolution to the trade dispute between the U.S. and China 

remains elusive. As of this writing, Treasury Secretary Steven Mnuchin, U.S. Trade Representative Robert Lighthizer, and 

a broader team will travel to China in search of an agreement by the March 1 deadline. On February 7, the National 

Economic Council Director Larry Kudlow asserted that “there is still a long way to go before the U.S. will strike a deal with 

China.” The S&P 500 Index fell by 0.9 percent that day. Stock market declines and trade uncertainty could erode

consumer confidence, restrain spending, and limit firms’ willingness to spend and invest.

The shutdown ended on January 25 when Congress passed and the President signed a short-term spending bill. We 

expect that the negative impact on economic activity will be largely 

recouped by the end of the first quarter. However, a portion of the 

lost activity will be permanent. 

The Fed Will Be Patient

The Fed maintained the federal funds rate at a range of 2.25 to 

2.50 percent at its January meeting, as expected. The surprising

outcome was the dovish shift in the Fed’s tone. In its statement the 

Fed said that it would be patient in determining future adjustments 

to the federal funds rate. Forward guidance about further gradual 

rate increases was eliminated. In view of the strong labor market, 

we continue to expect the Fed to raise rates once more, in June, 

before pausing.

Despite strong annual average hourly earnings growth, annual 

consumer inflation, measured by the Consumer Price Index, slowed 

in December to 1.9 percent, driven by a 0.3 percent drop in energy 

prices. However, core inflation, which excludes more volatile food 

and energy prices, held steady at 2.2 percent. Since March 2018 

core inflation has fluctuated within a narrow range of 2.1 percent to 

2.4 percent, suggesting that inflationary pressures remain 

contained and supporting the Fed’s decision to be patient.

 

Financial conditions tightened considerably in the fourth quarter of 

2018, according to the Federal Reserve Bank of Chicago’s National 

Financial Conditions Index (NFCI), and weighed on economic 

growth prospects. Since the start of 2019, financial conditions have

eased, helped along by a more dovish Fed. Easing financial 

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'10 '11 '12 '13 '14 '15 '16 '17 '18 Year-over-Year % Change

Headline Consumer Inflation Decelerates As Core Inflation Remains Steady

CPI: All Items CPI: All Items Less Food and Energy

-0.86

-0.84

-0.82

-0.80

-0.78

-0.76

-0.74

-0.72

-0.70

Jan '18 Apr '18 Jul '18 Oct '18 Jan '19 National Financial Conditions Index

Financial Conditions Have Eased to Start 2019

Beginning of Quarter NFCI
© 2019 Fannie Mae. Trademarks of Fannie Mae. 02.11.2019 4 of 5

conditions support economic growth by lowering borrowing costs and fostering investment. However, they could also 

encourage excessive debt accumulation backed by over-valued collateral amid an appearance of increased market 

liquidity.

Home Sales in 2019 Look a Lot Like 2018

In December, sales of existing homes fell 6.4 percent to 4.99 

million (seasonally adjusted annualized rate), the first time since 

November 2015 that sales were below the 5.0 million level. In 

November, new home sales rose by 16.9 percent to 657,000. 

 

Home buying conditions are trending in a favorable direction. A 

strong labor market supports housing demand and an 18-basis

point decline in mortgage rates over January, as well as slower 

house price appreciation, supports affordability. Annual growth in 

the Federal Housing Finance Agency’s Purchase-Only House 

Price Index remained at 5.8 percent in November, staying below 

6.0 percent for the second consecutive month after exceeding or 

equaling 6.0 percent for the prior two years. Fannie Mae’s Home 

Purchase Sentiment Index (HPSI) increased 1.2 points in January 

to 84.7, suggesting potential buyers are a bit more optimistic. 

However, the HPSI remains 4.8 points below its level from a year 

ago. 

Consistent with slower annual house price appreciation, the 

inventory of existing homes for sale (not seasonally adjusted) rose 

from a year ago for the fifth consecutive month in December to 

the fastest annual growth rate since October 2014. The months’ 

supply of homes rose to 3.7 months in December from 3.2 months 

in December 2017. However, a reading below 6.0 months 

typically indicates a shortage. The number of new homes for sale 

rose 15.1 percent over the year ending in November and the 

months’ supply rose from 4.9 months last November to 6.0 

months this November.

Single-family construction is expected to end the year on a soft note. Single-family starts fell 4.6 percent to 824,000 in 

November. While the government shutdown has delayed further updates on new residential construction, single-family 

permits, which typically lag starts by approximately one month, rose only 0.1 percent in November to a seasonally 

adjusted annual rate of 848,000. 

Pending home sales fell 2.2 percent in December, suggesting that weakness in existing home sales will continue early in 

2019 in spite of favorable home buying conditions. However, a 12.8 percent increase in average purchase mortgage 

applications in January offers some hope for home sales entering the spring buying season. In recent weeks, purchase 

mortgage applications have returned a portion of these gains, suggesting that any jump in home sales may be short-lived.

Our February forecast downgraded home sales and thus contributed to lower expectations for purchase mortgage 

originations in 2018 and 2019. Expected purchase mortgage originations were revised lower in 2018 and 2019 to $1.147 

trillion and $1.181 trillion, respectively. Projected refinance originations were raised to $431 billion in 2019 in response to 

our modestly lower interest rate forecast. The 30-year fixed mortgage rate in 2019 is now expected to average 4.4 

percent, one-tenth below our January forecast. On net, we lowered our expectation for total single-family mortgage 

originations by approximately $3 billion to $1.611 trillion, which is 0.2 percent above the $1.608 trillion in total single-family 

originations in 2018. 

 

For information on multifamily market conditions, please see the February 2019 Multifamily Market Commentary.

Note: Projected single-family mortgage origination volumes are as of February 15, 2019.

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'13 '14 '15 '16 '17 '18 SAAR, Thousands of UnitsSAAR, Millions of Units

Existing Home Sales Fall Below 5.0 Million for 

the First Time Since 2015

Existing Home Sales New Home Sales (Right Axis)

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3.81%

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4.93%

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Declining Mortgage Rates and Slowing Home Price Appreciation Bode Well for Affordability

FHFA House Price Index (Y-o-Y % Change, NSA)

30-Year Fixed Mortgage Rate (Right Axis)
© 2019 Fannie Mae. Trademarks of Fannie Mae. 02.11.2019 5 of 5

 

Economic & Strategic Research (ESR) Group

February 11, 2019

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: Autodata, Census Bureau, Institute for Supply Management, Bureau of Labor Statistics, Federal Reserve Bank of Chicago, 

National Association of REALTORS®, Federal Housing Finance Agency, Freddie Mac 

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

Hamilton Fout, Director Michael Neal, Director

Eric Brescia, Economist Rebecca Meeker, Business Analyst