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Economic Growth Slows Amid Financial Market Crosscurrents

Incoming economic data point to a widespread loss of momentum in 

late 2015 and early 2016. We project another year of unspectacular 

economic growth in 2016, with real gross domestic product (GDP)

rising 2.0 percent following a 1.8 percent gain in 2015. Consumer 

spending will continue to underpin growth in 2016, albeit at a slightly 

more moderate pace than last year. While lower gasoline prices 

should benefit consumers, there has been little evidence that 

windfalls from declining gasoline prices have boosted consumer 

spending. 

While an economic boost from declining oil prices has been elusive, 

evidence of the negative side of the global oil rout is mounting. First, 

the price collapse has reduced the value of energy stocks and the 

overall equity markets. The high correlation between the U.S. stock 

markets and the price of oil is perhaps because the markets view oil prices as a gauge of the health of the global 

economy. In addition, the sharp and sustained decline in oil prices has also led to a pullback in domestic crude production

and exploration, reducing nonresidential business investment in oil-drilling structures, and capital expenditures in miningrelated equipment. Finally, employment in energy-producing states has reflected the drop in oil prices. Some states, such 

as North Dakota, saw outright declines in nonfarm payrolls in 2015, but collectively job gains in energy-producing states 

slowed markedly over the past year.

The strong dollar and a sluggish global economy have hurt manufacturing and net exports, which should drag further on 

economic growth in the U.S. Low energy prices should continue to pressure nonresidential investment in structures, and 

the squeeze on profit margins and the strong dollar will weigh on business capital investment. However, we expect that 

the strength in residential investment and government spending should help offset some of those weaknesses. Downside 

risks to our forecast include increased stress in the banking system that could lead to tighter credit conditions and 

widening risk spreads; a further slowdown in economic growth in China, as well as turmoil in its equity and foreignexchange markets; additional appreciation in the dollar (e.g., through a large one-off yuan devaluation) or drops in oil 

prices; and a widening conflict in the Middle-East.

Monetary Policy Turns Dovish Around the Globe

In addition to slowing economic activity, financial conditions have deteriorated over the past month, with lower equity

prices and wider credit spreads. Global concerns have intensified, especially for China, and central banks across the 

globe have turned more cautious. The Bank of Japan (BoJ) surprised the markets by announcing at its January monetary 

policy meeting that it would follow the European Central Bank (ECB) and implement a negative interest rate policy. 

Further cuts seem likely this year as inflation remains well below its target. The ECB also signaled that it might engage in 

further policy stimulus in the near future.

Market expectations for the pace of Fed tightening have slowed, 

reflected in the fed funds futures market, which indicates that 2016 

rate hikes are now off the table. We believe that slowing economic

growth, a sharp deterioration of financial conditions, and weakening 

inflation expectations suggest more patience from the Fed for the 

next rate increase and a slower pace of tightening over the midterm. We now expect the next fed funds rate increase in June, 

followed by another one in December, compared with three 

increases this year assumed in the prior forecast. Consistent with 

this belief, we assume that reinvestment phase-out will begin in 

early 2018—a year later than in our previous forecast. Recent 

dovish shifts by the ECB and the BoJ, as well as risk-off sentiment 

in the markets, have put further downward pressure on long-end 

interest rates, with the 10-year Treasury yield falling below 1.7 percent on February 8 to reach a 12-month low. The yield 

curve flattened, sending the spread between 2-year and 10-year Treasury yields to the narrowest gap since 2008. The 

yield hovered around 1.73 percent at the time of this writing.

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'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 Total Nonfarm Payroll (SA, Year-over-Year % Change)

Job Growth Decelerated in Energy-Producing States

Energy States*

Non-Energy States

*Energy States: AK, LA, MT, ND, NM, OK, TX, WV, WY

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'08 '09 '10 '11 '12 '13 '14 '15 '16

The 10 Year-2 Year Treasury Yield Spread Reaches the Narrowest Gap Since 2008

UST 10-Year Yield UST 2-Year Yield Spread
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Economic Growth Ends 2015 with a Whimper

We trimmed our forecast of first quarter economic growth by 0.6 

percentage points to a 1.9 percent annualized pace following the 

meager 0.7 percent first estimate of fourth quarter growth. Real 

consumer spending drove growth, rising 2.2 percent annualized 

and contributing 1.5 percentage points to the increase in GDP. 

Residential investment and the government sector also added to 

growth, helping to offset drags from inventories, net exports, and 

business fixed investment. Although inventory investment declined

further in the fourth quarter, we believe the level of investment

remains unsustainably high, suggesting that the inventory 

correction could extend into the current quarter, continuing to drag 

on GDP growth.

Consumers Save the Day

Our forecast of a rebound in growth in the first quarter reflects our expected pickup in real consumer spending growth to 

2.7 percent annualized. Real consumer spending was uninspiring in December, edging up only 0.1 percent, despite a 

decent income gain. As a result, the saving rate rose to tie a three-year best, building a cushion for consumers early this 

year. In addition, the solid earnings growth reflected in the January jobs report should support stronger consumer 

spending this quarter. A rebound in January vehicle sales suggests that consumer spending might already be picking up. 

Despite the equity market crosscurrents, the labor market remains

healthy. Following outsized gains averaging 279,000 per month during 

the fourth quarter of 2015, growth in nonfarm payrolls moderated to 

151,000 in January. However, the unemployment rate fell to 4.9 percent, 

the first four-handle rate in nearly eight years, and the labor force 

participation rate edged up for the second consecutive month. The 

tightening labor market helped boost average hourly earnings growth, 

which jumped 0.5 percent from the prior month, the largest monthly 

increase in a year, and 2.5 percent from a year ago. In another 

encouraging sign, the average work week rose one-tenth to 34.6 hours.

The combination of increased hours worked and solid earnings gains 

implied strengthening labor income growth at the start of the year.

The Job Openings and Labor Turnover Survey (JOLTS), which is 

released with a one-month lag to the employment report, painted an upbeat picture of the labor market going into 2016,

with increased job openings, hires, and quits, as well as decreased layoffs, in December. Notably, the job openings rate 

increased to 3.8 percent, matching the high for the expansion and the highest on record since the inception of the series 

in 2000. The quit rate, which reflects workers’ confidence in the jobs market, jumped to an expansion high of 2.1 percent. 

The combination of more job openings and quits supports the view that wage gains should continue to strengthen. A 

survey from the National Federation of Independent Business (NFIB) reinforced the notion of a tightening labor market in 

January. Both the share of firms reporting unfilled job openings and the share reporting increasing compensation over the 

past three months were at expansion highs. However, the share planning to raise compensation over the next three 

months pulled back from its expansion high in the prior month.

 

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'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 JOLTS: Quits Rate (SA, %)

Quit Rate Jumps to Expansion High

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'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 Hundreds NFIB Small Business Survey (Share of Firms Having...) 

Small Businesses Compete to Fill Open Positions

Raised Compensation Over Past 3 Months Positions Not Able to Fill (Right Axis)

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Government Consumption and

Investment

Net Exports of Goods and Services

Change in Private Inventories

Residential Fixed Investment

Nonresidential Fixed Investment

Personal Consumption Expenditures

GDP

Contribution to 2015 Q4 Real GDP Annualized % Change

GDP Growth Anemic in Q4 as Personal Consumption is Forced to Carry the Load

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'06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 SA, Year-over-Year % Change

Wage Growth Picks Up as the Unemployment Rate Declines Further

Average Hourly Earnings Unemployment Rate (Right Axis)
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The trend in consumer credit outstanding data from the Fed also 

suggests improving consumer fundamentals. Revolving credit 

(largely credit card debt) rose 5.1 percent in December from a year 

ago for a second consecutive month. If this uptrend continues, it 

would indicate increased confidence, boding well for consumer 

spending this year. Meanwhile, nonrevolving credit (largely auto and 

student loans) has slowed slightly during the past year, helping to

narrow the gap between revolving and nonrevolving credit. 

Drags Remain

We expect the strong dollar, sluggish global growth, and low oil 

prices will remain drags on growth in 2016. After subtracting 0.7 

percentage points from GDP growth in 2015, the biggest drag since 

2004, net exports are expected to slow economic growth again this 

year, albeit to a lesser degree. Even if the dollar stabilizes, the lags 

inherent in the relationship between relative prices and trade volumes imply a lasting effect on the change in net exports. 

Given our expectation of continued low oil prices this year, expenditures on oil and gas wells and shafts and oilfield 

machinery, which fell about 50 percent in 2015, should continue to decline, but at a moderating pace. Because its share of 

GDP is now approximately only half of what it was a year ago, the energy sector’s drag on economic growth should be 

modest this year; however, we expect overall nonresidential investment in structures to subtract from growth again this 

year. 

Housing Roundup

Against the backdrop of weak activity elsewhere in the economy, the housing market remained resilient, contributing 0.3 

percentage points to GDP growth during the fourth quarter as well as for all of 2015. Stronger income growth and low 

mortgage interest rates last year helped boost housing activity. Single-family starts and new home sales reached the 

highest annual levels since 2007, existing home sales had the best showing since 2006, and multifamily starts posted the 

best year since 1988. (For more information on rental market conditions, read the February 2016 Multifamily Market 

Commentary). Home price gains strengthened, with the CoreLogic home price index rising 6.3 percent in December from 

a year ago, the biggest annual gain since July 2014. The dearth of homes available for sale should continue to support 

home prices; however, tight supply could also make it difficult for potential homebuyers to find homes to fit their needs. 

With renewed declines in the stock market since late last year, strong home price appreciation has become a key support 

for household balance sheets and helped lift more underwater mortgages into positive equity position, reducing the 

likelihood of default and creating a healthier housing market.

On a sobering note, the Census Bureau’s Housing Vacancy Survey 

showed the homeownership rate (not seasonally adjusted) declined 

0.2 percentage points to 63.8 percent in the fourth quarter of 2015 

from a year ago, sending the 2015 average to 63.7 percent, the 

lowest annual reading since 1967. Data on household formation from 

the survey also disappointed, with the year-over-year gain 

moderating significantly to less than 500,000. However, we do not 

put much weight on just one quarter of this survey, which can 

produce volatile estimates of household growth. The weakness may 

reflect a payback from the spike in household growth registered in the 

fourth quarter of 2014. The annual average for all of 2015 showed an 

increase of 1.3 million households over 2014. Smoothing the volatile 

quarterly series over the past several years, we can clearly see that 

household formation has trended up.

Mortgage interest rates are expected to remain a support for home buying activity this year. Given the renewed flight-tosafety over the past month, we lowered our projected long-term interest rate path, with the 30-year fixed mortgage rate

expected to remain below 4.0 percent through the rest of this year. Home sales were upbeat going into 2016. New home 

sales, which measure contract signings on new homes, posted the biggest monthly jump in December since August 2014.

Existing home sales also posted a double-digit increase after a disappointing November, when closings were likely 

delayed by implementation of the TILA-RESPA Integrated Disclosure (TRID) regulation. Pending home sales, which 

record contract signings on existing homes, were essentially flat in December, but their stabilization following the 

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'05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15

Consumer Credit Outstanding (EOP, NSA, Year-over-Year % Change)

Consumers Appear More Comfortable Using Credit Cards

Revolving Credit Nonrevolving Credit

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'95 '97 '99 '01 '03 '05 '07 '09 '11 '13 '15 Total Occupied Housing Units (Break-adjusted, Thous, Y-o-Y Change)

Despite Quarter-to-Quarter Volatility, Housing Formation Has Trended Higher

Household Formation

3-Year Moving Average
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downtrend between May and November could be considered a positive. Data from weekly purchase mortgage 

applications have been much more encouraging, with average monthly readings for December rising 7 percent from a 

year ago on top of nearly a 5 percent gain in November, though they have cooled somewhat since the start of the year. 

While we believe that labor market conditions will tighten further, 

helping to boost wages, we also expect that home price 

appreciation will continue to outpace income growth, constraining 

home purchase affordability and impeding home sales. Affordability 

challenges are more prevalent in the lower-end of the housing 

market. Data from CoreLogic showed that home price appreciation 

in late 2015 was much stronger in the lower-end of the housing 

market than in the overall market, thanks to a very lean inventory 

consisting of about five months’ supply of homes for sale. In 

October 2015, the months’ supply readings for the low and the lowto-middle price tiers were comparable to those witnessed more than 

a decade ago.

One positive for affordability is continued easing credit standards, according to the latest Fed’s senior loan officer survey. 

While the survey showed signs of further tightening in lending standards in the three months ending in January for several 

types of loans, including commercial and industrial loans and commercial real estate loans, lending standards for 

residential mortgages eased further for GSE-eligible loans, the largest segment of mortgage originations. We believe that 

continued gradual easing of credit constraints, via low down payment government loans and various GSE products, 

should help alleviate affordability problems for some potential first-time homebuyers, who are key to continued expansion 

in the home sales market. 

Our outlook for housing activity is little changed from the prior forecast. We expect home sales to rise further this year, but 

at a more moderate pace than last year. Multifamily starts have been a bright spot for the housing sector during the last 

few years. Despite continued strong demand for rental housing, we 

believe that expansion in that segment of the market is in a more 

mature state, and therefore we expect multifamily construction gains 

to be more modest this year. We expect that some of the supply 

constraints for single-family homebuilding will ease amid strong 

pent-up demand and positive momentum of new home sales at the 

end of last year, allowing builders to increase production at a faster 

pace this year. While our forecast of purchase mortgage 

originations is largely the same as in the January forecast, we 

revised higher our projected refinance originations by slightly more 

than $100 billion in 2016 to reflect our lower mortgage interest rate 

forecast. Total single-family mortgage originations should drop 

about 11 percent this year to $1.51 trillion, before declining by less 

than 5 percent in 2017. We expect the refinance share of 

originations to trend down from 47 percent in 2015 to 37 percent in 

2016 and 31 percent in 2017. 

February 9, 2016

Economic & Strategic Research (ESR) Group

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: Bureau of Labor Statistics, Bloomberg, Bureau of Economic Analysis, National Federation of Independent Business, Federal 

Reserve Board, Census Bureau, CoreLogic, National Association of REALTORS®, Fannie Mae ESR Forecast

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.

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Months' Supply of Homes by Price Tier

Inventory Is Tightest for the Low and Low-to-Middle Price Segments

Tier 1

Tier 2

Tier 3

Tier 4

Note: Tier 1: 0-75% of median, Tier 2: 75%-100% of median, Tier 3: 100%-125% of median, Tier 4: 125% + of median

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Single-Family Starts Multifamily StartsExisting Home SalesNew Home Sales Period-over-Period Change, %

Gains in Housing Activity Should Moderate, Except for Single-family Construction

2015

2016 Forecast

Thous. 2015 2016

Single-Family Starts 715 817

Multifamily Starts 396 417

Existing Home Sales 5,260 5,402

New Home Sales 501 558
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ESR Macroeconomic Forecast Team

Doug Duncan, SVP and Chief Economist Mark Palim, VP

Orawin T. Velz, Director Frank Shaw, Financial Economist

Hamilton Fout, Director