Economic Developments – December 2017

© 2017 Fannie Mae. Trademarks of Fannie Mae. 12.11.2017 1 of 5

Domestic Demand Builds Momentum into 2018

Despite hurricane-related disruptions, third quarter real gross 

domestic product (GDP) growth strengthened by two-tenths from 

the second quarter to 3.3 percent annualized. While we expect 

domestic consumer and investment spending growth to pick up 

this quarter, trade will likely drag on growth and inventory 

investment should add less to growth this quarter. Thus, we 

expect headline growth to slow to 2.6 percent annualized in the 

fourth quarter, putting full-year 2017 growth at 2.5 percent. We 

anticipate that GDP growth will decelerate to 2.1 percent for all of 

2018. 

On December 8, Congress reached agreement on a two-week 

continuing resolution to keep the government operating as it 

works on a two-year spending bill. At the same time, 

Congressional negotiators are reconciling tax bills from the 

Senate and House with a goal of enacting legislation by the end of the year. We will wait to see the final bill before 

estimating its impact, but, if tax legislation is passed, it should be a net positive for growth in coming years, posing upside 

risks to our forecast.

Business Investment Shines

Our December forecast for 2017 economic growth is half a percentage point stronger than that in our January 2017 

forecast. The biggest upside surprise to our economic forecast this year came from business equipment investment, 

which rose last quarter for the fourth consecutive quarter to the strongest pace in three years. At the start of the year, we 

had expected businesses to wait for widely anticipated fiscal stimulus before ramping up their capital expenditures. As it 

turned out, the unexpected strength in business equipment investment likely reflected, in part, deregulation that has 

occurred throughout this year. 

To gauge regulatory actions, some analysts use the number of 

pages added to the Federal Register, where new regulations 

must be published. The number of Federal Register pages fell 

sharply from nearly 97,000 in 2016 to approximately 60,800 

pages annualized as of early November 2017, the lowest reading 

since early 1990s. This marks the biggest decline in regulatory 

actions since the introduction of the Federal Register in 1936.

One way to see the impact of the rollback in regulations on 

business sentiment is to look at the survey of small businesses by 

the National Federation of Independent Businesses (NFIB). The 

survey showed that the Small Business Optimism Index jumped 

sharply after the presidential election. While the index has 

declined somewhat this year, the October index was only about 

two points shy of the expansion best reached in January. 

Details of the NFIB survey show the share of small businesses saying that government requirements is the most 

important problem fell to 14 percent in October from 21 percent a year ago. Meanwhile, the percentage of businesses 

saying that the quality of labor is the most important problem surpassed those citing government requirements. However, 

taxes have consistently been the most important problem, cited by between 20 percent and 22 percent of respondents 

this year. 

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Business Capital Expenditures Growth Has Steadily Strengthened Since Late Last Year

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The Number of Pages in the Federal Register Is Forecasted to Decline Sharply in 2017 

Note: Data in red represents projected 2017 pages at an annualized pace as of November 8
© 2017 Fannie Mae. Trademarks of Fannie Mae. 11.13.2017 2 of 5

 

Deregulation is not the only factor supporting business equipment investment, however. Core capital goods orders

(nondefense durable goods orders excluding aircraft)—a forward looking-indicator of business equipment investment—

started to rebound late last year, coinciding with the election but also with the rebound in crude oil prices. As crude 

rebounded, core orders benefited from a recovery in mining machinery orders and energy exploration activity late in 2016.

In addition, the decline in the dollar at the beginning of 2017 and strengthening demand abroad have also helped spur 

capital investment. In October, core orders rose for the fourth consecutive month, suggesting solid business equipment 

investment growth again this quarter.

As business capital expenditures growth firmed, productivity has shown signs of life. Nonfarm productivity (output per 

hour) rose 3.0 percent annualized in the second quarter, the strongest quarterly gain in three years. On a year-over-year 

basis, productivity increased 1.5 percent, the biggest annual gain since the second quarter of 2015. Still, over the current 

expansion, productivity growth has been anemic compared to previous expansions, suggesting more room to grow, which 

could allow economic growth to accelerate with wage pressures under control.

 

Jobs Growth Is Solid and Broad-Based

Nonfarm payrolls rose 228,000 in November. A small net upward revision for the prior two months put the three-month 

average gain at 170,000. The year-to-date average monthly gain came in at 174,000, compared with 190,000 in 2016. 

Job gains were broad-based. Manufacturing payrolls rose 31,000 following a 23,000 gain in the prior month, consistent 

with the strength in recent trends in core capital goods orders. Even the retail sector, which lost jobs in eight of the first 

eleven months this year, saw the biggest increase since January, soothing concerns about the health of brick-and-mortar 

store sales going into the holiday season. Residential construction employment also posted healthy monthly back-to-back 

gains, hinting that residential investment will likely add to growth this quarter for the first time in three quarters.

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NFIB Small Business Survey (SA, 1986=100)

Small Business Confidence Remains Elevated

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Small Business Survey: Most Important 

Problem (Share of Firms reporting...) 

For Small Businesses, Quality of Labor Is a Growing Concern, In Contrast to Regulation 

Quality of Labor Government Requirements

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'07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 Nominal Broad Trade-Weighted Exchange Value of the US$ (Jan-97=100) Nondefense Capital Goods ex Aircraft (SA, Bil.$)

Core Capital Goods Orders Trend Up Since Election, with Help from Declining Dollar

Core Capital Goods Orders Trade-Weighted Dollar Index (Right Axis)Election Presidential 

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'07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 Total Nonfarm Productivity (SA, % Change)

Productivity Growth Shows Some Signs of Life

Quarter-over-Quarter Change Year-over-Year Change
© 2017 Fannie Mae. Trademarks of Fannie Mae. 11.13.2017 3 of 5

 

Average hourly earnings rose 0.2 percent from October and 2.5 percent from a year ago, leaving the annual gain fourtenths below the expansion best seen last December. The average workweek increased for the first time in five months, 

ticking up to 34.5 hours. The increases in average hourly earnings and the average workweek, when combined with 

strong job gains, point to a more upbeat picture for labor income.

The household survey showed that the unemployment rate and the labor force participation rate were flat at 4.1 percent 

and 62.7 percent, respectively. The broadest measure of labor underutilization (the U-6 rate), which includes discouraged 

workers and part-time workers who prefer full-time jobs, edged up one-tenth from an expansion low to 8.0 percent.

Consumers Should Remain the Biggest Driver of Growth

After a strong third quarter finish, consumer spending disappointed at the beginning of the fourth quarter. Real consumer 

spending edged up just 0.1 percent in October after a 0.5 percent gain in September, while real personal income rose 0.4 

percent. The weaker spending growth and stronger income gain pushed the saving rate two-tenths higher from an 

expansion low to 3.2 percent, the first increase since May. The downtrend in the saving rate occurred as households 

reduced savings to boost consumer spending. The increase in labor income presaged by the employment report should 

provide more support for spending or for savings.

While the saving rate hovered around its expansion low, household net worth—assets minus liabilities—continued to rise, 

setting a fresh record high. Net worth for households and nonprofit organizations increased $1.7 trillion to $96.9 trillion in 

the third quarter, driven by gains from both stock market wealth and housing wealth, the latter of which reflects strong 

home price appreciation. Net worth as a percent of disposable personal income increased to 673 percent, the highest 

reading since quarterly record keeping began in the early 1950s. With a better near-term income outlook and an 

improving household balance sheet, we expect real consumer spending growth to pick up to 2.7 percent annualized in the 

fourth quarter from 2.3 percent last quarter, and maintain similar growth rates through 2018. 

 

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Another Solid Monthly Payroll Gain Lifts the Hiring Trend Higher

Change in Total Nonfarm Employment

3-Month Moving Average

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Retail Sector Posts Largest Monthly Job Gain Since January Heading into Holiday Season

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Personal Saving Rate (SA, %)

Saving Rate Hovers Around Expansion Low

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Household Net Worth as a Share of Personal 

Income Rises to a Record High

Dot-Com Bubble

Housing Bubble
© 2017 Fannie Mae. Trademarks of Fannie Mae. 11.13.2017 4 of 5

Inflation Pressure Is Muted

The Personal Consumption Expenditures (PCE) deflator, the Fed’s favored measure of inflation, edged up 0.1 percent in 

October following a 0.4 percent rise in the prior month, with the moderation largely attributable to a decline in energy 

prices following the hurricane-induced surge. The annual increase slowed one-tenth to 1.6 percent, well under the Fed 

two-percent target. Excluding food and energy, the core PCE price index increased 0.2 percent, while the annual rise 

remained at 1.4 percent. We continue to expect two more fed funds rate increases in 2018. Passage of a tax cut bill would 

likely lead to more Fed tightening, however. 

Housing Roundup

Housing activity was upbeat across the board at the start of the fourth quarter. Total housing starts rose in October to the 

highest level in a year, existing home sales posted the first back-to-back gains this year, and pending home sales

(contract signings on existing homes) increased for the first time 

in four months, as sales rebounded from the hurricane 

disruptions. Meanwhile, new home sales jumped, approaching a 

decade high. 

Tight inventory continues to boost home prices. The CoreLogic 

house price index, which is used by the Federal Reserve Board

to estimate the value of real estate assets, rose 6.9 percent 

annualized during the third quarter. The strong home price 

appreciation helped boost home equity, which increased 8.5 

percent annualized during the quarter. As a percent of real estate 

value, homeowner equity rose to 58.6 percent, only 1.2 

percentage points below the most recent peak at the end of 

2005.

The yield on 30-year fixed-rate mortgages is expected to average 4.0 percent this year. Thus, compared with the January 

forecast, we overestimated mortgage rates for all of 2017 by two-tenths. We also overstated housing starts, as year-todate total housing starts through October are about 2.5 percent higher than during the same period last year, less than 

half of the gain projected at the start of the year. While we expected shortages of skilled labor and land to be a factor 

restraining building activity, the problem appears to have been more severe than we had anticipated. However, our 

forecast for total home sales should come very close to our January prediction, as year-to-date sales showed a 2.0 

percent gain this year from last year, compared with our forecast of a 2.2 percent increase in the January forecast. Our 

modest prediction hinged on our expectation that strong home price appreciation throughout 2017 would likely be a 

headwind for affordability and sales. 

We expect mortgage rates to rise gradually, averaging 4.2 percent in the fourth quarter of 2018 from 3.9 percent in the 

current quarter. Total housing starts and total home sales should rise about 5 percent and 3 percent, respectively, in 

2018. Passage of a tax bill would pose both upside and downside risks to the forecast. Our expectations for total singlefamily mortgage originations are little changed from the prior forecast, as they are predicted to drop about 12 percent this 

year to $1.81 trillion before declining further by about 5 percent to $1.73 trillion in 2018. The refinance share should drop 

from 37 percent this year to 31 percent in 2018.

For information on multifamily market conditions, read the December 2017 Multifamily Market Commentary.

Economic & Strategic Research (ESR) Group

December 11, 2017

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 Economic Analysis, Federal Register, National Federation of Independent Business, the Federal Reserve Board, 

Census Bureau, Bureau of Labor Statistics

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Homeowners’ Equity as a Share of Real Estate Value

Homeowners' Equity Share of Real Estate Value Climbs to Highest Level Since Q1 2006
© 2017 Fannie Mae. Trademarks of Fannie Mae. 11.13.2017 5 of 5

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 Frank Shaw, Economist 

Hamilton Fout, Director