Economic Developments – June 2018

© 2018 Fannie Mae. Trademarks of Fannie Mae. 6.13.2018 1 of 5

Growth Poised to Pick Up Firmly

Economic growth slowed to 2.2 percent annualized in the first quarter from 2.9 percent in the final quarter of 2017. We 

forecast a pickup in economic activity during the rest of the year, boosted by stimulative fiscal policies, including 

accelerating growth in spending appropriations. Our full-year growth forecasts over the next two years remain unchanged, 

with real gross domestic product (GDP) expected to expand by 2.7 percent in 2018 and then increase at a slower pace of 

2.3 percent in 2019 as fiscal impacts fade.

We see a balance of risks to our forecast. Upside risks include a potential acceleration of business investment and a 

reduction in household conservatism resulting in a stronger pickup of consumption than we are currently expecting. The 

upward revisions to business investment in structures, equipment, and intellectual property products in the second 

estimate of GDP is the basis for the investment component of the upside risk. Downside risks include a faster pace of 

interest rate increases than currently anticipated and uncertainty from trade policy.

Tensions with our trading partners are intensifying. Earlier this month the administration allowed exemptions from steel 

and aluminum tariffs for Canada, Mexico, and the European Union to expire, effectively imposing 25 percent and 10

percent tariffs on steel and aluminum imports, respectively. The three trading partners quickly retaliated by imposing tariffs 

on U.S. products. The Administration also announced plans to move forward with impending tariffs on Chinese imports.

While the impact of proposed tariffs on the overall economy may be modest, escalating trade rhetoric could drag on equity 

markets and business and consumer confidence. Political uncertainty in Italy, the third largest economy in the Euro zone,

and shocks to emerging markets bear close monitoring, although the impact on U.S. financial conditions has been limited 

thus far.

Second Print of GDP Shows Positive Details for Domestic Demand

Headline growth for the first quarter was downgraded slightly in the second GDP estimate but the details were positive, on 

net, for domestic demand. The one-tenth downgrade in real GDP growth resulted from small downward revisions in 

inventory accumulation, consumer spending on services, government spending, residential investment, and net exports, 

which outweighed an upward revision to nonresidential investment.

Nonresidential investment was the only component of GDP that 

was revised higher. The upgrade in real nonresidential investment 

growth, from 6.1 percent annualized to 9.2 percent, was large 

enough to push final sales to domestic purchasers (GDP minus 

trade and inventories)—a gauge of strength in domestic demand

and a better measure of underlying growth—three-tenths higher 

than the prior estimate, to 1.9 percent annualized. However, the 

increase was still a drastic deceleration from 4.5 percent during the 

fourth quarter. 

Real residential investment was revised lower from a flat reading 

to a decline. This marks the third time in four quarters that housing 

subtracted from GDP growth.

Corporate profits, the new piece of data in the second print of GDP, showed that before-tax profits fell in the first quarter 

for the second consecutive quarter. However, after taxes, profits surged during the quarter, thanks to the cut in corporate 

taxes from the Tax Cut and Jobs Act.

A meaningful acceleration in productivity growth has remained elusive but often lags a pickup in business investment. 

Nonfarm productivity grew just 0.4 percent annualized during the first quarter, three-tenths slower than in the prior 

estimate. The year-over-year increase in productivity remained within the narrow range of 1.2 percent to 1.4 percent seen 

over the past year. Meanwhile, unit labor cost growth was revised higher by two-tenths to 2.9 percent annualized during 

the quarter, the biggest quarterly rise in a year. However, the annual increase remained subdued, rising just 1.3 percent 

from a year ago, decelerating from 1.8 percent in the prior quarter.

-1.5% -0.8% 0.0% 0.8% 1.5% 2.3% 3.0%

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 Q1 2018 Real GDP Annualized % Change

After Revision, Nonresidential Investment Is 

the Main Driver of First Quarter Growth

Advance Estimate

Second Estimate
© 2018 Fannie Mae. Trademarks of Fannie Mae. 6.13.2018 2 of 5

 

Consumer Spending Poised for a Rebound...

Incoming data are reinforcing our expectation for strengthening 

economic growth this quarter. Real consumer spending started 

the second quarter on a strong note, rising 0.4 percent in April

following a 0.5 percent rise in March. Given the first quarter’s 

strong finish and the second quarter’s solid start, we expect real 

consumer spending growth to pick up to 3.0 percent annualized 

this quarter from 1.0 percent last quarter. Our expectation for 

accelerated spending is bolstered by continued improving labor 

conditions.

...Amid a Tighter Labor Market 

Hiring picked up in May, with nonfarm payrolls posting a strong, 

broad-based increase of 223,000 following a net upward 

revision for the prior two months. Wages grew 0.3 percent, the 

biggest monthly gain since January. However, the annual increase showed no signs of breaking out, staying within the 

tight range between 2.6 percent and 2.8 percent seen since December. The unemployment rate edged down to 3.8 

percent, the lowest level in 18 years, with a record-low rate for African Americans, while the broadest measure of labor 

underutilization (U-6) declined to 7.6 percent, the best showing in 17 years. One weakness was the third consecutive drop 

in the labor force participation rate to 62.7 percent.

Other labor market reports also point to continued reduced slack in the market. For example, the Job Openings and Labor 

Turnover Survey (JOLTS), which lags the monthly employment report by one month, showed that job openings rose in 

April to a record high of 6.7 million, which exceeded the number of unemployed persons (6.3 million) for the first time 

since record keeping on job openings began in 2000. At the onset of the current expansion, there were 14.7 million 

unemployed people and 2.4 million job openings.

 

-12%

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12%

'13 '14 '15 '16 '17 '18 Corporate Profits (SAAR, $, Q-o-Q % Change)

After-Tax Profits Surge, Thanks to the Tax Act

Corporate Profits with IVA and CCAdj Corporate Profits After Tax

-4%

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'07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 Total Nonfarm Productivity 

Productivity Growth Remains Anemic In the First Quarter

Quarter-over-Quarter (SAAR, % Change)

Year-over-Year (SA, % Change)

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Measures of Labor Underutilization Decline to 

the Lowest Levels in Nearly Two Decades

Civilian Unemployment Rate: 16 yr + U-6: Unemployed and Marginally Attached as a % of Labor Force

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Labor Market is Increasingly Tight

JOLTS: Job Openings Unemployed, 16 yr+

-0.4%

-0.2%

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0.6%

0.8% Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 Personal Consumption Expenditures (SAAR, Chn.2009$, M-o-M % Change)

Consumer Spending Is Poised for a Strong Rebound This Quarter
© 2018 Fannie Mae. Trademarks of Fannie Mae. 6.13.2018 3 of 5

Business Equipment Investment Disappoints

We had expected a boom in business investment in equipment this year in response to the full expensing provision of the 

Tax Act. So far, actual investment has fallen short of expectations. Real business equipment investment grew 5.5 percent 

annualized during the first quarter, decelerating from double-digit gains during the second half of 2017. Lackluster data 

from the transportation sector suggest that real equipment spending is poised to decline this quarter for the first time since 

the third quarter of 2016. If realized, this quarter’s decline should be a one-off, given the generous tax provisions. 

However, protectionist trade policy could increase uncertainty, leading businesses to delay spending decisions. Strong 

equipment spending growth is important to boost productivity 

growth and keep labor costs contained.

Trade Boosts Near-Term Growth

The nominal trade deficit narrowed in April for the second 

consecutive month, as exports increased to a fresh record 

high while imports fell. At $46.2 billion in April, the trade 

deficit has narrowed more than $9 billion from its level just 

two months prior, when it reached its widest level since 2008. 

We expect net exports to add to growth this quarter.

However, going forward, trade will likely face headwinds. 

Recent tariff actions increased the odds of a negative

conclusion to the North American Free Trade Agreement 

(NAFTA) negotiations. The importance of trade with Canada 

and Mexico varies significantly among states. For example, in 2017, exports to Canada accounted for about 8 percent of 

North Dakota’s GDP, and exports to Mexico made up more than 5 percent of Texas’ state product. Thus, while the impact 

on the nation might be modest, trade restrictions would likely hurt some states much more than others.

Fed Signals More Aggressive Tightening

Annual inflation held steady in April after accelerating in March amid reduced labor market slack. The Fed’s favored 

measure of inflation—the Personal Consumption Expenditures (PCE) deflator—rose 0.2 percent from March but the yearover-year increase remained at 2.0 percent. The core PCE deflator (excluding food and energy) also rose 0.2 percent 

during the month, leaving the annual increase unchanged at 1.8 percent.

At the June Federal Open Market Committee (FOMC) meeting, the Fed raised the federal funds rate by 25 basis points, to 

a range of 1.75 percent to 2.00 percent, as universally expected. In the post-meeting statement, the FOMC discontinued 

forward guidance, dropping language indicating that “the federal funds rate is likely to remain, for some time, below levels 

that are expected to prevail in the longer run.” 

The Fed’s updated economic projections indicate slightly stronger growth, lower unemployment rates, and higher inflation 

rates for 2018 than in the March projections. In addition, the dot plot, which shows members’ federal funds rate 

projections, implies a total of four rate increases in 2018, one hike more than was projected in March. With inflation 

expectations expected to remain well-anchored around the Fed’s 

inflation target, we continue to forecast only one more rate increase 

this year, but with the risk skewed toward two hikes.

Housing Roundup

Housing activity was downbeat in April, with declining housing 

starts, new home sales, and existing home sales. The for-sale 

inventory of existing homes has remained below year-ago levels

for nearly three years. Inventory shortages are impeding sales, 

but demand appears to be strong as homes are selling fast, with 

properties typically staying on the market for only 26 days in April, 

the shortest duration since the series began in 2011.

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Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Existing Homes Available for Sale (NSA, Millions of units)

Year-over-Year Declines in For-Sale Inventories of Existing Homes Continue Unabated

2015 2016

2017 2018

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'92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 Trade Balance: Goods and Services (SA, Billions of Dollars)

Exports Rise to a Fresh Record High

Imports

Exports
© 2018 Fannie Mae. Trademarks of Fannie Mae. 6.13.2018 4 of 5

Tight inventory continues to boost prices in the presence of strong 

demand. Main measures of home prices—the S&P CoreLogic CaseShiller, CoreLogic, and FHFA home price indices—showed strong 

increases in the first quarter, pushing annual gains to between 6.4 

percent and 6.9 percent for the nation.

While the strength in home prices has restrained home purchase 

affordability and sales, it helped increase household net worth

(assets minus liabilities) during the first quarter to $100 trillion for 

the first time, as gains in real estate wealth and other components 

outweighed the first drop in stock market wealth in 10 quarters. 

For the first quarter, homeowners’ equity in real estate posted the 

largest gain in almost five years, pushing the equity share of real 

estate value to 59.7 percent, the highest reading since the end of 2005

and a significant rebound from the trough of 36.2 percent witnessed 9 years go.

 

Lean inventory, a strong labor market, and positive demographics should support future single-family homebuilding. Home 

builders’ confidence has remained historically high, but builders continue to face headwinds from rising costs. The median 

size of new homes sold has been declining in recent years, as builders have focused on smaller homes to meet rising

demand from entry-level buyers. However, the record-high cost of lumber has pressured profit margins, making it more 

difficult to produce relatively modest-priced homes. In addition, shortages of available lots and skilled labor have remained 

primary concerns for builders. Finished lot price as a share of sales price has risen since 2015, and the construction 

industry unemployment rate fell in May to 4.4 percent, tying the lowest level since the inception of the series in 2000, 

pressuring wages.

 

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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 Q4 2005

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'78 '81 '84 '87 '90 '93 '96 '99 '02 '05 '08 '11 '14 '17 Median Square Feet of Floor Area in New Single-Family Houses Sold: U.S. 

Home Size Appears to Have Peaked in 2014

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Commodity Price: Framing Lumber

($ per 1000 Bd Ft)

Record-High Cost of Lumber Hurts Builders' Profits

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

Unemployment Rate: Construction (%)

Construction Unemployment Rate Reaches Lowest Level in Nearly Two Decades

-30%

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'00 '02 '04 '06 '08 '10 '12 '14 '16 '18 House Price Indices (Year-over-Year Growth, %)

Annual Home Price Appreciation Remains Above Six Percent

FHFA House Price Index: Purchase Only CoreLogic: US National S&P CoreLogic Case-Shiller: US National
© 2018 Fannie Mae. Trademarks of Fannie Mae. 6.13.2018 5 of 5

The near-term outlook for home sales is bearish, as pending home sales fell in April and purchase mortgage applications 

dropped in May. Increasing mortgage rates are adding to affordability challenges. Mortgage rates rose in May for the 

eighth consecutive month, with the 30-year fixed mortgage rate 

averaging 4.59 percent, compared with 3.81 percent just last 

September. We lowered our forecast for existing home sales 

slightly, with total home sales rising about two percent this year 

compared with 2.5 percent in the prior forecast. However, we 

revised higher our purchase originations forecast for 2018 due to 

a downwardly revised share of homes sold for cash. 

Total mortgage originations are expected to fall about 6 percent 

from 2017 to $1.71 trillion in 2018, with a refinance share of 28

percent, compared with 36 percent in 2017. Single-family (1-4 unit 

properties) mortgage debt outstanding in the first quarter of 2018 

climbed to the highest level since the third quarter of 2010, but the 

quarterly increase was the smallest in two years.

Economic & Strategic Research (ESR) Group

June 13, 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: Bureau of Economic Analysis, Federal Reserve Board, Bureau of Labor Statistics, Census Bureau, Foundation for International

Business and Economic Research, and National Association of REALTORS®, Mortgage Bankers Association

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 Rebecca Meeker, Business Analyst

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Near-Term Outlook for Home Sales Worsens

Mortgage Applications for Purchase Index (Monthly Average) Pending Home Sales Index (Right Axis)