Economic Developments – December 2016

© 2016 Fannie Mae. Trademarks of Fannie Mae. 12.20.2016 1 of 5

Growth May Slow to End 2016 But Sentiment Brightens

We expect economic growth to moderate to less than two percent this quarter, with full-year 2016 growth at 1.8 percent. 

We have not included the effects of any new federal policies in this forecast, due to considerable uncertainty about the 

President-elect’s policy agenda and the extent of support he will receive from the new Congress. The risks to our 2017 

growth forecast of 1.8 percent are balanced between upside and downside. 

The economy expanded 3.2 percent annualized in the third quarter, a sizable pickup from average growth of only about 

one percent in the prior three quarters. However, the strong pace appears unsustainable, as temporary support from 

agricultural exports generated much of the growth, helping net exports add nearly one percentage point to growth. As 

such exports receded, the trade deficit widened significantly in October, and we expect net exports to subtract about one 

percentage point from growth this quarter. As the trade deficit widened to start the fourth quarter, consumer spending 

growth also slowed.

Long-term interest rates have risen significantly over the past month, with the 10-year Treasury yield touching 2.60

percent at the time of this writing, the highest rate since July 2015, presenting headwinds for housing. At the same time

the dollar is approaching a 14-year high, which could weigh on manufacturing and other exports, as well as U.S. profits 

overseas.

 

Confidence Improves Across the Board

Investors are bullish, with major U.S. stock market indices reaching

record highs in early December. Consumer and business 

confidence improved following the election. The Conference Board 

confidence index jumped to an expansion high in November, and 

the preliminary estimate of the University of Michigan sentiment 

index rose in December to just one-tenth below the expansion best 

in January 2015, which was the highest reading since the start of 

2004. Strong equity markets and continued solid job gains have 

helped improve sentiment, and the election results also helped 

boost sentiment as consumers believe that the incoming 

Administration will adopt pro-growth policies. For example, a press 

release from the University of Michigan consumer sentiment survey 

noted that a jump in sentiment in early December was “largely due 

to” Presidential-elect Trump’s victory, as more consumers noted the 

potential positive impact of new economic policies “than ever before 

recorded in the long history of the survey.” 

Business confidence has also risen, as made evident by the Business Roundtable’s survey of CEOs and comments from 

earnings calls. Meanwhile, small business sentiment improved significantly in November, with the National Federation of 

Independent Business (NFIB) Optimism Index jumping to the best showing in nearly two years, driven by increased 

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Mortgage Rates and 10-Year Treasury Yields 

Rise After the Election

10-Year Treasury Note Yield

30-Year Fixed Mortgage Rate

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Nominal Broad Trade-Weighted 

Exchange Value of the US$ 

U.S. Dollar Strengthens to a 14-Year High

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Consumers and Businesses Are Upbeat 

Following the Presidential Election

Conference Board Consumer Confidence

University of Michigan Consumer Sentiment

NFIB Small Business Optimism Index (Right Axis)
© 2016 Fannie Mae. Trademarks of Fannie Mae. 12.20.2016 2 of 5

optimism in the economic outlook. The election seemed to have helped boost confidence, as the NFIB noted a sharp 

increase in optimism in responses received after the election.

Furthermore, economists are also generally more upbeat following the election. According to the December Blue Chip 

Economic Indicator Survey, the consensus forecast of economic growth next year rose slightly from the prior month. 

About 47 percent of respondents reported that they had raised their forecasts of real gross domestic (GDP) growth in 

2017 as a direct result of the election outcome. Consistent with the notion that an increase in aggregate demand (e.g., 

from fiscal stimulus) late in the business cycle – at a time when the labor market is at or near full employment – would add

to wage and inflationary pressure, about 44 percent of Blue Chip respondents said that they had raised their inflation 

forecasts due to the election results. Our economic growth forecast is below the Blue-Chip consensus. We were among

the bottom ten forecasts both before and after the election as we remain in wait-and-see mode.

Some Encouraging News in the Third Quarter

The second print of third quarter real GDP showed that corporate 

profits rose 6.6 percent (not annualized) from the second quarter. 

Corporate profits increased 2.8 percent from a year ago, ending a 

string of five consecutive annual declines, which has occurred only 

one other time during an expansion. The annual rise in the third 

quarter was solely because of a rebound in financial sector profits; 

annual profits in nonfinancial sectors continued to drop for the sixth 

consecutive quarter.

Another notable detail from the second estimate of third quarter 

GDP was a sizable upgrade in real consumer spending growth to 

2.8 percent annualized from 2.1 percent in the prior estimate. 

However, incoming data suggest that spending growth will moderate 

sizably this quarter as real consumer spending edged up just 0.1 

percent in October, retail sales ticked up 0.1 percent in November, 

and November auto sales ticked down, albeit from a strong pace in the prior month.

Consumer Fundamentals Are Positive

Despite signs of a slowdown this quarter, we expect consumer spending to continue to drive growth. The November 

employment report showed a decent job gain of 178,000. It also showed a three-tenths percentage point drop in the 

unemployment rate to an expansion low of 4.6 percent; although the drop was driven more by a decline in the labor force 

than by job growth. The labor force participation rate ticked down for the second consecutive month to 62.7 percent, the 

lowest reading since June. Annual earnings growth moderated three-tenths of a percentage point to 2.5 percent from an 

expansion high in the prior month. This measure of earnings growth is not adjusted for compositional shifts in 

employment, however. For example, an influx of new workers into lower-paying positions can drag on overall earnings 

growth. 

An alternative earnings measure not influenced by these

compositional shifts is the Atlanta Fed’s Wage Growth Tracker. It 

showed that annual wage growth remained at an expansion high of 

3.9 percent in November. It is likely that some slack remains in the 

labor market. The broadest measure of labor market 

underutilization, which includes part-timers who want full-time jobs 

and discouraged workers who want a job but are no longer looking

for one, continued to slide, falling to 9.3 percent. While the rate has 

trended down to the lowest level since April 2008, it remains

elevated relative to levels in the previous expansion, when it 

troughed at 7.9 percent. 

In addition to improving labor market conditions, rising household 

net worth should help support consumers. The net worth of 

households and nonprofit organizations—the value of assets minus 

liabilities—increased $1.6 trillion to $90.2 trillion in the third quarter of 2016, boosted by gains in both housing and stocks.

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Corporate Profits with IVA and CCAdj 

(SAAR, $, Year-over-Year % Change)

Corporate Profits Rise from a Year Ago, Ending 

The Five Quarter Streak of Annual Declines

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Hourly Wage Growth Tracker

(3M Mov Avg of Median Y-o-Y % change)

Atlanta Fed Wage Growth Measure Remains at 

an Expansion High
© 2016 Fannie Mae. Trademarks of Fannie Mae. 12.20.2016 3 of 5

 

Overall, we expect consumer spending to be the biggest driver of growth in 2017. Nonresidential investment should also 

add to growth, as investment in structures should be less of a drag due to the rebound in oil prices amid modestly 

improving business investment in equipment. The only major drag to growth next year should be net exports.

The Fed Should Exercise Caution Amid Heightened Uncertainty

The Fed raised the fed funds rate at the December Federal Open Market Committee (FOMC) meeting as universally 

expected. The “dot plot,” which showed each member’s expected fed fund rate in coming years, implies three rate hikes 

next year compared with two in September. The additional expected hike could be viewed as a sign of a more hawkish 

stance. However, we shouldn’t give this projection too much weight, given that, at one point, the dot plot signaled four rate 

increases in 2016 versus the one that actually materialized. We believe that the Fed will likely be in wait-and-see mode 

given this substantial policy uncertainty and anticipate two hikes each in 2017 and 2018. However, the Fed will be vigilant 

in monitoring wage pressure, as further tightening in the labor market should lead to a pickup in compensation growth. If 

the productivity growth trend remains anemic, rising worker compensation will lead to increasing unit labor costs, which

will compress profit margins unless businesses pass the higher costs on to consumers through higher prices. During her 

testimony before the Joint Economic Committee in November, Fed Chair Janet Yellen observed that changes in the fiscal 

outlook, to the extent that they influence economic growth, labor markets, and inflation forecasts, could alter the course of 

interest rates. She noted that fiscal stimulus that does not spur faster productivity and labor force growth could result in

more upward pressure on inflation and higher interest rates.

Housing Roundup

Housing data point to a double-digit gain in residential investment 

this quarter, consistent with our view that residential investment will 

add to economic growth after subtracting from growth in the second 

and third quarters. Both single-family and multifamily starts jumped 

in October. However, home sales were mixed, with existing home 

sales rising to an expansion high amid declining new home sales.

(For more information on multifamily market conditions, read 

the December 2016 Multifamily Market Commentary.)

Pending home sales, which typically lead existing home sales by 

one to two months, were little changed in October, signaling that 

existing home sales should remain strong in the near term. Another 

leading indicator of home sales, purchase mortgage applications, 

has been mixed of late. They declined in October through midNovember but then surged during the third week as the postelection spike in mortgage rates prompted some potential 

homebuyers to act before rates rose further. 

Homebuilders’ confidence surged in December, with the National Association of Home Builders (NAHB)/Wells Fargo 

Housing Market Index jumping seven points to 70, the highest reading since July 2005. (A reading of 50 or higher 

indicates more builders view the single-family market conditions as “good” rather than “poor”). The NAHB attributed the 

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Unemployment Rates Dip to Expansion Lows

Civilian Unemployment Rate: 16 yr +

U-6: Unemployed and Marginally Attached as a % of Labor Force

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Households and Nonprofit 

Organizations: Assets (NSA, Bil.$)

Household Net Worth Shows 

Broad-based Gains

Other

Real Estate

Equities

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SAAR, Millions of Units

SAAR, Millions of Units

Existing Home Sales Reach New Expansion 

Best, As New Home Sales Falter

Existing Home Sales

New Home Sales (Right Axis)
© 2016 Fannie Mae. Trademarks of Fannie Mae. 12.20.2016 4 of 5

jump to the election results, noting that builders are hopeful that President-elect Trump will cut burdensome regulations as 

pledged during the campaign. Overall consumer housing sentiment declined in November, however. The Fannie Mae 

Home Purchase Sentiment Index® (HPSI) decreased for the fourth consecutive month. The results are fairly evenly split 

between responses collected before and after the election, and there is evidence of an increase in consumer optimism in 

the immediate aftermath of the election.

Home price appreciation remains strong. The CoreLogic Home Price Index, the measure used by the Fed to estimate the 

value of household real estate assets, showed that home price appreciation strengthened in October, rising 6.7 percent 

from a year ago. For the third quarter, the Index appreciated a strong 6.5 percent annualized, helping to boost the value of 

household real estate holdings and net worth. Housing wealth, which is strongly influenced by home values, rose $554 

billion from the second quarter. Meanwhile, single-family mortgage debt outstanding increased $93.5 billion — a 3.7 

percent annualized rate — the fastest pace since the end of 2007. Owners’ home equity as a percentage of the value of 

household real estate increased to 57.3 percent, up substantially from the trough of 36.0 percent in the first quarter of 

2009 but below the previous peak of 59.8 percent reached in the fourth quarter of 2006. 

 

While strong home price appreciation benefits homeowners, it 

presents an affordability challenge to potential first-time 

homebuyers, especially given recent increases in mortgage rates.

Freddie Mac’s survey showed that mortgage rates continued to rise 

in early December to 4.13 percent, the highest reading since early 

October 2014. The rise in mortgage rates of about 60 basis points 

since before the election suggests some headwinds to home sales. 

However, if long-term interest rates increase along with stronger 

economic growth, rising incomes could help support housing 

affordability and home sales. History suggests a weak correlation 

between mortgage rates and house prices. For example, home 

prices continued to rise during the 2013 “taper tantrum,” defying the 

spike in mortgage rates and declining housing demand. 

We expect mortgage rates to rise gradually, from an average of 3.8 

percent this quarter to 4.2 percent a year from now, about 50 basis points higher than the previous forecast. We project 

an increase in total home sales of nearly three percent in 2017, little changed from the prior forecast. Our 2017 sales 

outlook hinges on our expectations of a slow rise in interest rates, continued improving household income, and a positive 

household formation outlook. 

We revised higher our forecast of refinance originations this year due to stronger volume through October than 

anticipated, but we downgraded next year’s forecast in response to higher mortgage rates. For all of 2016, we expect total 

mortgage originations to increase 10.0 percent from 2015 to $1.90 trillion with a refinance share remaining at 47 percent. 

Mortgage originations should decline about 17 percent in 2017 to $1.57 trillion, as a result of a drop in refinance 

originations, sending the refinance share lower to 33 percent.

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Mortgage Debt Oustanding

(1-4 Units, NSA, Annualized % Change) 

Growth in Single-Family Mortgage Debt 

Outstanding Reaches New Expansion High

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Owners Equity in Real Estate as a % of 

Household Real Estate Value

Strong Home Price Appreciation Boosts 

Homeowners’ Equity

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CoreLogic National House Price Index: 

(Year-over-Year % Change, NSA)

Mortgage Rates and Home Price Gains Show 

Little Correlation

Annual Home Price

Appreciation

30-Year Fixed Mortgage

Rates (Right Axis)

Taper Tantrum
© 2016 Fannie Mae. Trademarks of Fannie Mae. 12.20.2016 5 of 5

Economic & Strategic Research (ESR) Group

December 14, 2016

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: Bloomberg, Federal Reserve Board, Bureau of Economic Analysis, Conference Board, University of Michigan, National 

Federation of Independent Business, Federal Reserve Bank of Atlanta, Bureau of Labor Statistics, National Association of REALTORS®, Census 

Bureau, CoreLogic, and 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

Orawin T. Velz, Director Frank Shaw, Economist 

Hamilton Fout, Director Michael T. Vangeloff, Strategic Planning Analyst III