Economic Developments – February 2017

© 2017 Fannie Mae. Trademarks of Fannie Mae. 2.15.2017 1 of 5

Subdued Growth Continues as Markets Assess Policy 

Risks

We expect full-year economic growth to be 2.0 percent for 2017, similar to the 1.9 percent growth in 2016 and unchanged 

from our prior forecast. Consumer spending’s contribution to growth in 2017 should decline slightly, government spending 

should add to growth at a similar pace, and residential and nonresidential investment should contribute more to growth. 

Trade is expected to be a bigger drag on growth this year than last year, while inventory investment should add slightly to 

growth after subtracting from it in 2016. 

Our view is based on the assumption that materially positive 

impacts on growth from any new fiscal stimulus and deregulation 

will likely be limited in 2017. In addition, we see some downside 

risks from the Administration’s trade and immigration policy. The 

President’s executive orders so far have been generally consistent 

with expectations stemming from his campaign promises, including 

rejecting the Trans Pacific Partnership (TPP), reviewing the North 

American Free Trade Agreement, tightening travel and immigration

policy, repealing the Affordable Care Act, and reducing regulatory 

burden. Considerable uncertainty regarding the net impact of new 

policies on the economy leads us to wait for more clarity before 

factoring them into our forecast, as the policy agenda presents risks 

in both directions. For example, while a lighter regulatory burden 

could potentially be a positive for businesses, restricted travel and 

immigration policy could hurt businesses’ ability to recruit talent. Also, 

walking away from the TPP is potentially detrimental to growth, 

because if the rest of the TPP countries successfully form free-trade 

agreements, the U.S. will be left out of the benefits of resulting trade 

with those countries.

Following the post-election run-up, long-term Treasury yields have 

slipped, with the 10-year Treasury yield hovering around 2.4 percent 

at the time of this writing, still more than 50 basis points higher than 

immediately before the election. Global economic growth has gained 

momentum, but downside risks from Europe and elsewhere, including 

banking stress in Italy, elections in the Netherlands and France, and 

financial instability in China, remain in the near term.

Trade Subtracts Sizably from Growth

As expected, economic growth slowed to 1.9 percent annualized in 

the fourth quarter after an unsustainably strong third quarter.

Following an outsized rise in net exports in the third quarter due to a 

temporary surge in agricultural exports, net exports posted a record 

quarterly drop. In the fourth quarter, trade was the only detractor 

from growth among the major components of gross domestic product

(GDP), but the drag from net exports was large enough to fully offset 

the contribution from consumer spending. For all of 2016, net exports 

posted the worst annual performance during the expansion. 

Meanwhile, residential fixed investment contributed to growth for the 

first time in three quarters. Business fixed investment expanded 

modestly for the third consecutive quarter as the first expansion in 

equipment investment in five quarters and ongoing growth in 

intellectual property outweighed the drop in structures investment. 

The volatile inventory investment component made the largest 

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2.6 Nov-16 Dec-16 Jan-17 Feb-17 10-Year U.S. Treasury Bond Yields (%)

Post-Election Rise in U.S. 10-Year Treasury Yield Stalls

-2.0% -1.0% 0.0% 1.0% 2.0% 3.0% 4.0%

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 Real GDP Annualized % Change

An Expected Drag from Net Exports Slows Down 

the Pace of Economic Growth

Q3 - 2016

Q4 - 2016

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'02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 Real Net Exports of Goods & Services (SAAR, Bil.Chn.2009$)

Net Exports Post the Worst Annual Performance in the Expansion
© 2017 Fannie Mae. Trademarks of Fannie Mae. 2.15.2017 2 of 5

contribution to growth since early 2015. Despite the weakening growth headline, a gauge of domestic demand, final sales 

to domestic purchasers (or GDP excluding net exports and inventory investment) accelerated to 2.5 percent annualized, 

the strongest gain since the third quarter of 2015.

Consumer Spending Will Underpin Economic Growth...

We expect economic growth in the current quarter to be similar to the fourth quarter, supported by slightly stronger real 

consumer spending growth. Real consumer spending ended 2016 on a strong note, rising 0.3 percent. The gain was 

driven by an increase in auto sales to an expansion high. However, auto sales fell 4.4 percent in January, more than 

offsetting the gain in the prior month. Consumer spending increases continued to outpace gains in personal disposable 

income, and, as a result, the saving rate fell in December for the second consecutive month to 5.4 percent, the lowest 

reading since March 2015. Increased household net worth from rising equity values and strong home price gains should 

help support consumer spending, but increasing energy prices will weigh on real disposable income. 

Consumer sentiment cooled slightly in January, with the Conference Board consumer confidence index slipping from a 

15-year high at the end of 2016. The largest drop in the expectation component since November 2015 outweighed the 

rise in the present situation component. The University of Michigan preliminary sentiment index pulled back in February 

for the first time in four months as the expectations component eroded, with household finance expectations declining to 

the lowest level since last August. Both measures of confidence remain elevated, however, which should help support 

demand for credit, another driver of consumer spending. Growth in revolving credit (largely credit card debt) slowed 

markedly in December after posting the biggest annual gain of the expansion in November. However, for all of 2016, the

gain in revolving credit continued to accelerate to 6.1 percent, rivalling the increase in nonrevolving credit outstanding 

(largely auto and student loans), which has decelerated in recent years to 6.5 percent. However, the increase in revolving 

credit in 2016 was still smaller than the gains seen prior to the recession.

 

One potential headwind for consumers is tighter lending standards for autos, credit cards, and other consumer installment 

loans. The Federal Reserve Senior Loan Officer Opinion Survey for the three months ending in January showed that the 

net share of banks reported tightening standards for auto loans jumped to the highest level since the inception of the 

series in the second quarter of 2011. Tightening likely reflected the potential for increased defaults on subprime auto 

loans as interest rates rise. Another notable result from the survey was the surge in the net share of banks tightening 

lending standards for credit cards for the first time in nearly seven years to the highest reading since the second quarter of 

2010.

...With Support from the Labor Market

Labor market conditions were mixed in January. Nonfarm payrolls increased by 227,000, and, despite downward revisions 

to the prior two months' data, the average monthly gain over the past three months picked up to 183,000, the best hiring 

pace since last October. However, wage gains disappointed, with average hourly earnings up only 0.1 percent during the 

month despite increased minimum wages in many states around the start of the year. Annual wage gains slowed to 2.5 

percent from an expansion high in the prior month. Other recent wage-related reports also showed muted wage pressures

in the fourth quarter. The Employment Cost Index showed that annual growth in compensation held steady, while the 

productivity report pointed to moderating unit labor cost growth. 

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Consumer Confidence Pulls Back

Conference Board (SA, 1985=100) University of Michigan (NSA, Q1-66=100)

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

Annual Revolving Consumer Credit Usage Strengthens 

Revolving

Nonrevolving
© 2017 Fannie Mae. Trademarks of Fannie Mae. 2.15.2017 3 of 5

The January employment report also showed an uptick in the unemployment rate to 4.8 percent amid the second 

consecutive increase in the labor force participation rate. More people joining the labor force point to more slack in the 

labor market than the 4.8 percent unemployment rate might suggest. Overall, despite the stronger-than-expected 

headline, the January employment report pointed to more room for improvement in the job market and a lack of wage 

pressure, supporting a gradual normalization of monetary policy. 

 

Business Investment Fundamentals Improve

Nonresidential investment in both structures and equipment fell in 2016, in large part reflecting declines in mining activity 

resulting from falling oil prices. The recent upturn in oil prices has boosted drilling activity and mining exploration, and as a 

result nonresidential investment should add slightly to growth in coming quarters. However, nonresidential investment in 

structures faces the headwind of ongoing tightening of lending standards on commercial real estate loans. The Fed 

survey showed that banks continued to tighten lending standards for commercial real estate loans but not as severely as 

in recent quarters. The trend in commercial real estate loan demand has been softening in recent years, and the latest 

survey showed the first decline in demand since 2010.

We expect some improvement this quarter in business investment in equipment, as its leading indicator, core capital 

goods orders, rose in December for the third consecutive month. While improved business sentiment is encouraging, 

without a concrete plan for tax cuts and deregulation, we expect only a slight improvement in business investment this 

year.

Fed Expected to Gradually Tighten amid Fiscal Policy Uncertainty

The Fed held the target range for the fed funds rate steady at the January 31-February 1 Federal Open Market Committee

meeting. Overall, the statement was little changed relative to December. The Committee removed the reference to 

transitory factors related to energy and import prices as holding down inflation, likely reflecting the recent firming in energy 

prices. The Fed’s preferred measure of inflation—personal consumption expenditures deflator—posted a year-over-year 

increase of 1.6 percent in December, the fastest gain since September 2014. While the statement acknowledged inflation 

is below the Fed’s two-percent target, it noted inflation had “increased in recent quarters.” Given substantial fiscal policy 

uncertainty, we expect two quarter-point rate hikes this year, with the first occurring in June. 

Housing Roundup

Both existing and new home sales declined in December, likely due to the spike in mortgage rates after the election. For 

all of 2016, existing and new home sales posted the best annual performance since 2006 and 2007, respectively. 

Inventory remains very tight, as the number of existing homes for sale has fallen year-over-year for 19 straight months,

ending the year at a record low since the series’ inception in 1999. While the inventory of new homes for sale has trended 

up, it remains historically low. 

The depressed level of inventory has maintained upward pressure on home prices, as the main price measures recorded 

solid year-over-year growth in late 2016. Both the Case-Shiller and the CoreLogic National House Price Indices showed 

that homes in the lower price range appreciated faster than those in the upper end of the price distribution.

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'07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 Average Hourly Earnings (SA, Year-over-Year % Change)

Year-over-Year Wage Gains Slip to a 10-Month Low from Prior Month's Expansion Best

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

Wage Pressures Have Been Muted

Employment Cost Index: Compensation Nonfarm Business Sector: Unit Labor Cost
© 2017 Fannie Mae. Trademarks of Fannie Mae. 2.15.2017 4 of 5

Leading indicators of home sales have been encouraging. Pending home sales, which record contract signings on 

existing home sales, rebounded in December, and purchase mortgage applications continue to hold up well relative to 

refinance applications. In addition, the Fannie Mae Home Purchase 

Sentiment Index® (HPSI) showed that housing sentiment 

rebounded in January, ending a string of five consecutive monthly 

drops. 

While mortgage rates trended down to an average of 4.17 percent 

during the second week of February after their recent peak of 4.32 

percent at the end of 2016, they remain more than 60 basis points 

higher than during the first week of November. It is premature to 

suggest that home sales will be immune to the post-election rise in 

mortgage rates. Higher rates might have brought buyers into the 

market before rates increased further, which would mean that the 

rise in rates pulled forward some sales, and the negative impact of 

rising rates will be felt with a lag. 

Single-family housing starts fell further in December from the 

expansion best in October, while multifamily starts remain very 

volatile, jumping following a large drop in the prior month. For all 

of 2016, total housing starts reached the highest level since 

2007, but the annual gain was the weakest since 2011. Singlefamily starts have risen every year of the expansion except 2011 

but still remain more than 240,000 units below the long-term 

annual average of 1.02 million units. Multifamily construction 

likely has peaked, declining slightly in 2016 after recording the 

sector’s best year since 1988 in 2015. The multifamily share of 

total housing starts also peaked in 2015 and has trended down

since, hovering around 35 percent in recent months. Home

builders remain optimistic in early 2017, hopeful of regulatory 

reform under the new Administration and Congress. Their top 

concerns for 2017 include rising mortgage rates, a lack of lots, 

and labor shortages. 

Rising mortgage rates likely led to declining mortgage demand reporting by lenders. The Federal Reserve’s Senior Loan 

Officer Opinion Survey for the three months ending in January showed that overall mortgage demand fell from the prior 

quarter for the first time in a year. In addition, demand for mortgages declined across all loan types for the first time in two 

years. The drop in demand occurred amid the 11th consecutive quarter that the net share of banks reported easing 

lending standards, though the share in the most recent three months was the smallest of the easing streak. 

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'12 '13 '14 '15 '16 '17 FHLMC: 30-Year Fixed-Rate Mortgages Mortgage Applications (5-9-2013 = 100)

After Post-Election Rise In Rates, Refinance Applications Fall as Purchase Holds Steady

Refinance Purchase FRM30 (Right Axis)

Taper Tantrum Presidential Election

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'99 '01 '03 '05 '07 '09 '11 '13 '15 Millions Existing Homes Available for Sale (NSA)

Inventory of Existing Homes for Sale Deteriorates Further

Year-over-Year % Change

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New Home Inventory Has Trended Up, But the Level Remains Historically Low

Year-over-Year % Change

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Multifamily Share of Total Housing Starts (+2 Units, %)

Multifamily Share of New Home Construction Has Trended Down Since June 2015 Peak
© 2017 Fannie Mae. Trademarks of Fannie Mae. 2.15.2017 5 of 5

Our forecasts of mortgage rates, home sales, and home prices are 

little changed from last month. We expect mortgage rates to rise 

only gradually, from an average of 3.8 percent in the fourth quarter 

of 2016 to 4.3 percent during the fourth quarter of 2017. We project 

that total home sales will continue to increase in 2017 but that the 

pace of gains should slow to 2.2 percent from 4.5 percent in 2016. 

Our 2017 home sales outlook hinges on our expectation for a slow 

rise in interest rates and continued improvements in household 

income and household formation. We project total mortgage 

originations to drop about 19 percent this year to $1.57 trillion, as 

the decline in refinance originations outpaces the rise in purchase 

originations. The refinance share of total production should decline 

15 percentage points from 2016 to 33 percent.

Economic & Strategic Research (ESR) Group

February 10, 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: Federal Reserve Board, Bureau of Economic Analysis, The Conference Board, The University of Michigan, Bureau of Labor 

Statistics, National Association of REALTORS®, Census Bureau, Mortgage Bankers Association, Freddie Mac, FHFA, Case-Shiller, CoreLogic.

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

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Mortgage Demand Declines Across All Loan Types, Amid Easing Lending Standards

GSE Eligible Government Non-Jumbo Non-GSE QM-Jumbo Non-QM Jumbo Non-QM Non-Jumbo Subprime

Net Share of Banks Reporting...

...Tightening Standards ...Stronger Demand