Economic Developments – June 2017

© 2017 Fannie Mae. Trademarks of Fannie Mae. 4.14.2017 1 of 5

Monetary Policy Tightens; Fiscal Policy Languishes; 

Yield Curve Flattens

This month marks the eighth anniversary of the U.S. economic 

expansion, the third-longest of the post-World War II era. We expect 

the expansion to continue, with GDP growth at 2.0 percent for all of 

2017. Moderate growth should continue next year, but the potential for 

fiscal stimulus remains a wild card for the 2018 outlook. The odds that 

Congress will enact major pieces of legislation, including health care,

tax reforms, and infrastructure investment, by the end of this year 

have diminished, and thus meaningful impacts from fiscal stimulus 

appear to be unlikely before 2018. The economy also faces another 

fiscal policy uncertainty later this year, perhaps in November, as 

Congress will have to raise the debt ceiling to avoid a government 

shutdown and a technical default. The Congressional Budget Office 

estimates that tax revenue for the first eight months of Fiscal Year 

2017 missed projections by as much as $70 billion. If budget deficits 

deteriorate significantly in coming months, the Treasury could run out 

of money sooner than November. Meanwhile, the Fed continues to 

normalize monetary policy, raising the fed funds rate at the June 13-

14 Federal Open Market Committee (FOMC) meeting by 25 basis 

points. In the Q&A session following her press conference, Chair 

Yellen said balance sheet normalization could occur “relatively soon.”

Following the FOMC meeting, long-term yields declined and the yield 

curve flattened further. The yield on 10-year Treasuries reached a 

three-year high of 2.63 percent on March 13, two days before the Fed 

raised the fed funds rate. The yield has trended down since then, 

reaching 2.13 percent on June 14. Mortgage rates have moved lower 

in tandem, with the average rate on 30-year fixed mortgages declining 

to below 4.0 percent during late May and early June. The spread 

between 10- and 2-year Treasury notes narrowed from a post-election 

high of 135.5 basis points in late December to below 80 basis points 

for the first time since early September.

Global uncertainty has mounted as the U.K. election resulted in a 

hung Parliament in which the Conservative party came in first but 

failed to achieve an outright majority. Formal Brexit talks, which were 

due to start this month, are likely to be delayed, and the future of the 

British exit from the European Union in March 2019 is more uncertain. 

However, Euro Zone economic activity, including industrial production,

has recently picked up, boosted by strength in Germany. At its 

meeting earlier this month, the European Central Bank raised its 

growth forecast and changed its forward guidance, dropping the 

easing bias on interest rates.

A Meaningful Growth Rebound Is in the Cards, But Is Likely Unsustainable

First quarter economic growth was revised higher by 0.5 percentage points to 1.2 percent annualized in the second 

estimate of gross domestic product (GDP). The upward revision largely reflected stronger consumer spending and 

nonresidential investment growth than initially reported. The second print of GDP provided the first glimpse of corporate 

profits, which fell 1.9 percent (not annualized) in the first quarter—the first drop in three quarters. Profits of domestic

financial and nonfinancial corporations fell, offsetting a rise in profits from the rest of the world.

36

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 Oct-1945 Oct-1949

 May-1954

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 Mar-1991

 Nov-2001

 Jun-2009

Length of Economic Expansion

(in Months)

Cycle Start

Current Expansion is the Third Longest 

Post World War II

The median duration is 

45 months since WWII

0%

1%

2%

3%

4%

5%

6%

7%

'06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17

Mortgage Rates and 10-Year Treasury Yields 

Decline to 2017 Lows

10-Year Treasury Note Yield

30-Year Fixed Mortgage Rate

0.7%

0.8%

0.9%

1.0%

1.1%

1.2%

1.3%

1.4%

Jan-16

Feb-16

Mar-16

Apr-16

May-16

Jun-16

Jul-16

Aug-16Sep-16

Oct-16

Nov-16Dec-16

Jan-17

Feb-17

Mar-17

Apr-17

May-17

Jun-17

Spread between 10- and 2-Year 

Treasury Yields

10-Year to 2-Year Treasury Spread 

Has Narrowed in 2017
© 2017 Fannie Mae. Trademarks of Fannie Mae. 4.14.2017 2 of 5

Incoming data support our prior forecast that economic growth will 

rebound to 2.9 percent annualized in the second quarter. Real 

personal income and real consumer spending both grew 0.2 percent 

in April. Furthermore, an upward revision to first quarter consumer 

spending pushed March’s gain higher to a strong 0.5 percent. The 

trend in consumer spending last quarter was consistent with our 

belief that unseasonably warm weather, which reduced demand for 

utilities, and delays in tax refunds temporarily restrained spending 

growth. By March, however, tax refunds appeared to have caught up 

with year-to-date disbursements of recent years, providing a boost for 

consumer spending moving into the second quarter. However, auto 

sales fell in May for the fourth time in five months, supporting our 

view that sales likely peaked last year, and retail sales dropped in 

May, though prior months’ data were revised higher. All factors 

considered, we expect consumer spending growth to rebound to 3.1 

percent annualized this quarter from 0.6 percent in the prior quarter. However, this quarter’s strong rebound is unlikely to 

be sustainable, and consumer spending growth should moderate during the second half of the year, weighed down by 

durable goods spending.

For the current quarter, an inventory investment swing should also support growth. After subtracting more than one 

percentage point from growth during the first quarter, we expect inventory investment to contribute to growth as 

businesses increase production to build stockpiles to more sustainable levels. Nonresidential and residential investment 

growth will likely slow from the stellar performance in the prior quarter. Government spending is expected to add to 

growth, boosted by a rise in defense spending, but net exports should drag on growth.

Consumer Fundamentals Are Mixed

The second estimate of GDP showed a sizable downward revision in 

wage and salary income for the fourth quarter. Real disposable

personal income increased 1.7 percent annualized in the first quarter, 

but the 2.0 percent increase for the fourth quarter was revised 

sharply lower to show a 0.3 percent drop. The personal saving rate 

for the first quarter rose to 5.2 percent, up from 4.9 percent in the 

prior quarter, which received a 0.6 percentage point downgrade.

The May jobs report also suggested that hiring and wage growth 

have lost some steam. Nonfarm payrolls rose 138,000 on the heels 

of downward revisions of 66,000 jobs for the prior two months. The 

three-month moving average gain has steadily declined from 201,000 

in February to 121,000 in May. Retail trade was hit particularly hard, 

losing over 80,000 jobs between February and May—the first time 

the sector experienced such losses since 2009. Meanwhile, wages 

have shown no signs of heating up amid reduced slack in the labor 

market, with average hourly earnings posting an annual gain of just 

2.5 percent for the second straight month—the weakest gain since 

August. 

While a separate household survey showed that the unemployment 

rate ticked down to 4.3 percent, a 16-year low, the decline was 

caused by a large decrease in the labor force that outpaced a decline 

in household employment. The labor force participation rate fell 0.2 

percentage points to 62.7 percent, the lowest reading this year.

One silver lining is the ongoing decline in the broadest measure of 

labor underutilization, the U-6 unemployment rate, which includes 

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Light Vehicle Retail Sales 

[Imported+Domestic] (SAAR, Mil. Units)

Drop in Car Sales Drives Decline in Total 

Vehicle Sales

Car Sales

Light Truck Sales

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Change in Retail Trade Employment

(SA, Month-over-Month, Thous) 

The Retail Trade Sector Takes A Big Hit

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Persons Not in Labor Force: Want a Job, 

Not Looking: Discouraged (NSA, Thous)

The Number of Discouraged Workers Declines 

to Pre-Recession Levels
© 2017 Fannie Mae. Trademarks of Fannie Mae. 4.14.2017 3 of 5

discouraged workers and part-time workers who prefer full-time jobs. 

The rate fell two ticks to 8.4 percent, the lowest level since November 

2007. Notably, the number of discouraged workers fell to just 

355,000, the lowest reading since November 2007. The number of 

part-time workers who want full-time jobs has declined steadily since 

August 2016, but remains well above pre-recession levels. 

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

released with a one-month lag to the jobs report, suggests a shortage 

of skilled labor may have partly restrained hiring. Since February, the 

job openings rate has exceeded the hires rate. In April, the jobs 

openings rate rose two-tenths to 4.0 percent, tying an all-time high, 

while the hires rate fell one-tenth to 3.5 percent, marking a one-year 

low. The 0.5 percentage point gap between the job openings and 

hires rates is the largest since the survey’s inception in 2000. The 

growing gap between job openings and hires rates suggests firms 

are having a difficult time finding qualified workers to fill open 

positions.

While the trends in hiring and wages disappointed, data from the 

Financial Accounts of the United States were upbeat, as household 

(including nonprofit organizations) net worth—assets minus 

liabilities—grew $2.35 trillion to $94.8 billion during the first quarter, 

boosted by gains from both stocks and home equity. Net worth as a 

share of disposable personal income rose to a record high. While 

research suggests that the propensity to consume from an increase 

in wealth is smaller than from a similar increase in income, improving 

household balance sheets are a positive for consumers. 

 

Monetary Policy Uncertainty Beyond June Has 

Increased

Although hiring has slowed markedly, the labor market appears to be 

at or near full employment. At the same time, inflation pressure has 

cooled. After exceeding the Fed’s 2.0 percent target in February, the 

annual rise in the Fed’s favored measure of inflation—the personal 

consumption expenditures (PCE) deflator—moderated for the second 

consecutive month in April, dropping to 1.7 percent. Since the March

FOMC meeting, the unemployment rate has fallen 0.4 percentage 

points while the annual growth in PCE moved 0.2 percentage points 

farther away from the target, providing mixed signals for the Fed. 

Another measure of inflation, the Consumer Price Index, moderated 

further in May, with the annual inflation slowing to 1.9 percent—the 

smallest gain since November. The annual increase in core prices 

also moderated to 1.7 percent, the slowest pace in two years. 

The statement following the June meeting noted that annual inflation 

has declined recently to below 2.0 percent, and the committee 

expects it to remain below the target in the near term. The statement 

offered new detail on how the Fed will taper reinvestment of principal 

payments from its securities holdings, although it provided no 

specifics on when the process balance sheet normalization would 

begin, other than "this year." Our forecast calls for another rate hike 

1.5%

2.0%

2.5%

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3.5%

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4.5%

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17

JOLTS Rate

(Level as a %of Total Employment)

The Gap Between Job Openings and Hires 

Rates Continues to Widen

Job Openings

Hires

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

'12 '13 '14 '15 '16 '17

Personal Consumption Expenditures: 

Chain Price Index (Y-o-Y % Change)

Fed’s Favored Inflation Measure Falls Further 

Below the Two-Percent Target

PCE: Price Index

PCE: Less Food and Energy

Federal Reserve Target

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Households & Nonprofit Org: Net Worth 

as a % of Disposable Personal Income 

Household Net Worth as a Share of Personal 

Income Rises to a Record High

Dot-Com Bubble

Housing Bubble

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Households and Nonprofit 

Organizations: Net Worth (NSA, Bil.$)

Household Net Worth Rises, Boosted by 

Increases in Housing and Stock Wealth

Other

Real Estate

Equities
© 2017 Fannie Mae. Trademarks of Fannie Mae. 4.14.2017 4 of 5

in September and a start of reinvestment tapering in December. 

However, the slowdown in hiring and muted inflation and wage 

pressures could delay the Fed’s intended path of monetary policy 

normalization. 

For Housing, the Song Remains the Same

The narrative for the housing market has not changed over the past 

year: labor shortage continues to restrain homebuilding, and tight 

inventory constrains sales and boosts home prices. Year to date

through April, single-family starts were up 7.0 percent, significantly 

greater than a 1.9 percent gain for multifamily starts. The small gain in 

year-to-date multifamily starts reflects the maturity of that sector’s

expansion, which we believe peaked last year. Single-family starts 

remain near levels witnessed in a typical recession prior to the last 

downturn. Labor shortage remains a lingering issue for the residential 

construction industry, according to various private surveys of home 

builders. The JOLTS survey corroborates those results. The April 

survey showed that the job openings rate for the construction industry 

jumped to the highest reading since September, while the quits rate—

a gauge of workers’ confidence—remained at an expansion high for 

the third consecutive month.

One piece of encouraging news is that builders appear to be 

responding to demand for smaller homes. The share of completed 

new single-family homes with less than 2,400 square feet of floor area 

rose in 2016 for the first time since 2009. If this trend continues, it 

could help alleviate the critically tight supply in the lower end of the 

market.

After rising to expansion bests in March, both new and existing home 

sales pulled back in April. Unusually warm winter weather, combined 

with declining mortgage rates in January and February, likely pulled 

forward some sales into the first quarter.

Tight inventory in the existing home market continues to constrain 

sales. While the number of homes for sale saw a seasonal rise in April, 

it remains significantly below last year’s level, continuing annual 

declines that extend back nearly two years. The number of days on the 

market fell to a fresh record low, and the months’ supply remained 

historically tight at 4.2 months, versus 4.6 months last April. 

Lean inventory is a boon for home prices. The CoreLogic House Price 

Index, the measure used by the Fed to estimate the value of real 

estate assets, posted a 6.9 percent annual gain in April—the strongest 

rise since May 2014. Strong home price appreciation during the first 

quarter helped boost homeowners’ equity, which has now surpassed 

its previous peak recorded 11 years ago, according to the Financial 

Accounts of the United States. On the debt side, single-family (1-4 unit 

properties) mortgage debt outstanding rose 1.9 percent annualized, 

the weakest quarterly gain in a year.

While robust home price gains have helped spur increases in 

household wealth, they have restrained home purchase affordability. 

The Fannie Mae National Housing Survey® for May suggests that high 

and rising home prices continue to favor sellers. The net share of 

Americans who reported that now is a good time to buy a home, which 

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Housing Starts (SAAR, Thous.Units)

Single-family Starts Remain at Historically 

Depressed Levels

Single-Family

Multifamily

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70%

'99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16

New Single-Family Homes Completed 

with <2,400 sq ft of Floor Area (%)

Share of New Homes with Less than 2,400 

Square Feet of Floor Area Increases in 2016

30%

35%

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45%

50%

55%

60%

65%

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

NSA, $Billions

Strong Home Price Appreciation Helps Boost 

Home Equity

Homeowners' Equity in Real Estate

Owners' Equity as a % of Real Estate (Right Axis)

-100%

-80%

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-20%

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HPSI: Percent of Respondents Who Say 

it is a Good Time to Buy/Sell

Consumers Believe Housing Is a 

Seller's Market 

Good Time to Buy

Good Time to Sell
© 2017 Fannie Mae. Trademarks of Fannie Mae. 4.14.2017 5 of 5

has moved in a tight range over time, dropped to a record low. On the other hand, the net share who reported that now is 

a good time to sell a home has trended up substantially since 2012 following a trough in home prices. The share rose to a 

record high in May, surpassing the good time to buy net share for only the second time since the survey’s inception in 

2011. 

The near-term outlook for existing home sales remains bearish, as pending home sales fell in April for the second 

consecutive month. Mortgage rates should remain supportive for home sales, as we expect them to stay near current 

levels, averaging 4.0 percent in the fourth quarter. Our forecast for home sales and originations are little changed. We 

expect total home sales to rise 3.2 percent this year. Total single-family mortgage originations are projected to drop about 

21 percent this year to $1.62 trillion, with a large drop in refinance originations outweighing a modest rise in purchase 

originations. We expect the refinance share to move lower, from 48 percent in 2016 to 34 percent in 2017.

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

Economic & Strategic Research (ESR) Group

June 14, 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: National Bureau of Economic Research, Federal Reserve Board, Freddie Mac, Bloomberg, AutoData Inc., Bureau of Labor 

Statistics, Bureau of Economic Analysis, Census Bureau, Fannie Mae.

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