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Economy Remains on a Firm Footing Amid Global Risks

After a marked slowdown in the third quarter, economic growth is poised to pick up in the current quarter as expected. Our

outlook for the second half of the year is little changed from our prior forecast, and thus our view for all of 2015 has not 

changed over the past month. We expect the economy to grow 2.2 percent this year and expand at a 2.4 percent pace in 

2016, supported by solid consumer spending growth and a pickup in construction activity and continued rising home sales

and prices. Headwinds for manufacturing and exports stemming from the strength in the dollar and weak global growth 

are unlikely to dissipate in the near term. However, the drag on manufacturing from the inventory cycle and declining oil 

prices should fade next year.

The sharp slowdown in economic growth in the advance estimate of third quarter Gross Domestic Product (GDP) to 1.5 

percent annualized from 3.9 percent in the second quarter was neither surprising nor alarming. The sole negative 

component of economic growth was an expected slowdown in the pace of inventory building from unsustainable levels. 

Real inventory investment, which surged to about $113 billion in each of the first two quarters of the year—the largest 

back-to-back inventory builds on record—slowed sharply to a $56.8 billion pace in the third quarter. While the marked 

deceleration was a negative for the third quarter, subtracting 1.4 percentage points from GDP growth, it sets the stage for 

faster growth in coming quarters. Growth in real consumer spending and in nonresidential and residential fixed investment 

also slowed from the second quarter, but only moderately. As a result, final sales to private domestic purchasers—a 

gauge of underlying domestic demand—moderated from the second quarter, but still maintained a solid 3.2 percent pace, 

suggesting that the economy has ample momentum heading into the final quarter of the year.

Net exports were largely neutral to growth in the third quarter, thanks to the substantial narrowing in the trade deficit in 

September as exports rose during the month and imports fell after a surge in the prior month. However, we expect imports 

to bounce back given positive consumer fundamentals in the U.S. domestic economy and continued appreciation of the

U.S. dollar.

While real consumer spending growth registered a solid 3.2 percent pace during the third quarter, the monthly data 

showed that it lost momentum heading into the fourth quarter, increasing just 0.2 percent in September following a 0.4 

percent rise in August. However, auto sales strengthened further in October to 18.24 annualized units, surpassing 18 

million units for two months in a row for the first time since 2002, and are poised to set an annual record high.

In addition, the October jobs report showed strong employment and wage gains, which will help support consumers in the 

current quarter. Nonfarm payrolls posted a 271,000 gain, the biggest increase this year. Upward revisions to previously 

reported data brought the average gain over the last three months to a solid 187,000, erasing concerns that hiring slowed 

sharply in recent months. Gains were broad-based, led by private services. Manufacturing payrolls were flat, and mining 

payrolls extended losses to 10 consecutive months. The real estate industry received some good news, as construction 

payrolls posted the biggest gain since February; however, the gain for the residential segment remained relatively modest 

compared with the increases seen earlier this year.
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The headline unemployment rate edged down to 5.0 percent for the right reasons, as a large increase in household 

employment outweighed the increase in the number of people joining the labor force. More importantly, the broader U-6 

unemployment rate, which includes discouraged workers and part-time workers who prefer full-time jobs, ticked down to 

9.8 percent, the lowest level since May 2008. Another piece of good news was the 0.4 percent jump in average hourly 

earnings after a flat reading in the prior month. The annual gain accelerated to 2.5 percent, breaking out of the narrow 

band witnessed during most of the expansion to reach the fastest rate since July 2009. The outsized gain in October 

average hourly earnings likely reflects some payback for weakness in September, however.

Recent credit data indicate that consumers are becoming more 

comfortable using their credit cards. Total consumer credit 

surged $28.9 billion in September, among the largest monthly 

gains on record, mainly because of a jump in non-revolving 

credit (mostly auto and student loans), which has increased 

every month since August 2011 and accounts for nearly three 

quarters of total consumer credit. However, revolving credit also 

posted a healthy monthly gain in September, the largest increase 

since April. The year-over-year gains in revolving credit have 

accelerated in recent months, with the September increase 

marking an expansion best. The October Fed’s Senior Loan 

Officer Survey showed banks loosened lending standards on 

consumer loans over the past three months amid rising demand, 

which is a positive for the near-term outlook for consumer 

spending.

On the business spending front, core capital goods orders (nondefense capital goods orders excluding aircraft)—a leading 

indicator of business equipment spending—declined in September for a second consecutive month, suggesting that 

business equipment spending should moderate substantially from the strong pickup in the third quarter. Low energy prices

will likely lead to another decline in nonresidential investment in structures in the current quarter.

For the current quarter, we expect consumer spending to be the biggest driver of growth for the rest of this year and 

moving into 2016. Net exports should turn from neutral to a drag on growth. However, residential investment growth is 

expected to strengthen modestly from the 6.1 percent annualized pace in the third quarter. Meanwhile, we revised higher 

our government spending growth forecast due to the Bipartisan Budget Act of 2015. Most importantly, we expect inventory 

investment to be neutral to growth after subtracting substantially from growth in the third quarter. On net, we believe 

economic growth will accelerate about one percentage point to 2.6 percent annualized in the current quarter.

In her testimony to the House Financial Services Committee last month, Fed Chair Janet Yellen noted that a December 

rate hike is a “live possibility” based on an expectation that inflation will move toward the 2.0 percent target amid an 

improving labor market and fading transitory factors that have weighed on inflation. The October jobs report served to fuel 

market expectations that a liftoff this year is very likely. According to fed funds futures, the odds of a December rate 

increase rose to slightly more than 70 percent from nearly 60 percent before the jobs report. Barring a dismal November 

jobs report and international turmoil over the next month, we expect the Fed to raise the fed funds rate in December,

which will shift the monetary policy debate to the question of how fast the Fed will tighten.
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Housing Roundup

Recent housing and mortgage news has been mixed. After two 

monthly drops, housing starts rebounded in September, 

exceeding 1.2 million units for the second time since October 

2007. Multifamily starts drove the gain, while single-family starts

were little changed during the month. (For more information on 

multifamily market conditions, read the November 2015 

Multifamily Market Commentary.) However, permits fell in 

September for the second time over the last three months. 

Meanwhile, following strong gains in each of the prior two months, 

new home sales plummeted in September to the weakest pace 

since November 2014, making the average for the third quarter 

only slightly better than the second quarter. While the inventory of 

new homes for sale has posted year-over-year increases since 

January 2013 and jumped to a five-year high in September, a 

tight supply of more affordable homes likely contributed to the soft

sales trend for the spring and summer months. Despite lackluster 

single-family starts and home sales, home builders remain optimistic, with a gauge of their confidence jumping in October

to a fresh expansion high. 

Existing home sales rebounded in September, nearly recouping 

the large drop in August and returning to July’s expansion best. 

For the third quarter as a whole, total existing home sales posted a 

double-digit annualized gain, but moderated from the robust pace 

of the second quarter. Forward-looking indicators suggest some 

near-term setbacks, however. Pending home sales pulled back 

during September for a second consecutive month, and average 

weekly purchase mortgage applications for all of October fell for 

the third time over the last four months.

Inventory in the existing home market remains lean. The number of 

homes for sale posted an annual drop in September for the fourth 

consecutive month. The tight supply and the declining distressed

sales share over the past year continued to put upward pressure 

on home prices. The August Case-Shiller national index showed 

the biggest year-over-year home price gain in about a year, while 

the September CoreLogic index posted the strongest annual

increase in more than a year.

Over the past several years, the housing market has been 

characterized by sustained declines in the homeownership rate 

and sluggish household growth. The Housing Vacancy Survey 

offered some tentative signs that both of these trends may be 

turning the corner in the third quarter. Over the past year, the 

number of households increased 1.4 million, boosted by a strong 

gain in renters and the first rise in owner households since the 

second quarter of 2014. Meanwhile, the homeownership rate (not 

seasonally adjusted) rose 0.3 percentage points to 63.7 percent, 

the first quarterly increase in two years. However, the rate 

remained 0.7 percentage points below the level of the third quarter 

of 2014.

Treasury yields rose sharply following the upbeat October jobs report, reflecting the increased odds of a December rate 

hike, with yields on 2‐ and 10‐year Treasury Notes jumping 15 and 18 basis points to 0.90 percent and 2.34 percent, 

respectively. Given our expectations that the Fed will tighten monetary policy at a measured pace during this cycle amid 

monetary easing abroad, including a cut in the deposit rate by the European Central Bank this December, fixed mortgage 

rates should gradually trend up to just slightly more than 4.0 percent by the end of 2016, the same as in our prior forecast. 

Our forecast for housing activity is also little changed. Year-to-date housing indicators show a marked improvement from 

the year-ago period, and we expect improvement in single-family starts and home sales to continue in 2016, supported by 
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continued low mortgage rates and the improving income trend. In 

addition, lending standards, especially for government-sponsored 

enterprise (GSE) mortgages, eased further over the past three

months, according to the October Federal Reserve Senior Loan 

Officers Survey. These positive fundamentals should help some 

recently formed renter households move into homeownership, 

stabilizing the downtrend in the homeownership rate. For mortgage 

production this year, we project that total mortgage originations will 

rise approximately 32 percent to $1.71 trillion, with a refinance 

share of 46 percent. Expected improving housing starts, home 

sales, and home prices in 2016 should drive purchase mortgage 

originations higher. However, rising mortgage rates will 

significantly curtail refinance activity. We project that the decline in 

refinance originations will outweigh the increase in purchase 

originations, resulting in an 18 percent drop in total mortgage 

origination in 2016 to $1.41 trillion, and a 14 percentage point drop 

in the refinance share to 32 percent.

November 10, 2015

Economic & Strategic Research (ESR) Group

For a snapshot of macroeconomic and housing data between the monthly forecasts, please read ESR’s Economic and Housing Weekly 

Notes.

Sources for chart data: Bureau of Economic Analysis, Bureau of Labor Statistics, The Federal Reserve Board, the National Association of 

REALTORS®, Census Bureau, Fannie Mae ESR forecast

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

Orawin T. Velz, Director Frank Shaw, Analyst

Hamilton Fout, Director