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A Soft Start to 2015, but Acceleration Expected 

Some special factors, including inventory drawdown, unusually high snowfall in parts of the country, and the West Coast 

port slowdown, have gotten 2015 off to a slower start than we had anticipated. However, we expect that much of the 

reduced activity will shift into the second quarter, similar to the pattern observed in the first half of 2014. Thus, we 

maintain our view that growth will strengthen in coming quarters and economic growth will pick up moderately this year to 

2.8 percent. Labor market conditions are upbeat, and consumer and business fundamentals remain positive. Downside 

risks to growth are concentrated overseas—for example, slowing growth abroad and geopolitical events—and

domestically due to increased volatility in financial markets as the Federal Reserve modifies its forward guidance to 

prepare the market for the liftoff in the target fed funds rate. 

2014 Was a Slowdown From 2013

Growth slowed from 3.1 percent in 2013 to 2.4 percent in 2014, as fourth quarter economic growth received a downgrade 

in the Bureau of Economic Analysis’ latest estimate of gross domestic product (GDP). A slower pace of inventory 

accumulation and a larger drag from trade than previously reported pulled fourth quarter growth down to 2.2 percent 

annualized from the 2.6 percent in the first estimate. Residential investment was revised slightly lower, adding just 0.1 

percentage points to growth. Incoming data led us to revise lower our forecast for first quarter growth by about one half a 

percentage point to 2.0 percent. We expect that consumer spending will be the primary driver of growth, while residential 

and nonresidential investment and state and local government will contribute modestly to growth. Trade and inventory 

investment are likely to drag on growth during the quarter. 

Consumer Spending Growth Takes a Breather as Saving Rises

We expect real (inflation-adjusted) consumer spending growth to 

come in substantially weaker than the 4.2 percent annualized pace 

in the fourth quarter of 2014. Consumers appeared cautious to 

spend in January even as gasoline prices continued to fall sharply,

boosting real personal income by 0.8 percent. However, real 

consumer spending rose at only a 0.3 percent pace, as consumers 

responded to the surge in income by adding to savings, pushing 

the saving rate up to 5.5 percent—one percentage point higher 

than just two months prior. 

The trend in real disposable income also strengthened, jumping 0.8 

percent from December and 4.2 percent from January 2014, the 

biggest year-over-year gain since the end of 2012. Thus, 

consumers have plenty of support to pick up the pace of their 

spending even as gasoline prices have trended up since the end of 

January 2015. 

The decline in unit auto sales in February, the third consecutive 

monthly drop, suggests another month of weak durable goods 

spending; however, cold temperatures across the country likely 

spurred spending on home heating. 

Consumer credit data show cautious consumers, as the trend in 

credit growth has recently weakened following the strength 

witnessed throughout most of 2014. Consumer credit increased in 

January at the weakest pace since November 2013. Revolving 

credit (largely credit card debt), the volatile segment of consumer 

credit, dropped in January following a sizable gain during the 

holiday seasons, while non-revolving credit (largely student debt 

and auto loans) continued to expand at a fast clip. We remain 

confident in our forecast that consumer spending growth will pick up this year, amid improving labor market conditions, 

stronger income growth, elevated consumer confidence, and easing lending standards for consumer loans.
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Job Growth Plows Ahead 

Consumers have some cushion to support stronger spending 

growth, particularly with the highest saving rate since the end of 

2012. Meanwhile, job growth remains solid. Despite concerns that 

energy job cuts, West Coast port labor disruptions, and inclement 

weather would weigh on February payroll growth, the February 

jobs report showed a pickup in net hiring to 295,000. The threemonth average job gain moderated, but to a still robust 288,000. 

Over the past year, the economy created a remarkable 3.3 million 

jobs, the best since 2000. February gains were broad-based, as 

65.4 percent of the 278 industries measured by the Bureau of 

Labor Statistics witnessed employment growth. However, the 

impact of declining oil prices was evident in energy sector payrolls, 

as mining payrolls posted the biggest job loss since the recession, 

falling 9,300 in February following a drop of 5,800 jobs in the prior 

month. The impact on the mining industry also is evident in other layoffs data during the month, including the 

Challenger Announced Layoffs and the Job Openings and Labor Turnover Survey (JOLTS).

The jobs report revealed some other soft spots. Wage gains were muted, with average hourly earnings edging up just 0.1 

percent from January and 2.0 percent from February 2014, holding within the narrow band observed over the past two 

years. Low inflation and weak productivity growth suggest a breakout in wage gains to the near 4 percent pace witnessed 

prior to the recession is out of reach. Nonfarm productivity fell sharply in the fourth quarter of 2014, posting the first yearover-year decline since the third quarter of 2011.

Nonetheless, through the first two months of the first quarter, the payroll proxy of labor income—average hourly earnings 

multiplied by average hours worked—was up 5.7 percent annualized, providing some support for consumer spending in 

coming months. Flat year-over-year inflation, weighed down by the plunge in energy prices, means that most of the jump 

in labor income is real. Thus, while consumers appeared to have taken a breather at the start of the year, we expect them 

to spend more in coming months.

The wage component in the Employment Cost Index (ECI) showed 

stronger wage gains than observed in the average hourly earnings. 

Data from the JOLTS showed that the quits rate ticked up in 

January, tying its expansion best seen last October and this 

January, indicating high levels of worker confidence in the labor 

market. Historically, the ECI’s wage component correlates well with 

the lagged quarterly series of the quits rate. Thus, the rising trend 

in the quits rate should foreshadow stronger wage gains later this 

year. 

The separate household survey from the monthly jobs report 

showed a two-tenths drop in the unemployment rate to an 

expansion low of 5.5 percent. Unfortunately, the decline was 

largely a result of people leaving the labor force. The labor force participation rate ticked down to 62.8 percent—just onetenth above 

a more than three-decade low. A broader measure of labor underutilization known as the U-6 unemployment rate, which 

includes part-time workers for economic reasons and discouraged workers, fell 0.3 percentage points to 11.0 percent, the 

lowest reading since September 2008. The number of long-term unemployed (27 weeks or longer) also declined sizably in 

February and over the past year. 

Consumer Confidence is a Tailwind Even With February Payback 

Measures of consumer confidence pulled-back in February from expansion-highs in January. The Conference Board 

consumer confidence index fell in February, though it still marked the second highest reading of the recovery. Both the 

present situation and the expectations components fell, but the latter plummeted to the lowest level since last September. 

Similarly, the Reuters/University of Michigan consumer sentiment index pulled back after reaching an 11-year high in 

January. 
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Bad weather and rising gasoline prices may have explained some 

of the rollback in confidence. Despite the rising trend in retail 

gasoline prices since the end of January, gasoline prices still 

remained close to a five-year low at the time of this writing. Given 

good news from the labor market and still elevated confidence 

levels, we are not concerned about this one-month drop. In 

addition, results from Fannie Mae's February 2015 National 

Housing SurveyTM showed a marked improvement in consumers’ 

view regarding the direction of the general economy. The share of 

consumers who think the economy is on the right track rose to a 

record high since the inception of the survey nearly five years ago 

and, for the first time, exceeded the share who believe the 

economy is on the wrong track. 

The Fed Contemplates Its Inflation Forecast

Inflation measures have moved lower over the past several 

months, thanks to the sharp decline in oil prices and a sizable 

increase in the value of the dollar. The personal consumption 

expenditures (PCE) deflator declined 0.5 percent in January, 

leaving year-over-year inflation at just 0.2 percent—the lowest 

since October 2009. Core PCE, which excludes food and energy, 

ticked up 0.1 percent in January and 1.3 percent from a year ago, 

little changed from the year-over-year gain in December. The 

steady year-over-year gain in core prices should help soothe the 

Federal Reserve, as it occurred despite a near record decline in the 

medical care price index (which accounts for nearly 20 percent of 

the Core PCE index), reflecting one-time reductions in government 

reimbursements in Medicare and Medicaid for physicians and 

hospitals. 

In her semiannual testimony to Congress in February, Fed Chair Janet Yellen largely reiterated the Fed’s view that 

inflation will return to target “over the medium term” as the jobs market continues to improve and the transitory impacts of 

declining energy prices fade. In the Q&A session, Yellen noted that the Fed does not have to see higher wages before 

raising rates as wages are lagging, and that monetary policy has to be forward looking. We continue to expect the first 

hike in the target fed funds rate in September amid further broad-based central bank easing across the globe. The labor 

market continues to tighten, and while inflation remains well below the target, reduced slack in the economy as well as a 

rising trend in crude oil prices should give the Fed some assurance that inflation will gradually move up going forward. 

Trends in Trade Likely Muddled for Some Time

The nominal trade deficit narrowed in January, recouping more than half of the widening in December. The real goods 

deficit, which is an input in the calculation of GDP, narrowed slightly, as real exports posted the largest decline since 

December 2013 while real imports showed the biggest drop since June 2014. The labor disruptions at the West Coast 

ports, unresolved until mid-February, resulted in delays in processing cargoes, making it difficult to assess the underlying 

trend.

Manufacturing Takes a Hit

The factory sector appears to have lost momentum at the start of the year. While manufacturing, on net, has benefited 

from declining oil prices, export-oriented manufacturers have been hurt by the rising value of the dollar and weak global 

economies. Manufacturing surveys, both national and regional, pointed to slowing manufacturing expansions. For 

example, the Institute for Supply Management (ISM) manufacturing index fell in February for the fourth consecutive month 

reaching the lowest reading since January 2014, albeit remaining in expansionary territory. However, the export orders 

component fell again in February to the lowest level in more than two years, after slipping into contracting territory in 

January. Some survey respondents referenced that the West Coast port issues hurt their imports and exports. Overall, the 
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outlook for the sector is positive as the global economy growth backdrop is projected to improve going forward while 

domestic demand strengthens.

Low oil prices are another factor weighing on manufacturing and on 

the energy sector in particular, which has already materialized in 

layoffs data. The negative impact also is evident in the industrial 

output data. Manufacturing output, which accounts for about twothirds of industrial production, rose only slightly in January. The 

plunge in oil prices showed up in mining production, which fell for 

the third time in four months, as output related to drilling oil and gas 

wells plummeted. The total capacity utilization rate held steady at 

79.4 percent, weighed down by the drop in the capacity utilization 

rate in mining operations, which fell one percentage point in 

January and three percentage points since June.

Meanwhile, reduced oil prices also weighed on nondurable goods 

orders (which include petroleum refinery shipments) in the factory 

orders report. However, the details on durable goods orders offered some renewed optimism for business investment as 

core durable goods, a leading indicator of business equipment spending, rose in January for the first time in five months. If 

the improvement persists in coming months, it would suggest that business investment may be turning the corner after 

essentially flattening in the fourth quarter of last year.

By contrast, the January construction spending report showed a sharp drop in private nonresidential construction 

spending, the first decline in seven months, which suggests weak growth in nonresidential investment in structures in the 

current quarter.

Soggy Housing at the Start of the Year

Early housing indicators for 2015 flattened at best or weakened, 

supporting our forecast that real residential investment growth will 

weaken in the current quarter from the fourth quarter of last year. 

Single-family starts declined sharply in January, nearly reversing 

the surge in the prior month, and their leading indicator, singlefamily building permits, also fell. Homebuilders were less optimistic 

in February in light of the sector’s lackluster performance. The 

Wells Fargo/National Association of Home Builders Housing 

Market Index edged down for the second consecutive month, 

moving below the average reading witnessed during the second 

half of 2014. The component measuring traffic of prospective 

buyers was particularly downbeat, which makes sense given the 

severe winter weather in much of the country. By contrast, 

multifamily starts and permits increased during the month, 

continuing the theme that the sector has been driving the housing 

recovery, performing in the current expansion at a level 

consistent with activity witnessed prior to the recession. (For 

more information on multifamily market conditions, read the 

March 2015 Multifamily Market Commentary).

New home sales were essentially flat in January from the 

December pace, which was an expansion-high, while existing 

home sales declined sharply during the month. However, 

pending home sales picked up in January, giving hope that the 

roughly 7.0 percent cumulative decline in existing home sales 

since October will stabilize in coming months. 

Even as sales volumes faltered at the outset of the year, new 

and existing home inventory remains tight, supporting home 

price growth. Measures of home prices held up well near the 
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end of 2014, and some measures even showed strengthening gains. For example, the CoreLogic national home price 

index (not seasonally-adjusted) increased 1.1 percent in January, breaking four consecutive months of decline. Year-overyear growth in home prices also accelerated in January after slowing down for 10 consecutive months, rising to 5.7 

percent.

Loan performance continued to improve during the final quarter of 

2014. The Mortgage Bankers Association National Delinquency 

Survey highlighted the link between rapid improvements in the 

labor market and sharply lower early-stage delinquency, which 

stood at the lowest rate since the 1970s. Late-stage delinquency 

continued to march lower, albeit remaining historically high. 

Long-term interest rates moved higher in response to the strength 

in the February jobs report. However, global monetary easing will 

continue to pressure long-term rates. When the Fed hikes rates 

later this year as we expect, the yield curve should flatten as 

shorter-term rates will likely rise faster than longer-term rates.

Mortgage applications have leveled off following the surge at the 

start of the year. The boom in refinancing applications, in 

particular, has lost momentum as mortgage rates have moved off 

their recent lows in late January. Refinancing demand still remains 

at a level higher than at any point last year. After seeing a similar 

spike to start the year, purchase mortgage applications have lost 

over half of the ground gained earlier in the year. Meanwhile, FHA 

continued to outperform conventional demand, supported by the 

recent reduction in FHA mortgage insurance premiums (MIPs). 

Our forecast for housing indicators is little changed from the prior 

forecast. We maintain our belief that once upbeat hiring translates 

into stronger income growth, which we expect to occur, a stronger 

housing recovery will follow. Housing also should receive an 

additional tailwind in the mortgage market. The Fannie Mae 

Mortgage Lender Sentiment SurveyTM showed that lenders 

believed that lending standards have eased, and the February 

Fannie Mae National Housing SurveyTM showed that a record high 

percentage of consumers believed that it is easy to get a mortgage. 

We expect a broad-based housing recovery, with housing starts and 

home sales rising by approximately 15 and 6 percent, respectively. 

We project that total single-family mortgage originations will rise 

nearly 5 percent in 2015 to $1.24 trillion before declining modestly in 

2016. The refinance share should fall from 45 percent in 2015 to 35 

percent in 2016. Our forecast points to a slight increase in total 

single-family mortgage debt outstanding in 2015 before a gradual 

acceleration in 2016.

March 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; Federal Reserve Board; Challenger, Gray & Christmas, Inc.; Bureau of Labor Statistics; Fannie 

Mae National Housing SurveyTM, February 2015; Bureau of the Census; National Association of REALTORS®; Mortgage Bankers Association

Opinions, analyses, estimates, forecasts and other views of Fannie Mae's Economic and 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 
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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

Orawin T. Velz, Director 

Brian Hughes-Cromwick, Economist 

Mark Palim, VP

Richard Koss, Director

Hamilton Fout, Director

Frank Shaw, Business Analyst