Economic Developments – March 2019

© 2019 Fannie Mae. Trademarks of Fannie Mae. 03.11.2019 1 of 5

Economy Progresses But Is Clearly Slowing

U.S. economic growth is expected to slow to 2.2 percent over the full year of 2019 from 3.1 percent in 2018. Our forecast 

of deceleration of economic growth over 2019 reflects a number of factors, including the fading boost from the Tax Cuts 

and Jobs Act. Business investment and consumer spending are also expected to slow.

The risks to our outlook remain to the downside, but the impact of recent progress addressing these downside risks could 

shift the balance closer to neutral. The key downside risks to our forecast include slower foreign economic growth and 

trade uncertainty between the U.S. and China. However, consequent policy responses by some of the world’s major 

foreign monetary and fiscal authorities, as well as evidence of progress on U.S.-China trade deliberations, could limit the 

potential damage. We assume that the federal government debt ceiling will ultimately be raised and in a manner that does 

not permanently erode economic activity. In addition to the continued easing of financial conditions and a patient Fed, 

modest improvements in labor productivity represent a key upside potential to U.S. economic growth.

We continue to expect home sales to stabilize in 2019, flat from 2018 levels and below the expansion peak in 2017. The 

still-solid labor market, mildly discounted by the surprisingly slow pace of job growth in February, and strong rate of 

household formation, driven by owner-occupied households, support housing demand. Slowing house price appreciation 

and falling mortgage rates have improved housing affordability in recent months. Purchase mortgage originations are 

expected to expand slightly in 2019 amid expectations of stable home sales and continued house price growth. 

Meanwhile, refinance originations are expected to shrink this year from their 2018 level as rates hold steady over the year.

Business Spending Supports Fourth Quarter Economic Growth 

The first estimate of fourth quarter real gross domestic product (GDP) growth came in at a 2.6 percent annualized rate, 

slower than the 3.4 percent annualized rate of growth in the third 

quarter. Consumer and government spending as well as private 

inventory accumulation provided a smaller contribution to overall 

economic growth in the fourth quarter than in the third quarter. 

Residential investment and the widening trade deficit subtracted 

from economic growth. Business spending growth was a bright 

spot, providing a stronger contribution to economic growth in the 

fourth quarter relative to the third quarter.

Economic growth in the first quarter of 2019 is expected to slow 

further. Risk aversion will likely restrain consumer spending in 

the first quarter, slower foreign economic growth is expected to 

weigh on the U.S. trade balance, and business spending should

decelerate following the surprising jump in the fourth quarter. 

However, government spending is projected to accelerate in the 

first quarter following a sharp slowdown in the fourth quarter. 

Residential investment is expected to remain weak.

 

Consumers Grew Cautious as Financial 

Wealth Contracted

Personal consumption expenditures (PCE) grew by 2.8 percent 

annualized in the fourth quarter, slowing from 3.5 percent in the 

prior quarter due in part to the largest monthly decline in real 

consumer spending in over nine years in December. Meanwhile,

households’ financial assets declined in the fourth quarter for the 

first time since 2015, as the Standard and Poor’s 500 Composite 

Index (S&P 500) fell in every month of the quarter. In response 

to lost financial wealth consumers likely grew more cautious. 

The growth in personal income combined with a drop in 

-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

Consumer Spending and Business Investment Help to Propel Growth

Q3 2018

Q4 2018

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0%

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'06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 Households & Nonprofit Organizations (NSA, $, % Change) 

Household Assets Post Largest Decline of the Expansion

Assets Nonfinancial Assets

Financial Assets
© 2019 Fannie Mae. Trademarks of Fannie Mae. 03.11.2019 2 of 5

spending over December contributed to a 1.5 percentage point 

increase in the savings rate over the month of December to 7.6 

percent, the highest level since January 2016.

 

Consumer spending growth should remain modest in the nearterm. Core retail sales, which excludes autos, gas, and building 

materials, rose by 1.1 percent in January following a 

downwardly revised 2.3 percent drop in December. Personal 

income edged down in January, the first decline since 

November 2015. Although wages and salaries grew, the subsidy 

payments to farmers that boosted growth in December waned in 

January and personal interest and dividend income on asset 

holdings fell. Both the Conference Board’s Consumer 

Confidence Index and the University of Michigan’s Consumer 

Sentiment Index improved significantly in February, following the 

end of the government shutdown and an improvement in 

financial conditions. The U.S. Department of Treasury announced on February 28 that the average refund at that point in 

the filing season was up 1.3 percent relative to the same time in 2018.

Business Investment and Productivity Growth Improved

Nonresidential investment growth accelerated to 6.2 percent annualized in the fourth quarter from 2.5 percent in the third 

quarter. Business spending growth was boosted by a 13.1 percent surge in intellectual property products, but we expect 

some giveback of that momentum this quarter. Equipment spending growth also quickened in the fourth quarter, but nonresidential structures spending declined for the second consecutive 

quarter.

Business spending growth is expected to slow in the first quarter 

of 2019. The second straight month of declines in new orders of 

nondefense capital goods, excluding aircraft, in December will 

restrain business spending at the start of 2019. A continued 

upward trajectory in nonresidential construction employment, 

builders and specialty contractors, suggests that structures 

spending could stabilize in the first quarter. The decline in 

employment over February likely reflected severe winter 

weather during the month and is expected to prove temporary.

Productivity rose by 1.8 percent annually in the fourth quarter, 

breaking out of the 1.0 percent to 1.4 percent range that has 

prevailed since the end of 2016. Faster productivity presents upward 

potential for broader economic growth. 

 

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Upward Trend in Nonresidential Construction Employment Is Good for Business Investment

Nonresidential Construction Employment (SA, Mil., Left Axis) Real Business Fixed Investment: Structures (SAAR, Bil., $2012)

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'15 '16 '17 '18 Total Nonfarm Productivity (SA, YoY %Change) 

Productivity Growth Reaches the Fastest Pace Since the Start of 2015

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3% Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Nondefense Capital Goods ex Aircraft (SA, Month-over-Month % Change)

Core Capital Goods Orders Decline for Second Consecutive Month

New Orders Shipments

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Personal Saving Rate (SA, %)

Saving Rate Reaches Highest Level in Nearly Three Years
© 2019 Fannie Mae. Trademarks of Fannie Mae. 03.11.2019 3 of 5

Trade Deficit Widens to a 10-Year High

The U.S. trade deficit widened over the fourth quarter of 2018, subtracting 0.2 percentage points from GDP growth. 

Exports rose by 1.6 percent annualized over the fourth quarter, but import growth rose by 2.7 percent. The U.S. trade 

deficit hit a 10-year high of $59.8 billion in December, driven by a surge in imports while exports posted the largest 

monthly decline in nearly three years. 

The trade deficit is expected to widen this quarter. We expect exports to decline further as slower economic growth 

abroad limits foreign demand for U.S. goods and services. Additionally, the dovish shift by the European Central Bank 

(ECB) could result in a stronger dollar relative to the euro, making U.S. exports more expensive to our major trading 

partners in Europe. However, if the ECB policy change strengthens aggregate demand across the euro area, then U.S. 

exports could ultimately benefit.

Government Spending and Private Inventories Contribute to Growth

Government spending slowed in the fourth quarter, partly reflecting a 5.6 percent decline in nondefense federal 

expenditures, the largest drop since the fourth quarter of 2013, when the government also experienced a shutdown. Much 

of this spending is expected to be recouped over 2019, and the federal government is expected to ultimately raise the 

debt limit that was reinstated on March 2. However, any flare-up in political tension associated with the process of raising 

the debt ceiling could weigh on business and consumer sentiment. Nevertheless, the boost to government spending from 

the 2018 Budget Reconciliation Act is expected to fade by the end of 2019, limiting future spending growth. Meanwhile, 

private inventories edged up in the fourth quarter, contributing only 0.1 percentage points to growth, the smallest positive 

contribution since 2002. We expect inventory investment to slow in the first quarter, dragging modestly on growth.

Despite a Lower Unemployment Rate, Upside Inflationary Risks Appear Limited

The February jobs report indicated that the economy added 20,000 jobs, a sharp decline from the upwardly revised 

311,000 jobs added in January and the slowest pace of job growth since September 2017. The less volatile three-month 

moving average declined by 59,000 to 186,000. However, other metrics from the report suggest that the labor market 

remains solid. The labor force participation rate held steady at the highest rate since September 2013. The unemployment 

rate fell two-tenths to 3.8 percent, suggesting that the effects from the government shutdown on the unemployment rate 

have been reversed. Average hourly earnings growth rose 3.4 percent year over year, an expansion best.

Despite the uptick in wage growth to a near-decade high, 

inflationary pressures remain limited. The PCE deflator, the 

Federal Reserve’s preferred measure of inflation, slowed to 1.7 

percent annually in December, while core PCE growth, which 

excludes more volatile food and energy prices, held steady in 

December at 1.9 percent. In February, the Consumer Price 

Index (CPI) showed that annual headline inflation had 

decelerated for the fourth consecutive month to 1.5 percent. 

Core CPI grew 2.1 percent annually and has ranged between 

2.1 percent and 2.4 percent since March 2018. The University of 

Michigan’s measure of expected inflation one year from now has 

fallen to 2.6 percent, the lowest level since November 2017, a 

month before the Tax Cuts and Jobs Act was signed into law. In 

addition, the announcement by the Administration of an 

indefinite delay of the tariff hike on $200 billion in imports from 

China will also constrain inflation.

Downside Risks Lessen

Over the month of February, many of the downside risks to our forecast have moderated. While the trade conflict between 

the U.S. and China has not been resolved, at the end of February the Administration announced a delay of the tariff hike 

on $200 billion in Chinese exports to the U.S. that was slated to begin on March 2. The Administration cited “substantial 

progress” in trade talks. The U.S. ambassador to China noted that while a trade deal is not imminent, the two sides are 

“closer than they have been for a long time.” On March 10, the Wall Street Journal reported that China has agreed to not

devalue its currency to help its export sector.

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Average Hourly Earnings Hit Expansion High With No Sign of Inflationary Pressure Core CPI (YoY %Change) CPI (YoY %Change) Avg. Hourly Earnings (YoY %Change, Right Axis)
© 2019 Fannie Mae. Trademarks of Fannie Mae. 03.11.2019 4 of 5

Slowing foreign growth could also undermine our forecast. China’s February exports fell 20.7 percent from a year earlier, 

the steepest decline in three years. Chinese exports to the U.S. plunged 26.2 percent, a decline that may be partly 

attributable to higher U.S. tariffs. China’s government expects economic growth in 2019 to fall within a range of 6.0 to 6.5 

percent, slowing from 2018’s pace of 6.6 percent. In response to slower growth, a package of tax cuts, increased 

government spending, and relaxed controls over foreign access to Chinese markets was announced.

The ECB recently lowered its economic growth projection for the euro area in 2019 by six-tenths to 1.1 percent and

lowered its inflation outlook four-tenths to 1.2 percent, further below its 2.0 percent target. Expectations of slower 

economic growth, lower inflation, and the potential of a “hard Brexit” (i.e., that the United Kingdom would leave the

European Union without a deal to lessen the economic shock) prompted the ECB to announce that it will now hold interest 

rates steady through the end of the year as well as offer a series of cheap long-term loans to the region’s banks.

The Federal Reserve Announces It Will Remain Patient

The Federal Reserve maintained its key policy rate at a range of 2.25 to 2.50 percent at its January meeting and noted in 

its statement that it would be patient in determining future adjustments to the federal funds rate. Financial conditions, 

measured by the Federal Reserve Bank of Chicago’s National Financial Conditions Index, continued to ease in the weeks 

following the January meeting. The minutes of the January meeting signaled that the characterization of monetary policy 

as “patient” would need to be reassessed if uncertainty abated. Although policy responses to slowing foreign economic 

growth and progress on the U.S.-China trade conflict have materialized, more time is likely needed to assess the full 

impact on the economy from these risks. Amidst these risks and uncertainties as well as still-muted inflation, we have 

pushed back our expectation of the timing of the Federal Reserve’s next rate hike from mid-year to the fourth quarter of 

2019. If downside risks continue to dominate, then we do not expect there to be an increase in 2019.

Home Sales Remain Soft as Affordability Outlook Improves

Home sales remain soft relative to their year-ago pace. Annualized existing home sales fell 8.5 percent in January to 4.94 

million, the lowest level since November 2015. Sales of new homes 

were 2.4 percent below their year ago level in December. According 

to the National Association of Realtors’ Housing Affordability 

Index, home buying affordability declined on a year-over-year 

basis in January for the 25

th consecutive month. However, the

recent decline in mortgage rates has helped improve 

affordability. Contract rates on 30-year mortgages fell in 

February to a monthly average of 4.37 percent, the third 

consecutive monthly drop. In addition, the S&P Case/Shiller 

National Home Price Index indicated that annual home price 

growth decelerated to 4.7 percent, the slowest pace of growth 

since September 2015.

The Housing Vacancy Survey reported that household formation 

increased by 1.5 million units year over year in the fourth quarter of 

2018 as a sharp expansion in the number of owner-occupied 

households over the quarter offset a small contraction in renter 

households. In addition, pending home sales, which measure

contract signings on existing homes, rose 4.6 percent in 

January, suggesting that closings on existing homes should 

experience growth in the coming months. 

Prospects for housing demand remain favorable, but several 

recent releases suggest that some momentum has been lost. 

Following a surge in January, average monthly purchase 

applications fell 10.3 percent in February to a level 1.1 percent 

above the December reading, suggesting more modest growth 

in home sales at the beginning of the year than we anticipated 

last month. Fannie Mae’s Home Purchase Sentiment Index®

reported that the percentage of respondents believing it is a 

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Housing Affordability Index 

(Composite, YoY % Change)

Housing Affordability Continues to Decline 

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Household Formation Driven Entirely By Owner-Occupied Households

Owner Households

Renter Households
© 2019 Fannie Mae. Trademarks of Fannie Mae. 03.11.2019 5 of 5

good time to buy a home fell 7 points in February from the prior year. 

Supply of existing homes remains low and could derail homebuying entering the spring season. Although the months’ 

supply of existing homes rose to 3.9 months in January, it remains well below the 6.0-month level consistent with a 

balanced market. Months’ supply of new homes sat at 7.8 months in December, unchanged for the third straight month. In 

addition, the 25.1 percent increase in single-family starts in January suggests that additional supply could arrive in the 

coming months. 

We continue to expect home sales to hold steady in 2019 near 2018 levels. In response to the decline in average monthly 

purchase mortgage applications in February, we lowered our forecast of home sales in the first half of 2019. However, we 

expect a portion of these sales to be recovered in the second half of the year as mortgage rates remain low. 

Due to the small downward revision to our home sales forecast this year, purchase mortgage originations were lowered to 

$1.176 trillion from $1.181 trillion and are now expected to expand by 2.7 percent from 2018, slightly less than the 3.0 

percent projected increase in our February forecast. Refinance originations were lowered from $431 billion to $417 billion 

in response to a 4 basis point increase in our projection for mortgage rates in 2019 and are now projected to shrink by 8.6 

percent in 2019 from their 2018 level, steeper than the 6.5 percent decline projected in our February forecast.

For information on multifamily market conditions, please see the March 2019 Multifamily Market Commentary.

 

Economic & Strategic Research (ESR) Group

March 11, 2019

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: Bureau of Economic Analysis, Federal Reserve, Census Bureau, Bureau of Labor Statistics, National Association of 

REALTORS®

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

Hamilton Fout, Director Michael Neal, Director

Eric Brescia, Economist Rebecca Meeker, Business Analyst

Richard Goyette, Business Analyst