Economic Developments – October 2018

© 2018 Fannie Mae. Trademarks of Fannie Mae. 10.15.2018 1 of 5

Outlook Remains Strong, But Housing Languishes

Economic growth is likely to be solid in the third quarter, and the lower level of job growth in September does not alter our

view that the labor market is robust. However, gross domestic product (GDP) growth likely slowed from its second quarter 

pace, partly reflecting a deceleration of business investment and consumer spending. In addition, the trade deficit likely 

widened as the surge of soybean exports seen earlier this year ahead of tariffs subsided and the dollar strengthened. 

Residential fixed investment is expected to have fallen for the third consecutive quarter. Home sales, which drive brokers’ 

commissions, hit a soft patch as higher mortgage rates likely deterred potential buyers. We expect home sales to rise in 

2019 as rates stabilize, but annual growth should be muted as existing sales are expected to be flat for the year. In 

summary, the economy is expected to have grown slightly faster in the third quarter than projected in our September 

forecast, but our full-year growth expectations for 2018 and 2019 remain unchanged at 3.0 percent and 2.3 percent, 

respectively.

Consumer Spending to Slow Modestly

Incoming data for the first two months of the third quarter suggest that real consumer spending growth is likely to slow 

from its pace in the second quarter. The August slowdown in real consumer spending reflected a deceleration in spending 

growth for nondurable goods, while growth in spending on services was flat. Although real spending growth on durable 

goods accelerated in August, core retail sales data, which excludes autos, building materials, and gasoline, slowed 

modestly in the third quarter. 

 

That said, gasoline prices continued to climb, tracking the upward trend in oil prices. Going forward, oil prices may 

continue to rise as production declines from Venezuela continue and U.S. sanctions against Iran’s oil exports are set to be 

implemented by November 4. However, offsetting supply increases in September by Saudi Arabia, Libya, the United Arab 

Emirates, Nigeria, and Angola provided some relief.

Growth in Business Investment Downgraded

Recent trends in equipment spending lowered our forecast for business fixed investment in the third quarter of 2018. 

Sustainable business investment spending likely cooled in the third quarter as growth in core capital goods shipments, a 

key input into business equipment spending, declined in August. In addition, core capital goods orders, a forward-looking 

indicator of business equipment spending, also disappointed.

Contributing to the slowdown in business investment were the monthly declines in private nonresidential construction 

spending over the first two months of the third quarter, following three consecutive months of gains. Spending on 

infrastructure, commercial, and, to a lesser degree, manufacturing structures all contributed to the decline over July and 

August. At this pace, nonresidential construction spending will detract from third quarter output.

The Labor Market Tightens...

Following an impressive 270,000 jobs in August, only 134,000 jobs were created in September. However, the lower level 

of job growth in September likely reflects the effects of Hurricane Florence and should not be interpreted as a sign of labor 

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Core Retail Sale Growth Slows in the Third Quarter

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Crude Oil Prices Rise to the Highest Level in Nearly Four Years

Retail Gasoline Price Crude Oil Price (Right Axis)
© 2018 Fannie Mae. Trademarks of Fannie Mae. 10.15.2018 2 of 5

market weakness. Details from the household survey indicated that the unemployment rate fell to its lowest level since 

1969. At the same time, the establishment survey indicated that much of the monthly slowdown in job growth could be 

attributed to declines in weather-sensitive sectors, such as retail and leisure and hospitality. The decline in jobs within the 

leisure and hospitality sector was its first monthly drop since shortly after Hurricane Harvey made landfall in September of 

last year.

Other indicators, such as those for initial claims for unemployment insurance, also suggest a strong but tight labor market. 

Despite a hiccup in the week ending September 22, which likely reflected the effects of the hurricane, initial claims for 

unemployment insurance fell to 207,000 in September, a level not seen since 1969. In addition, the Job Opening and 

Labor Turnover Survey (JOLTS), which lags the employment situation report by one month, indicated that the number of 

job openings reached a record high of 6.9 million in July, exceeding the number of unemployed for a fifth consecutive 

month. The percentage of small businesses, which account for the majority of job openings, citing job openings being 

hard to fill maintained its record high in September.

 

Going forward, solid growth in GDP suggests that the labor market should continue to tighten. In the near term, lost jobs 

due to Hurricane Florence are likely to be recouped in the coming months. At the same time, the unemployment rate 

should remain below its estimated natural rate.

...But Inflation Risks Remain Largely At Bay

Despite evidence of tightening labor market conditions, 

measures of inflation took a breather in the third quarter. 

Annually, the headline consumer price index slowed for the 

second straight month in September. Core CPI growth was 

unchanged from August but has slowed since reaching an 

expansion high in July. Growth in the price index associated with 

the personal consumption expenditures (PCE) category in GDP 

slowed in August. However, headline PCE, the preferred 

inflation target of the Federal Open Market Committee (FOMC), 

remained above 2 percent on a year-over-year basis, while core 

PCE sat at 2 percent for the fourth consecutive month. Although 

measures of consumer inflation remain near 2 percent, rising oil 

prices as well as expanding trade tensions may contribute to 

modest acceleration in inflation.

Global Risks Could Impact the Outlook

In a positive development for the economic outlook, trade tensions receded this month when Canada agreed to join the 

U.S. and Mexico in the United-States-Mexico-Canada-Agreement (USMCA) that will replace the North American Free 

Trade Agreement (NAFTA). Although U.S. steel and aluminum tariffs on Canada and Mexico have yet to be resolved, the 

USMCA has some important changes, particularly on local content and labor standards for automobile production. In 

addition, the USMCA can be reviewed every six years with an option to “sunset” it in 16 years. Daily changes in the U.S. 

10-year TIPS (Treasury Inflation Protected Securities) note rate suggest that financial markets may be interpreting the 

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Hurricane Florence Distrupts Hiring

Change in Monthly Employment (SA, Thous, Left Axis) Unemployment Insurance Claims: Monthly Avg (SA, Thous) Hurricane Disaster Declarations 30%

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Job Openings Conditions at Smaller Businesses Climb

Percent with Job Openings Hard to Fill

Job Openings At Establishments < 250 employees Smaller Business Share of All Job Openings (Right Axis)

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Consumer Inflation Slows For the Second Straight Month

CPI: All Items CPI: All Items Less Food and Energy
© 2018 Fannie Mae. Trademarks of Fannie Mae. 10.15.2018 3 of 5

recent breakthroughs in negotiations as beneficial for underlying U.S. growth. Although the agreement could have a small 

positive impact on U.S. manufacturing employment, the potential for an increase in manufacturing employment is 

expected to be offset by losses in manufacturing employment due to technology-based productivity gains. The USMCA is 

expected to be signed by national leaders in late November, but Congress, as well as the legislatures in Canada and 

Mexico, still have to approve the agreement.

While the trade relationship among the U.S., Mexico, and Canada 

has improved, tensions with China have worsened. On 

September 24, the Administration implemented tariffs on another 

$200 billion of Chinese imports. Moreover, the President stated 

that “if China takes retaliatory action against our farmers or other 

industries, we will immediately pursue phase three, which is tariffs 

on approximately $267 billion of additional imports.” Consumer 

goods represent a larger share of the imports targeted by the new

and proposed tariffs. At first blush, the new round and the 

prospect of subsequent tariffs could substantially influence 

consumer inflation and, by extension, Fed policy; however, the 

inflationary impact is likely to be small in part due to the dramatic 

weakening of the Chinese yuan.

Although fears of emerging market contagion have subsided a bit, 

concerns over Italy’s budget situation have intensified. The Italian 

national government’s budget plans, which reportedly include a 

mix of spending increases and tax cuts, would raise their deficit as 

a share of the overall economy at a time of high debt, slow 

economic growth, and in defiance of broader European Union

fiscal rules. Concerns about the potential for a widening deficit 

have pushed up rates on Italian bonds relative to the bonds of 

their German peers. Tighter financial conditions reflected in higher 

rates makes it more expensive for the Italian national government 

to finance new spending through the capital markets. Currently, 

our forecast does not anticipate significant impact from these 

developments. The Italian-German 10-year bond spread suggests 

that stress has not returned to 2011 and 2012 levels, the period of 

the Greek crisis, but given Italy’s size reflected in its G-7 

membership, it bears close watching for signs of additional stress 

and broader contagion risks, either through the banking sector or 

financial markets.

Fed Expected to Proceed with Gradual Rate Hikes

In a widely expected move, the FOMC raised its target federal funds rate by 25 basis points to a range of 2.00 to 2.25 

percent at its September meeting, citing “realized and expected 

labor market conditions and inflation” in its post-meeting 

statement. In addition, the statement dropped the phrase, “The 

stance of monetary policy remains accommodative.” However, 

as Chairman Powell noted in his post-meeting press conference,

“This change does not signal any change in the likely path of 

policy; instead, it is a sign that policy is proceeding in line with 

our expectations. We still expect, as our statement says, ‘further 

gradual increases in the target range for the federal funds rate.’”

With economic growth solid and inflation expected to remain at 

or modestly above 2 percent, conditions are supportive for 

another rate hike in December. However, Chairman Powell and 

his colleagues have repeatedly articulated a shift from an 

assessment of economic indicators relative to the economy’s 

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Italian 10-Year Bond Yield Spikes to the Highest Level In Over Four Years

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A Weakened Yuan May Offset Some Effects of U.S. Tariffs

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FOMC Members Signal Three Rate Hikes in 2019

September 26, 2018

Median: 3.125%

Current Level: 2.125%
© 2018 Fannie Mae. Trademarks of Fannie Mae. 10.15.2018 4 of 5

potential level toward a risk management framework that seeks to balance the risks between “removing accommodation 

too quickly” and needlessly ending the expansion and “moving too slowly” and risking higher inflation and inflation 

expectations. The expected path of gradual rate hikes is meant to balance these risks. 

The Summary of Economic Projections that accompanied the September statement indicated that, at the median, the 

FOMC expects an additional three hikes in 2019. However, the underlying “dot plots” from which this median is calculated 

also shows that the same number of FOMC members expect either two, three, or four hikes next year, assuming one 

more 25 basis point hike in 2018. This suggests that members’ views have yet to converge on the number of rate hikes 

next year.

If economic conditions evolve as expected, we anticipate that the FOMC will raise its short-term policy rate three more 

times, once more by the end of this year and then twice in 2019. Since rates on many residential construction loans are 

typically tied to the bank prime rate, tightening monetary policy will also likely raise builders’ borrowing costs, adding to the 

factors inhibiting a much-needed increase in single-family housing production.

Housing Roundup

Incoming data suggest that residential fixed investment will drag on growth in the third quarter. Existing home sales were 

flat in August after declining for the prior four months as homebuyers adjusted to higher mortgage rates and tighter 

inventories in many metros. Fannie Mae’s Home Purchase Sentiment Index® (HPSI) was lower in September, partly 

reflecting an increase in the proportion of respondents expecting mortgage rates to “go up” over the next 12 months and a 

decline in the share expecting mortgage rates to “go down.” In addition, forward-looking indicators for existing home sales 

suggest a lack of upside potential for home sales in the near term as well. The National Association of Realtors’ Pending 

Home Sales Index declined nationwide in both July and August, while an index of purchase mortgage applications from 

the Mortgage Bankers’ Association fell across the entire third quarter. Fannie Mae’s Mortgage Lender Sentiment Survey®

(MLSS) also reported an erosion in purchase mortgage demand in the third quarter of 2018, and lower demand may be 

contributing to mortgage lenders’ net negative outlook as they face “competition from other lenders.” In view of growing 

downside risks, we lowered our forecast for home sales over the duration of 2018, and we have marked down sales 

growth in 2019 as existing home sales are now expected to be flat next year.

As part of this month’s forecast, we downgraded our projections for purchase and refinance mortgage activity, given the 

higher rate environment and weak incoming sales and application data. In particular, we lowered our purchase 

originations forecast by approximately 2 percent for both 2018 and 2019 and lowered our refi originations forecast by 

about 3 percent for 2018 and over 8 percent for 2019.

Single-family starts, a key component of real residential fixed 

investment, rose in both July and August; however, due to a 

steep decline in June, single-family construction on average 

across the third quarter is likely to be below its average level in 

the second quarter. After increasing in the years following the 

Great Recession, the average size of single-family homes 

began to decline in 2016, further suggesting that builders are 

producing a larger proportion of smaller homes due to the 

geographic spread of employment to areas with lower land 

costs. In spite of the decline in the size of new homes, the 

average price per square foot rose to a new high in 2017,

offsetting the downward pressure on prices from the 

construction of smaller homes. 

Multifamily starts rose significantly in August but have been highly variable. The 92,000 unit increase in multifamily starts 

in August largely reversed the 77,000 unit decline over June and July. At 406,000 units, multifamily production remains

robust as demand for multifamily rental units on a national basis remained positive despite a slight slowing of rent growth. 

National estimated multifamily rents appear to have increased in the third quarter of 2018 by 0.75 percent, bringing the 

estimated national asking rent level to $1,267. That is a similar increase as a year ago in the third quarter of 2017 but a 

slowdown from second quarter 2018’s robust 1.5 percent rise and asking rent level of $1,258.

For information on multifamily market conditions, read the October 2018 Multifamily Market Commentary.

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New Homes' Price Per Square Foot Has Risen, Even As Size of Homes Shrinks

Average Size of New SF Homes Sold (Sq Ft) Average Size of SF Homes Started (Sq Ft) Average Price per Sq Ft of New Homes Sold (Right Axis)
© 2018 Fannie Mae. Trademarks of Fannie Mae. 10.15.2018 5 of 5

 

Economic & Strategic Research (ESR) Group

October 15, 2018

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: Census Bureau, Bloomberg, Energy Information Administration, Chicago Mercantile Exchange, Department of Labor, FEMA, 

Bureau of Labor Statistics, Federal Reserve

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