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Moving Past the Soft Patch

Financial market conditions and economic data have improved recently and eased concerns that the economy is at 

imminent risk of recession. However, these developments have not materially changed our outlook since our last forecast. 

We expect economic growth of 2.0 percent in 2016, essentially flat to the 2015 rate, with risk tilting toward the downside. 

We believe the full impact of the past rise in the dollar and the plunge in oil prices have not fully passed through the 

economy, and thus weakness in net exports and nonresidential fixed investments in equipment and structures related to 

energy exploration and development will continue to weigh on 

growth. We also expect the ongoing inventory correction process 

to drag on growth throughout this year following the largest backto-back inventory accumulations on record during the first two 

quarters of 2015. 

Stocks have bounced back from February lows to near their

highest level this year; credit spreads have sharply narrowed, 

especially for high-yield corporate debt; and oil prices have 

climbed, with West Texas Intermediate oil prices increasing to 

more than $37 a barrel at the time of this writing. As a result of 

receding financial turmoil, volatility has receded. For example, the 

VIX—the options price-based stock market fear gauge—is back 

down to the level seen in mid-December when the Fed began 

raising the fed funds rate. 

Meanwhile, the economy appears to have regained some footing after a fourth quarter slowdown during which real gross 

domestic product (GDP) grew just 1.0 percent annualized. Domestic consumer and business spending showed signs of 

strengthening this quarter. Real consumer spending rose 0.4 percent in January, the biggest gain since last May. While 

February auto sales edged down slightly to 17.5 million units annualized, the sales pace was the strongest for any 

February since 2000. Improving labor market conditions, cheap gasoline, and easy credit have combined to keep sales 

elevated. On the business side, core durable goods orders — a leading indicator of business investment in equipment —

posted the first rise in three months and the biggest gain since June 2014. After declining in the fourth quarter for the first 

time in a year, business equipment investment should return to modest growth in the current quarter.

 

The hiring picture remains solid, as job growth strengthened to 242,000 in February. With upward revisions of 30,000 jobs 

in the prior two months, monthly job gains over the last three months averaged 228,000, close to the average monthly 

gain in 2015. The current pace of job gains is more than sufficient to keep up with growth in the working age population. 

Job growth was broad-based in the service sector, but weakened for goods-producing industries. Both mining and 

manufacturing shed jobs. While construction jobs increased on a seasonally adjusted basis, the pace of gains, especially 

for residential construction employment, has trended down sharply since last November. Tempering the optimism from the 

headline job growth figure, average hourly earnings and the average work week fell following encouraging improvements

in January. The year-over-year gain in average hourly earnings fell back into the narrow band witnessed over the past few 

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Consumers Open Their Purse Strings at the Start of the Year

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A Sign of Life Emerges for Business Investment in Equipment

Nondefense Capital Goods Orders ex Aircraft

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Chicago Board Options Exchange Volatility Index

Stock Market Volatility Has Receded
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years after showing signs of breaking out. The outlook for future wage gains also suffered a troubling setback, according 

to the February National Federation of Independent Business (NFIB) survey. The net share of small businesses planning 

to increase worker compensation dropped for the second consecutive month, bringing the cumulative decline to 9.0

percentage points. The NFIB compensation outlook measure has now retraced all of the improvement seen between 

September and December, when it reached an expansion high.

 

Results from the February employment report’s household 

survey were encouraging, showing that the labor force 

participation rate rose for the third consecutive month — the 

first time that has happened since late 2006 — to a 13-month 

high of 62.9 percent. Even as improving labor market 

conditions attracted people back into the labor market, the 

headline unemployment rate maintained its lowest level in 

eight years of 4.9 percent. Furthermore, the broadest measure

of labor underutilization, which includes part-time workers who 

prefer full-time jobs and workers marginally attached to the 

labor force, fell to a new expansion low of 9.7 percent. 

The Fed Can Afford to be Patient

The February jobs report should reassure the Fed that the 

labor market remains healthy amid benign wage pressures, 

which should allow it to be patient in gathering more 

information before resuming policy normalization. On the 

inflation front, the Fed’s favored measure, the personal 

consumption expenditure (PCE) deflator, moved up 

measurably in January, sending the year-over-year increase to 

1.3 percent from a year ago, nearly doubling the prior month’s 

gain. The core PCE deflator (excluding food and energy items) 

rose 1.7 percent from a year ago, the biggest gain since July 

2014. While the PCE deflator moved in the right direction, we 

believe it will likely stay below the Fed’s target of 2.0 percent

for some time before trending higher as the effects of the rise 

in the dollar and the drop in oil prices wane. Overall, we 

believe that labor market and inflation conditions support our 

expectation that the Fed will raise the target twice by 25 basis 

points each in June and December.

While recent positive developments in the labor market and domestic demand point to continued economic expansion 

despite jitters over global financial market turmoil, the strong dollar and soft overseas demand suggest that trade will be a 

meaningful drag on growth this year. The accumulated rise in the dollar of more than 20 percent since the second half of 

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Average Hourly Earnings Growth Pulls Back After a Recent Break-out

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NFIB Small Business Survey (SA, %)

The Share of Small Businesses Planning to Raise Compensation Continues to Move Lower

Net Share Planning to Raise Worker Compensation in Next 3 Months

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Unemployment Rates Are at Expansion Lows

Civilian Unemployment Rate: 16 yr +

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Inflation Moves Toward the Fed Target

PCE: Price Index

PCE: Less Food and Energy
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2014 has been quite detrimental to U.S. exports. Real exports 

continued to weaken in January, posting the fourth straight yearover-year drop. Real imports have also slowed in recent months, 

but exports have declined faster. We expect net exports, along 

with inventories and oil-related nonresidential investment, to 

exert further drags on growth this year.

Housing Roundup

Real residential investment, which contributed 0.3 percentage 

points to growth in 2015, is expected to add similarly to growth 

this year. However, housing activity started 2016 on a soft note. 

Existing home sales posted a small gain in January following a 

surge in the prior month, new home sales dropped sharply, and 

both single- and multifamily starts pulled back. (For more 

information on rental market conditions, read the March 2016

Multifamily Market Commentary). Builders’ confidence slipped in 

February to the lowest reading since May 2015. Leading indicators suggest weakness in sales in coming months. Pending 

home sales declined in January, marking the fourth drop over the last six months. After rising sharply in November and 

December, average monthly purchase applications decreased in January and fell further in February. 

 

The inventory of existing homes for sale, which has been a 

lingering constraint for the market, fell on an annual basis for the 

eighth straight month in January. The months’ supply (an 

inventory-sales ratio released on a not seasonally-adjusted 

basis) remains at a historically low level of 4.0 months, compared 

with 4.5 months in January 2015. Lean inventories relative to the 

sales pace continue to put upward pressure on home prices. The 

Case-Shiller, FHFA purchase-only, and CoreLogic national home 

price indices all appreciated between 5.0 and 6.0 percent on a 

year-over-year basis in December 2015. 

The January CoreLogic index firmed further, posting the biggest 

year-over-year gain since June 2014. While home prices remain 

strong nationally, they showed signs of weakening in some states 

and local areas. Two states — Louisiana and Mississippi —

showed annual home price declines, while two oil-producing 

states, Oklahoma and Texas, saw slowdowns in annual price gains. Notably, in Midland, Texas, which has the highest 

concentration of oil employment of all metropolitan areas, the year-over-year home price increase moderated to 4.3 

percent in January 2016, less than half the pace of gain in January 2015.

While new home inventories have gradually trended up over the past year, their levels have remained low by historical 

standards. Builders continue to report shortages of labor and lots as the two biggest obstacles to increasing construction. 

According to a special survey from the National Association of Home Builders in January 2016, 71 percent of builders 

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Builders’ Confidence Resumes Decline as New Home Sales Drop Sharply

Home Builders: Housing Market Index New Single-Family Home Sales (Right Axis)

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Leading Indicators Point to Near-term Pullback 

in Home Sales

Mortgage Loan Applications for Purchase Index (SA)

Pending Home Sales Index (SA, Right Axis)

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The Rise in the Dollar Has Greatly Hurt U.S. Exports

Exports, FAS Value

Imports, Customs Value

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Tight Months’ Supply Puts Upward Pressure on Home Prices

CoreLogic National House Price Index Months' Supply of Existing Homes (Inverted, Right Axis)
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reported that cost and availability of labor was a problem in 2015, and 76 percent expected it to be an issue in 2016. The 

second most significant problem is cost and availability of lots, with 58 percent saying it was an issue in 2015 and 59 

percent believing it will be a problem this year. While we expect an accelerating pace of single-family housing starts in 

2016, labor and lots will likely remain a supply constraint, presenting some downside risk to our forecast.

Home price appreciation that continues to outpace income growth 

will further erode home purchase affordability, especially for firsttime home buyers. Repeat buyers could potentially realize capital 

gains from selling their current home to buy another one, and thus 

are less likely to be deterred by rising prices. Fannie Mae’s Home 

Purchase Sentiment IndexTM, which combines various measures 

of our National Housing Survey® into a single gauge of housing 

sentiment about the twelve months ahead, ticked up in February, 

essentially reversing the prior month’s drop. Details from the 

survey showed that, for consumers who think it’s a bad time to 

buy a home, high home prices have been an increasingly 

important factor.

Strong home price appreciation, combined with solid job creation,

has helped to significantly improve overall mortgage performance. 

Notably, the foreclosure starts rate decreased to 0.36 percent in 

the fourth quarter of 2015, the lowest reading since 2003, 

according to the Mortgage Bankers Association’s National 

Delinquency Survey. Interestingly, out of 12 states that posted an 

increase in foreclosure starts, five have oil-dependent economies

— Oklahoma, North Dakota, Louisiana, Colorado, and Texas.

One factor that should help support a continued rise in home sales 

this year is low mortgage rates. We revised lower our forecast of 

mortgage rates by about 10 basis points in 2016, with 30-year 

fixed mortgage rates expected to average 3.7 percent during the 

fourth quarter of this year. Our forecasts of housing activity and 

purchase mortgage originations are essentially the same as our

prior forecast: housing starts and total home sales should increase 

10.9 percent and 3.3 percent, respectively. We expect purchase 

mortgage originations to rise about 4.0 percent in 2016 to $951 

billion. However, with our lower mortgage rate forecast this year, we upgraded our projected refinance originations by 

approximately $50 billion to $609 billion. Refinance originations should decline about 23 percent from 2015 and account 

for 39 percent of total originations this year, 7.0 percentage points below the level in 2015. 

March 9, 2016

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.

Data source for charts: The Chicago Board Options Exchange, Bureau of Economic Analysis, Census Bureau, Bureau of Labor Statistics, National 

Federation of Independent Business, National Association of Home Builders, National Association of REALTORS®, Mortgage Bankers Association, 

CoreLogic, 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

Orawin T. Velz, Director Frank Shaw, Analyst

Hamilton Fout, Director

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High Home Prices Are Now Top Reason for Bad Time to Buy Perception

High Home Prices Poor Economic Conditions Difficulty Qualifying for Mortgage Unfavorable Mortgage Rates Low Housing Supply

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Colorado North DakotaLouisiana Oklahoma Texas United States

Mortgage Foreclosures Started (NSA, %)

Foreclosure Rates Rise in Oil-Dependent States

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