Economic Developments – January 2019

© 2019 Fannie Mae. Trademarks of Fannie Mae. 1.22.2019 1 of 5

The Economy’s Slowing, the Fed Slows, Housing Plateaus

We expect economic growth to decelerate this year to 2.2 percent, down from last year’s estimated pace of 3.1 percent, 

which we believe will turn out to have been the strongest pace of the current expansion. The projected moderation is 

based on our expectation that the impact of the fiscal stimulus will fade and that financial conditions will continue to tighten 

this year. Despite the slowdown, with the economy continuing to grow, the expansion will become the longest on record.

While overall growth shined last year, details showed some troublesome spots. This was particularly true in the housing 

sector, in which lackluster single-family homebuilding and declining home sales were evident. Economic momentum 

slowed as financial conditions deteriorated toward year-end. The stock market fell sharply, volatility spiked, corporate 

credit spreads widened, and the yield curve flattened. In addition, a late-year budgetary impasse led to a partial federal 

government shutdown as a Continuing Resolution affecting approximately 25 percent of discretionary outlays expired. The 

shutdown is now the longest on record. There are potential upside offsets in the form of consumers and businesses: In 

the event they look past the domestic and international policy uncertainty and instead focus on strong employment and 

wage growth in recent U.S. economic data, growth could exceed expectations. These are data the Fed will be watching as 

it continues to be “data dependent.”

Nonetheless, given growing downside risks, the Federal Reserve has turned more dovish, communicating its willingness 

to be “patient” in raising rates and to be flexible in response to incoming economic data. We believe that the slower pace 

of rate hikes this year will help to stabilize home sales. Thus, our theme for 2019 is “The Economy’s Slowing, the Fed 

Slows, Housing Plateaus.”

Economic Growth Shows Signs of Slowing...

The primary reason for our expected slowdown in growth going 

forward is consumer spending, which was the biggest driver of 

growth last year. In our December forecast, we expected annual 

growth in gross domestic product (GDP) in 2019 to decelerate to 

2.3 percent; but, in light of continued stock market volatility and 

the government shutdown, we marked down our forecast for 

economic growth by one-tenth of a percentage point. This largely 

reflects a downgrade of real consumer spending growth in the 

first quarter to 1.9 percent annualized from 2.1 percent in the prior 

forecast. For all of 2019, consumer spending growth should slow 

to 2.3 percent from an estimated pace of 2.8 percent in 2018, as 

the boost in household incomes from the Tax Cuts and Jobs Act 

wanes. Auto sales, which exceeded 17.5 million units annualized 

in December for only the second time last year, will likely decline

this year. 

 

Incoming data suggest that business investment growth this quarter will remain below its performance during the first half 

of 2018. The Institute for Supply Management (ISM) Manufacturing Index fell further from the August 2018 peak to 54.1 in 

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Total Light Vehicle Retail Sales 

[Imported+Domestic] (SAAR, Mil. Units)

Auto Sales Hit the Highest Level in Over a Year 

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ISM Manufacturing Index 

(SA, +50 = Expansion)

Purchasing Manager Survey Points to 

Slowing Manufacturing Activity

New Orders Manufacturing

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GDP (Q4/Q4 % Change)

Annual Growth Expected to Slow from the 

Fastest Pace of the Expansion Last Year

ESR Jan. 

Forecast
© 2019 Fannie Mae. Trademarks of Fannie Mae. 1.22.2019 2 of 5

December, indicating the slowest pace of growth in the sector since 

November 2016. The slowdown was driven by an 11 point decrease 

in the forward-looking new orders subcomponent. The durable goods

orders report corroborated the ISM survey, as core (nondefense 

excluding aircraft) capital goods orders, which is a leading indicator 

of business investment in equipment, fell in November for the third 

time in four months.

 

The labor market ended the year on a high note. An impressive 

312,000 jobs were added in December, the annual increase in 

average hourly earnings ticked up to tie the expansion best of 3.2 

percent, and the labor force participation rate reached 63.1 percent, 

the highest level in over a year. Over the full year of 2018, the

economy added 2.6 million jobs – the eighth consecutive year of job 

growth above 2.0 million and the biggest rise in three years.

 

The labor market should remain solid in 2019, although the pace of 

job growth is expected to slow as labor slack continues to diminish. 

As of November, the Job Openings and Labor Turnover Survey 

(JOLTS) showed that the number of job openings exceeded the 

number of people unemployed, corroborating reports of worker 

shortages. The December reading of the National Federation of 

Independent Businesses (NFIB) Small Business Optimism Index fell 

for the fourth straight month to 104.4, primarily because the net share 

of firms expecting the economy to improve plummeted to the lowest 

level since the Presidential election. Quality of labor remained the 

single most important problem for firms. 

Although the labor market is tight, inflation remains contained. Annual 

growth in the personal consumption expenditures (PCE) deflator, the 

Fed’s preferred measure of inflation, reached its recent peak at 2.4 

percent in July 2018 and steadily decelerated to 1.8 percent in November. 

Annual growth in the core PCE deflator, which excludes volatile food 

and energy prices, ticked up to 1.9 percent in November, but 

remained below the levels seen during the summer.

...And Downside Risks to the Outlook Mount

Several downside risks could undermine our forecast for 2019. 

Stock market volatility continues, which could lower confidence and 

curtail spending. The Conference Board’s consumer confidence 

index posted the largest monthly decline in three years in December

as the expectations component plunged the most in five years.

Another dark cloud comes in the form of slower growth abroad, 

which could limit foreign demand for U.S. goods and services, 

adversely impacting U.S. exports and slowing domestic growth. Trade 

issues also present uncertainty to our forecast. The U.S. and China agreed to a 90-day truce beginning on December 1, 

which will freeze the tariff rate on $200 billion in Chinese imports at 10 percent instead of increasing it to 25 percent on 

January 1 as planned. In light of the truce, the downside risks from trade frictions with China are temporarily removed, but 

uncertain prospects for a final resolution may derail some spending and investment activity. 

The deceleration of global growth, particularly in China and Europe, as well as prospects for slower growth in the U.S. and 

trade tensions likely contributed to recent declines in business confidence. In addition to the downtrend in the NFIB Small 

Business Optimism Index late last year, the Conference Board’s Measure of CEO Confidence fell from 55 in the third 

quarter of 2018 to 42 in the fourth quarter (readings below 50 indicate more negative responses than positive ones). 

Growing business pessimism could weigh on private investment and hiring.

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Personal Consumption Expenditures: 

Chain Price Index (Y-o-Y % Change)

Headline Inflation Falls Below the Fed's Target 

for the First Time Since February

PCE: Price Index

PCE: Less Food and Energy

Federal Reserve Target

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Level (SA, Millions)

Job Openings Continue to Exceed 

Unemployed People

JOLTS: Job Openings

Unemployed, 16 yr+

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NFIB Small Business Survey (SA, %)

Business Confidence Remains Historically 

High, Though Economic Expectations Weaken

Net Share of Firms Expecting Economy to Improve

Small Business Optimism Index (Right Axis)
© 2019 Fannie Mae. Trademarks of Fannie Mae. 1.22.2019 3 of 5

The partial government shutdown, if persistent, also poses 

downside risks to our forecast. Economic analysis from Bank of 

America Merrill Lynch suggests that 0.1 percentage point will be 

shaved off of first quarter growth for every two weeks of the partial 

shutdown. Unpaid workers could delay spending, which could 

temporarily reduce consumer spending. In addition, businesses 

may temporarily forego investment given rising uncertainty. 

Economic data releases, most notably by the Bureau of Economic 

Analysis and the Census Bureau, will be delayed, eroding the base 

of information needed to assess the economy. Financial market 

stresses will likely worsen if the shutdown extends into the debate 

on the debt ceiling, which is due to be reviewed on March 2.

The partial shutdown will also have ramifications for housing. First, 

homeowners affected by the shutdown may find it increasingly 

difficult to meet their monthly mortgage payments. Absent intervention, such as forbearance, rising delinquencies and 

foreclosures could occur. Second, prospective homebuyers affected by the shutdown may delay a home purchase. While 

the direct impact on home sales is likely to be small, the effects could deepen if the government shutdown undermines 

broader homebuyer confidence. Fannie Mae’s Home Purchase Sentiment Index® declined in December, but the drop did 

not reflect the government shutdown as responses were collected prior to its start. Results from the January release may 

reflect impacts from the shutdown. Third, the partial shutdown may disrupt some federal mortgage programs. The closure 

of the U.S. Department of Agriculture has halted activity under its Direct and Guaranteed Loan programs. While the 

Federal Housing Administration is open, it is operating with reduced staff, which may delay endorsements.

 

The Pace of Fed Tightening Should Slow... The Fed expects economic growth to slow during 2019. The Summary of Economic Projections (SEP) released at the 

December 2018 Federal Open Market Committee (FOMC) meeting showed that the Fed expects economic growth of 2.3 

percent in 2019, modestly slower than the 2.5 percent rate projected in September. The Fed also anticipates fewer rate 

hikes. The median federal funds rate projection in December implied two rate hikes in 2019, compared with the 

September projection of three hikes.

As of this writing, federal funds futures contracts that trade on the Chicago Mercantile Exchange imply no Fed rate 

increases in 2019. In addition, the minutes of the December FOMC meeting showed a dovish shift in the Fed’s thinking. 

The Fed still expects “further gradual increases” in the federal funds rate, but acknowledged that it can “afford to be 

patient about further policy firming.” In addition, Fed Chairman Powell remarked that the shutdown will postpone data 

releases, making it difficult for the Fed to assess the economy. We now expect the Fed to raise rates only once in 2019, in 

June, compared with two hikes in our December forecast, due to deteriorating financial market conditions, the Fed’s 

increasingly dovish commentary, and muted inflationary pressure. 

...Helping Housing to Plateau

We expect home sales to stabilize in 2019 after falling in 2018. 

Mortgage rates are expected to change little in 2019 from their 

level late last year of around 4.5 percent, allowing potential 

homebuyers time to adjust to the rate environment after the 

volatility experienced in 2018. When combined with our forecast 

of a slower pace of house price appreciation (4.2 percent in 2019

from 5.5 percent in 2018, according to the FHFA purchase-only 

Home Price Index), stable rates should support affordability and 

buyer confidence. At the same time, our forecast for continued job 

growth implies that the unemployment rate will remain near 

historic lows – a positive for wage growth and affordability.

We expect single-family starts to grow modestly in 2019 as home 

buying firms. Although labor shortages will likely continue to frustrate 

builders, lower interest rates should help contain their borrowing costs. Multifamily construction, which has had a solid run 

since 2010, is expected to move down in 2019. However, solid labor market conditions and favorable demographic trends, 

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Conference Board (SA, 1985=100)

Confidence Falls, As the Expectations 

Component Plummets

Consumer Confidence

Present Situation

Expectations

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30-Year Fixed Mortgage Rate (Weekly, %)

Mortgage Rates Rose Sharply In 2018 Before 

Falling At the End of the Year
© 2019 Fannie Mae. Trademarks of Fannie Mae. 1.22.2019 4 of 5

including household formations by Millennials, are expected to provide support to the multifamily sector in 2019. (For 

additional information on multifamily market conditions, please see the January 2019 Multifamily Market Commentary.)

Total residential investment, which includes new construction and home improvement spending as well as brokerage 

fees, is projected to rebound this year after contracting last year for the first time in seven years. 

We have left our purchase mortgage originations forecasts for both 2018 and 2019 largely unchanged from the December

forecast. However, we upgraded our 2020 purchase originations outlook slightly based on a more optimistic view of home 

price growth than in December. While a lower mortgage rate forecast led us to increase projected refinance originations in 

2019 and 2020 by approximately $10 billion and $6 billion, respectively, we continue to expect refinance volumes to 

decline over the next two years. 

Year in Review

Our 2018 theme, “Fiscal Policy and the Fed: Stimulus/Response,” 

underscored the crosswinds between fiscal and monetary policies 

that played out during the year. Fiscal boosts came from the Tax 

Cuts and Jobs Act and the Bipartisan Budget Act. Meanwhile, the 

Fed continued to normalize monetary policy by raising the federal 

funds rate four times in 2018, the most in the post-recession 

period. It also continued the process of shrinking its balance 

sheet, which started in October 2017, by letting Treasuries and 

agency debt and mortgage-backed securities mature and run off 

naturally.

Our current estimate of headline 2018 real GDP growth of 3.1 

percent exceeds our forecast from the beginning of last year by 

0.4 percentage points. While consumer spending and overall 

nonresidential and inventory investment likely grew in 2018 

roughly in line with our expectations, we made several 

misjudgments in forecasting other GDP components.

First, we did not account for impacts of the Budget Act, which was enacted in February 2018, when we prepared our 

forecast last January because of considerable uncertainty regarding its passage. This led to an underestimate of 

government spending in 2018 and contributed to the shortfall in our overall economic growth forecast. 

Second, and related to the first point, U.S. economic strength prompted the Fed to raise rates two more times than we 

initially anticipated. In addition, the strong economy pushed long-term Treasury yields higher. As the Fed tightened 

monetary policy at a faster pace than our trading partners, who experienced weaker economic growth, the dollar kept 

strengthening. The real trade-weighted value of the U.S. dollar against other major currencies rose about 4 percent for the 

year. In addition, trade tensions intensified. The combination of tariffs, a stronger dollar, and slowing global growth 

resulted in a much larger trade gap than we had expected. Capital expenditures also disappointed as business investment 

in equipment growth slowed substantially from the pace in 2017. Anecdotal evidence from business surveys and the Fed’s 

beige book suggested that trade uncertainty may have caused some firms to delay investment.

Third, we missed the mark on our forecasts of mortgage rates, housing activity, and residential investment. We had 

expected mortgage rates to rise gradually. At the same time, we had anticipated that the tax cut would help spur housing 

demand through increased disposable household income, despite some provisions that reduced the incentives for 

homeownership. 

Throughout last year, concerns about housing affordability emerged as mortgage rates rose sharply, with the average 

yield on 30-year fixed-rate mortgages rising nearly 100 basis points between November 2017 and November 2018. For all 

of 2018, rates averaged 4.5 percent, 50 basis points higher than our forecast from last January. And while house price 

appreciation slowed in the second half of 2018, it remained strong. Shortages of skilled labor and rising input costs 

inhibited homebuilding activity amid tight inventory of existing homes for sale, resulting in home price appreciation that 

outpaced income growth, which in turn hurt affordability and home sales.

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Full-Year 2018 Headline Economic Growth 

Likely Exceeds Our January 2018 Forecast

2018 GDP (Q4/Q4 %

Change)

Personal Consumption

Expenditures (Q4/Q4 %

Change)

Nonresidential Fixed

Investment (Q4/Q4 %

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Residential Fixed

Investment (Q4/Q4 %

Change)

Government Consumption

and Investment (Q4/Q4 %

Change)

Net Exports of Goods and

Services (Bil. 2012$, Right

Axis)

Change in Private

Inventories (Bil. 2012$,

Right Axis)

Note: Actual Q4 2018 GDP data are scheduled to be released on January 30.
© 2019 Fannie Mae. Trademarks of Fannie Mae. 1.22.2019 5 of 5

Existing home sales over the first 11 months of 2018 were 2.3 percent below their pace over the same period in 2017. 

Year-to-date new home sales through October 2018 were 2.9 percent higher than their level during the first 10 months of 

2017. Total home sales are now estimated to have declined in 2018 for the first time in four years, dropping by about 2.0

percent rather than notching the 2.0-percent rise anticipated at the beginning of last year. 

 

Single-family residential construction growth slowed in 2018. Single-family starts over the first 11 months of 2018 were

approximately 4.0 percent ahead of their pace over the same period in 2017. Anecdotal reports collected as part of the 

National Association of Home Builders/Wells Fargo Housing Market Index indicate that builders responded to weaker 

demand stemming from reduced home buying affordability. However, multifamily starts were a bright spot, with activity

through last November about 8.0 percent ahead of the pace during the same period in 2017.

Our current estimate for 2018 total mortgage originations falls 

short of the forecast at the start of the year by about $100 billion,

with more than 70 percent of the overly optimistic forecast

stemming from the refinance segment.

Last year was not all bad for the housing market, however. 

Annual household growth was well above one million during each 

of the first three quarters of 2018, fueled by owner-occupants. 

The homeownership rate, which bottomed in 2016, continued to 

increase during 2018, with young adults faring particularly well 

throughout the year.

 

Economic & Strategic Research (ESR) Group

January 10, 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, Fannie Mae ESR, Autodata, Institute for Supply Management, Bureau of Labor Statistics, 

National Federation of Independent Business, The Conference Board, Freddie Mac, Federal Housing Finance Agency, CoreLogic, Standard & Poor’s, 

National Association of REALTORS®, Census Bureau

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

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House Price Indices 

(Year-over-Year Growth, %)

Annual Home Price Appreciation Appears to 

Have Peaked

FHFA House Price Index: Purchase Only

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Total Existing Home Sales 

(NSA, Year-To-Date, Millions)

2018 Existing Home Sales Underperform the 

Prior Year 

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Homeownership Rate (NSA, %)

Young Adult Homeownership Rate Helps Boost 

Overall Rate

All Ages

Under 35 Years Old (Right Axis)