Economic Developments – April 2018

© 2018 Fannie Mae. Trademarks of Fannie Mae. 4.11.2018 1 of 5

Outlook Remains Firm, But With Rising Downside Risks

We previously forecasted that economic growth would slow moderately in the first quarter before picking up during the 

rest of the year, resulting in full-year 2018 growth of 2.8 percent. However, we now estimate that first quarter growth 

slowed to 1.7 percent annualized compared to our previous forecast of 2.1 percent. At the same time, the government 

revised higher its final estimate of fourth quarter real gross domestic product (GDP) growth four-tenths to 2.9 percent. 

Despite the marked deceleration in first quarter economic growth, we still expect activity to pick up substantially during the 

rest of the year, and thus have lowered our projected GDP growth for all of 2018 by just one tick to 2.7 percent.

Fundamentals support our strong outlook. Income growth remains 

healthy, consumers and businesses are optimistic, and fiscal stimulus 

from the tax cut and new federal budget should help boost demand 

through the rest of the year. While our 2018 growth forecast is little 

changed, downside risks are rising. The Administration has pledged 

to cut the U.S. trade deficit, which widened sharply in recent months 

to the worst showing since October 2008 in February and likely 

dragged on first quarter economic growth for the second consecutive 

quarter. Earlier this month, the Administration announced a 25 

percent tariff on $46 billion of Chinese imports, on top of the steel 

and aluminum tariffs imposed in March. After China announced 

retaliatory tariffs of equal size, the Administration raised the 

possibility of levying tariffs on another $100 billion of Chinese imports.

It is uncertain how much of the proposed tariffs are simply a negotiating

tool and how much will actually go into effect. Negotiations might 

result in an agreement that preempts tariff imposition by either 

country; however, even Treasury Secretary Mnuchin conceded that 

there is the “potential of a trade war.” The increasingly heated 

rhetoric on trade has already led to volatile movements in stock 

prices over the past month. If the threats and counter-threats on

trade continue, they could also lead to a significant loss in consumer 

and business confidence. If the United States actually deploys trade 

restrictions and China responds with aggressive retaliations (e.g., 

reciprocal tariffs, a reduction in Treasury bond holdings, restrictions

on services trade and market access for U.S. companies), the trade 

war could reverse much of the positive impacts of the fiscal stimulus or 

could trigger an even worse outcome—recession. 

The marked growth slowdown during the first quarter was not 

alarming per se. Since the end of the recession, economic growth 

has usually slowed between the fourth and first quarters because of 

lingering seasonality issues, before strengthening during the 

remainder of the year. Between 2010 and 2017, the average 

increase in real GDP in the first quarter was 1.2 percent annualized, 

at least one percentage point below the average growth during the 

other three quarters of the year. We expect this pattern to continue 

this year.

Consumer Spending Is Poised to Rebound

We had expected first quarter real consumer spending growth to slow 

from an unsustainable pace in the fourth quarter, which was partly boosted by replacement demand for vehicles damaged 

by the hurricanes. However, actual spending was even worse than expected. Real consumer spending was flat in 

February, and January’s data were revised lower by one-tenth to show a 0.2 percent decline. Meanwhile, real personal 

income rose 0.2 percent in February, and the nominal disposable personal income gain outpaced the nominal consumer 

spending increase for the second consecutive month, pushing the saving rate up two-tenths to 3.4 percent—a six-month 

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'07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 Trade Balance: Goods and Services (BOP Basis, SA, Bil.$)

The Trade Deficit Widens Substantially Over 

the Past Year

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Dow Jones Industrial Average Close Price (Thous.)

Dow Jones Industrial Average Index Shows Heightened Volatility 

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Q1 Q2 Q3 Q4 Real Annualized GDP Growth (Quarterly Average, 2010-2017)

Economic Growth Tends to Decelerate During 

the First Quarter
© 2018 Fannie Mae. Trademarks of Fannie Mae. 4.11.2018 2 of 5

high. Consumer credit data were consistent with the cautious consumer theme, showing essentially unchanged revolving 

credit (largely credit card debt) in February following an anemic gain in January. 

 

We expect consumer spending to improve in March and in coming 

months. By March, tax refunds had caught up to historical norms 

and most households had realized lower withholdings due to the 

Tax Act. Consumers also appeared to loosen their purse strings in 

March, as auto sales rose 2.4 percent, marking the first rise in three 

months from February’s six-month low. Sales of light trucks, which 

include sport utility vehicles, were solely responsible for the gain, as 

they rose to a 12-year high amid a sixth consecutive monthly drop 

in car sales to an eight-year low. Even with a rebound in spending 

in March, we expect real consumer spending growth to moderate to 

just 1.1 percent annualized in the first quarter from 4.0 percent in 

the fourth quarter before strengthening to nearly 3.0 percent in the 

second quarter.

Labor Market Is Not Immune to Volatility

The March jobs report stepped back from many of the strengths of 

the prior month, showing that labor market conditions were not 

immune to the volatility seen lately in other sectors. Nonfarm

payrolls increased 103,000, the worst showing since last 

September, following an upwardly revised gain of 326,000 in 

February, the biggest monthly rise since October 2015. However, 

job gains were revised sharply lower for January, resulting in a 

downward revision for the prior two months of 50,000, on net. 

Despite the net downgrade, the monthly gain during the first quarter 

averaged 202,000, well above the average monthly gain of 182,000 

in 2017.

Weather may have played a role in the February-March hiring 

swing, as evidenced by weather-sensitive industries. For example, 

after increasing by a decade-best 65,000 in February, construction 

employment fell in March by 15,000, the largest drop in three years. Retail trade payrolls also swung substantially, 

declining 4,000 in March following a gain of 47,000 in February. Weather didn’t tell the whole story, however. Generally, 

the average workweek drops during a period with significant weather disruptions, but the March workweek held on to 

February’s increase, remaining at 34.5 hours.

Average hourly earnings, which is closely watched as an indicator of wage inflation, picked up 0.3 percent from February, 

while the annual increase of 2.7 percent remained within the narrow band seen since late 2017. However, the annual 

wage increase for nonsupervisory workers, who account for roughly 80 percent of the private workforce, remained

unchanged at 2.4 percent for the fourth consecutive month.

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0.75% Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Dec-17 Feb-18 SAAR, Monthly % Change

Consumers Hold Back on Spending Even as 

Income Growth Improves

Personal Consumption Expenditures Personal Income

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15% Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18Revolving Consumer Credit Outstanding (EOP, SAAR, % Change)

Consumers Drastically Reduce Credit Card Debt Usage

Revolving Credit

Nonrevolving Credit

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Light Truck Sales Drive Gain in Auto Sales, as Car Sales Dip to Eight-Year Low

Car Sales Light Truck Sales

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Change in Total Nonfarm Employment (SA, Thousands)

First Quarter Average Monthly Job Gain Is Well Above the Average Increase in 2017

Change in Total Nonfarm Employment (3-Month MA)

Average Monthly Increase in 2017
© 2018 Fannie Mae. Trademarks of Fannie Mae. 4.11.2018

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Without broad-based increases, wage gains are unlikely to surge in 

the near term. In addition, the National Federation of Independent 

Business (NFIB) Small Business Economic Trends Survey showed 

that the net share of small business owners planning to raise worker 

compensation fell in March for the second consecutive month to the 

lowest reading since last November, although the level remains 

elevated. 

The household survey component of the March jobs report showed 

thatthe unemployment rate remained at 4.1 percent for the sixth

straight month as the labor force participation rate fell one tick to 62.9 percent, the first drop since last October. The broadest measure of 

labor underutilization, the U-6 unemployment rate, fell two-tenths and 

returned to its expansion low of 8.0 percent, thanks to a decline in the 

number of discouraged workers and others marginally attached to the 

labor force.

Business Investment Remains Key to the Outlook

One key factor underlying our outlook is strong business equipment 

investment growth, which would help spur productivity growth and 

keep unit labor costs and inflation contained amid ongoing fiscal 

stimulus. Recent trends in core (nondefense excluding aircraft) 

capital goods shipments, a proxy for capital investment, and core 

orders, a forward-looking indicator, suggested a slowdown in 

business capital investment growth in the first quarter, albeit from a 

strong average pace of roughly 11 percent annualized during the 

second half of 2017. 

Recent business surveys have raised concerns over whether robust 

capital expenditures growth will continue this year. The Survey of 

Business Executives (SBE) conducted in February by the Atlanta Fed 

in conjunction with academics showed that roughly three-quarters of 

executives made no changes to their capital expenditures plans in 

either 2018 or2019 in response to the passage of the Tax Act.

Comparing results from the February 2018 survey for 218 firms that 

also responded to a similar survey in November 2017, it appears that 

firms have revised lower their capital expenditures plans for 2018.

Results from the March NFIB survey were in line with the SBE 

survey. The share of small businesses planning capital expenditures

fell in March, erasing the improvement seen since November 2017.

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Total Nonfarm Employment Construction 

(SA, MoM Change, Thous.)

Weather Likely Caused Recent Wild Swings in Construction Employment

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'06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 Average Hourly Earnings (SA, Year-over-Year % Change)

Annual Wage Gains for Nonsupervisory Workers Have Moved Sideways

Total Private Industries Production and Nonsupervisory Industries

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NFIB Small Business Survey (SA, %)

The Net Share of Small Businesses Planning to Raise Worker Compensation Declined Sharply

Net Share Planning to Raise Worker Compensation in Next 3 Months

1% 1%

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100% Share of Respondents Who Said Capital 

2018 2019 Expenditures Would...

How Has the Recently Enacted Tax Cuts and Jobs Act Led You to Revise Your Plans for Capital Expenditures?

Decrease by ≥10% Decrease by <10% No material change

Increase by <10% Increase by ≥10%

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NFIB Small Business Survey: Planning Cap. Expenditure in 3-6 Mos (SA, %) 

Share of Small Businesses Planning Capital Expenditures Falls
© 2018 Fannie Mae. Trademarks of Fannie Mae. 4.11.2018 4 of 5

The Fed Expected to Raise Rates in June

The Summary of Economic Projections released at the March Federal Open Market Committee (FOMC) meeting

indicates that the Fed is more optimistic about economic growth and employment in 2018 while its view on inflation is

unchanged. However, the statement following the meeting shows that the Fed appears more confident that inflation will 

move toward the 2-percent target, noting that members expect that annual inflation will move up “in coming months,” as 

opposed to “this year” in the prior statement.

In February, the annual increase in the Fed’s favored measure of 

inflation—the Personal Consumption Expenditures (PCE) deflator—

picked up to 1.8 percent after holding at 1.7 percent for three 

consecutive months. Following an increase of 1.5 percent for four 

straight months, the annual rise in Core PCE (excluding food and 

energy) accelerated one tick to 1.6 percent, boosted by health care 

service prices, which jumped 2.2 percent from last February, the 

biggest annual gain since 2010. Annual PCE inflation likely 

strengthened in March, as a result of the base effect. That is the 

plunge in communication services prices (i.e., cellphone contracts)

last March is no longer weighing down the change in the index. 

With inflation trending up toward the target amid continued labor 

market improvements, we expect the Fed to raise interest rates for 

the second time this year in June before hiking once more later this year. In the prior forecast, we noted that risks tilted

toward four rate increases this year. However, with headwinds from trade protectionism emerging over the past month, we 

can’t rule out that the Fed may ultimately raise rates only twice this year. At his first press conference, Fed Chair Powell 

said that several FOMC members had voiced concerns over trade policy, and he noted that trade has become a bigger 

downside risk to the outlook. 

Housing Roundup

Incoming data support our view that real residential investment declined during the first quarter following strong 12.8 

percent annualized growth in the fourth quarter. New home sales fell in February for the third consecutive month, while 

existing home sales partially recovered from January’s drop. Total home sales during the first two months of the year were 

flat compared with the same period last year. Total housing starts fell in February, while nominal residential construction 

spending posted an anemic gain in February for the second consecutive month. Main measures of home prices—the S&P 

CoreLogic Case-Shiller, CoreLogic, and Federal Housing Finance Agency home price indices—continued to show strong 

annual home price gains of 6.1 percent to 7.3 percent for the nation in January.

The near-term outlook for home sales is mixed. While pending home sales rebounded in February, partly regaining the

sharp drop in January, purchase mortgage applications fell sizably in February and only partially recovered in March. We 

continue to expect total home sales to rise nearly three percent in 2018 amid increasing household income, a gradual rise 

in mortgage rates, and continued lean inventory. The for-sale inventory of existing homes continued to decline from yearago levels. While the number of new homes for sale has continued to trend up, the increase has been concentrated in 

incomplete units. Ongoing tightness in the inventory of completed new homes for sale should continue to restrain sales. 

 

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Existing Homes Available for Sale (NSA, Millions of units)

Year-over-Year Declines in For-Sale Inventories of Existing Homes Continue Unabated

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2017 2018

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New Single-Family Homes-for-Sale by 

Stage of Construction (EOP, SA, Thous)

Incomplete Units Account for an Increasing Share of For-Sale Inventories

Completed Units

Under Construction

Not Started

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'00 '02 '04 '06 '08 '10 '12 '14 '16 '18 Personal Consumption Expenditures (Y-o-Y % Change, SA, 2009=100)

Health Care Inflation Accelerates

Core PCE Health Care PCE
© 2018 Fannie Mae. Trademarks of Fannie Mae. 4.11.2018 5 of 5

Our mortgage rate and mortgage volume forecasts for 2018 are essentially the same as in our March forecast. We expect 

total mortgage originations to fall about 8 percent from 2017 to $1.69 trillion in 2018, with a refinance share of 29 percent, 

nearly 10 percentage points below the share in 2017.

Economic & Strategic Research (ESR) Group

April 10, 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, Bureau of Economic Analysis, Federal Reserve Board, AutoData, Bureau of Labor Statistics, 

National Federation of Independent Business, Federal Reserve of Atlanta, 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

Orawin T. Velz, Director Frank Shaw, Economist 

Hamilton Fout, Director Rebecca Meeker, Business Analyst