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A Moderate Rebound Is Underway after a Blip

Recent developments reinforced our view that, once again, the decline in economic activity during the first quarter was 

temporary, and the economy is poised to rebound in the current quarter. The strong dollar and the shale oil slump will 

continue to drag, but the unwinding of the temporary weather distortion will be a positive. We expect growth to pick up to 

2.4 percent annualized in the second quarter before accelerating in the second half of the year averaging around 3.0 

percent. Our forecast for the current quarter and the rest of 

the year is little changed from the prior forecast; however, 

because of the government’s downward revision in its 

growth estimate for the first quarter, we revised lower our 

projection for all of 2015 to 1.9 percent from 2.3 percent in 

the prior forecast. Our view for 2015 has deteriorated 

substantially over the past two months, with a downgrade in 

this year’s growth of nearly one percentage point between 

the April and June forecasts. Disappointing consumer 

spending against our expectations for a swift rebound is the 

key reason behind the deterioration in our outlook. Despite 

sizable declines in gasoline prices over the past year and 

strong fundamentals—including firming disposable income 

growth, rising household wealth, and high consumer 

confidence—real consumer spending grew just 1.8 percent 

annualized during the first quarter, as the bulk of the windfall 

from declining oil prices was saved.

As widely expected, the second print of first quarter gross domestic product (GDP) showed the economy contracted, 

compared with a modest gain reported in the first estimate. Real GDP fell 0.7 percent annualized, a downgrade from a 0.2 

percent increase in the first estimate. The main source of the downward revision was more imports than previously 

reported, reflecting a surge after West Coast ports reopened in late February. The drag from net exports was revised to 

nearly two percentage points—the largest since 1985. Slower inventory buildup was another cause of the downward 

revision. Despite the downgrade, inventory accumulation during the first quarter was still strong. Businesses likely will 

draw down inventories in the coming months, which will weigh on production and be a negative for growth in the current 

quarter.

Seasonal adjustment issues—as mentioned in the minutes of the April Federal Open Market Committee meeting as 

“statistical noise”—may have weighed on GDP aside from the temporary factors of severe weather and the West Coast 

port strikes. This quirk, also dubbed “residual seasonality,” implies that, even after the Bureau of Economic Analysis

(BEA) adjusts GDP for seasonality, first quarter GDP figures still show a seasonal pattern, which tends to suppress 

growth during the quarter. This suggests that GDP may not be an accurate gauge of the economy's true performance for

the first quarter. Real gross domestic income—another indicator of economic growth that measures overall economic 

activity by aggregating income generated from producing GDP rather than spending—indicated that the economy 

expanded 1.4 percent annualized in the first quarter. The large divergence between the two measures suggests the GDP 

measure understated the underlying strength in the economy during the first quarter. The BEA indicated that it will 

address some of the issues related to seasonal adjustment in the annual revision, to be released in July.

Consumer Spending Disappoints So Far...

Consumers resumed building up their saving at the start of the second quarter as personal consumption expenditures 

(PCE) were flat against a rebound in personal income. After declining one-half of a percentage point in March to 5.2 

percent, the saving rate nearly reversed the drop, rising to 5.6 percent in April. Adjusted for inflation, personal income

increased 0.4 percent in April after a 0.1 percent drop in the prior month. Meanwhile, real PCE remained flat following a 

0.4 percent rise in March, a weak start for the second quarter. Over the past year, real disposable personal income rose 

3.5 percent in April, accelerating from 3.2 percent in the prior month. So far this year, year-over-year gains in disposable 

personal income have been healthy, ranging from 3.2 percent to 4.1 percent, compared with an average growth rate of 

just 2.5 percent in 2014. The improving trend in real disposable income should help to support consumer spending this 

year. 

It appears that much of the windfall from declining gasoline prices last year went to saving. Between June 2014 and April 

2015, personal saving rose $85.6 billion annualized—roughly two-thirds of the decline in spending on gasoline and fuels 
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during the same period. The pickup in the saving rate in late 2014 coincided with the steep drop in retail gasoline prices.

Perhaps the decline in gasoline prices could lead to a delayed boost in consumer spending rather than the immediate 

jump many expected. Auto sales jumped 7.8 percent in May to 17.8 million units annualized, the strongest pace in nearly 

a decade, suggesting a rebound in consumer spending is in 

the cards. However, the downside to our forecast of improving 

trends in consumer spending is that consumers may opt to

save the windfall or use it to pay down debt, leaving spending 

growth weaker than we anticipate.

Consumer credit data also lend support to the view that 

consumer spending should pick up in the current quarter. 

Revolving credit balances (largely credit card debt) jumped 

11.6 percent annualized in April, the second largest gain in the 

current expansion. The month-to-month change can be 

volatile, however, and the year-over-year increases so far this 

year have been similar to the average gain in 2014. Therefore, 

further evidence of a sustained improvement is required

before we can conclude that consumers have become less 

cautious in their debt usage.

...But Jobs Report Suggests Things Are Looking Up

Labor market conditions are providing more near-term support 

for consumers, indicating the acceleration in income growth 

this year is likely sustainable. May nonfarm payrolls posted the 

largest increase since December, rising 280,000. Revisions to 

the prior two months also added a net gain of 32,000 jobs, 

putting average growth over the past three months at 207,000. 

Gains were broad-based across industries, though mining 

employment dropped for the fifth consecutive month, losing

17,000 jobs. Average hourly earnings rose 0.3 percent from 

April and 2.3 percent from a year ago, tying the biggest annual 

gain since August 2009.

Although the unemployment rate from the separate household 

survey ticked up to 5.5 percent, it was because the number of 

people joining the labor force outpaced the healthy rise in 

household employment. The labor force participation rate increased for the second consecutive month, edging up onetenth to 62.9 percent, an indication that improving job prospects are attracting more people into the labor force.

The combination of a decent gain in average hourly earnings and a strong increase in employment suggests more growth 

in wage and salary income in May. In addition, employment related to discretionary spending picked up strongly, including 
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31,000 jobs added in retail and 57,000 jobs added in leisure and hospitality. Combined with the surge in May auto sales, 

the May jobs report reinforces our expectation for PCE growth averaging above 3.0 percent in the second half of the year. 

The Job Opening and Labor Market Turnover Survey (JOLTS), which is released with a one-month lag to the jobs report, 

showed that businesses increased their effort to search for workers in April. Job openings jumped to a record high since 

record keeping began in December 2000 of 5.4 million. The job opening rate (openings as a share of total employment) 

rose to 3.7 percent, the highest share since January 2001 and the second highest in the history of the series.

Manufacturing May Soon Stabilize

The prolonged slump in the factory sector continued in April under pressure from the drop in energy-related investment, 

weak global demand, and the strong dollar. Weakness in activity is evident in the industrial production data, with mining 

output dropping in April for the fourth consecutive month, driven by a plunge in oil and gas well drilling nearly matching the 

decline witnessed during the Great Recession. The fourth consecutive double-digit decline in oil and gas well drilling this 

year has left activity 46.5 percent below the level a year ago. Meanwhile, the report showed that manufacturing output 

was flat after rising in March for the first time in four months. 

The factory orders report told a similar story, as orders fell in 

April for the eighth time in nine months. Details were 

disappointing, as core capital goods shipments—an input used 

to estimate business equipment spending—were revised 

lower. In addition, core capital goods orders, a leading 

indicator for shipments, were also downgraded from a solid 

gain to a modest loss, marking the third drop in the last four 

months. Durable goods orders data are quite volatile and tend 

to be revised substantially from month to month. Though the 

April data suggest that real business investment will likely 

weaken or even decline in the second quarter, we are not 

overly concerned at this point. Businesses may have frontloaded reductions in capital investment in drilling, and the drag 

from the decline in mining capital expenditures will likely 

diminish considerably in the second half of the year barring 

another collapse in crude prices.

Surveys of purchasing managers provided a glimpse of hope for stabilization in the factory sector. The Institute for Supply

Management (ISM) manufacturing index rose in May for the first time in seven months. The forward-looking new orders 

component advanced for the second month in a row to its highest level this year. The healing is expected to be gradual, 

however. While some temporary factors have unwound, some headwinds will likely persist, particularly a strong U.S. 

dollar. Comments from survey respondents also showed continued concerns over the strong U.S. dollar and challenges in 

the oil and gas industries.

Nonresidential Investment in Structures Shows Signs of Improvement

After a 20.8 percent annualized drop in the first quarter, driven by plummeting investment in mining structures related to 

the sharp decline in oil prices, nonresidential investment in structures will likely improve in the second quarter. The 

construction spending report showed that private nonresidential construction spending jumped 3.1 percent in April, 

compared with an average monthly gain of just 0.6 percent 

during the first quarter. The increase was broad-based across 

sectors. Although the report excludes the drilling component of

structure investment, the strength in non-energy structures 

should help offset some of the ongoing weakness in energyrelated structures investment during this quarter. However, 

given the sharp decline in the first quarter, nonresidential 

investment in structures will likely post a decline for all of 2015.

Trade Picture Improves Substantially as Distortions 

Unwind

The April trade deficit narrowed significantly as exports posted 

a solid gain while imports fell sharply after the surge in the 

prior month, confirming that the spike in the March deficit was 

temporary, largely caused by the unwinding backlogs at West 
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Coast ports. Revisions to data through March were positive, suggesting that net exports were a smaller drag on GDP than 

reported in the government’s second estimate. Overall, net exports should contribute to GDP in the second quarter but 

are expected to weigh on full-year growth amid a strong U.S. dollar.

Fed’s September Hike Appears on Target

The strength in hiring in May and accelerating wage gains suggest that the Fed should stand ready to begin normalizing 

interest rates in coming months. However, bearing on the other half of the Fed’s dual mandate, inflation still sits well 

below its 2.0 percent target. We continue to hold our call that the lift-off in the target fed funds rate will occur in 

September, though we expect the pace of tightening to be slower than in past monetary cycles.

Housing Moves in the Right Direction

Housing indicators at the start of the second quarter were 

generally upbeat. Following the dismal performance in the first 

quarter amid severe winter weather, April total housing starts

posted the biggest gain since early 1991, reaching the 

strongest pace since November 2007, just before the 

economy dipped into recession. Both single-family and 

multifamily starts showed double-digit gains, with the 

Northeast leading the increase, surging 85.9 percent during 

the month and a cumulative 300 percent since February. Total 

building permits also jumped in April, driven by the multifamily 

segment. (For more information on multifamily market 

conditions, read the June 2015 Multifamily Market 

Commentary.)

New home sales rebounded in April following a plunge in 

March. Although the number of homes for sale (seasonally

adjusted) has risen 44 percent from the low recorded in July 

2012, the for-sale inventory remains at historically low levels.

Inventories are especially lean at the lower-end of the market,

as there is little building of lower-priced homes. In the Census 

Bureau’s annual report on the Characteristics of New Housing 

Units Completed/Sold in 2014 released in early June, the 

share of single-family homes completed with square footage 

below 1,800 fell to 21.8 percent, down from 23.7 percent in 

2013 and 37.2 percent in 1999 when record-keeping began.

Homebuilders’ confidence disappointed as the spring selling 

season got underway. The National Association of Home 

Builders (NAHB) Housing Market Index (HMI) edged down 

two points in May to 54, driven by declines in the present 

sales and buyer traffic components. However, the index 

remains above the neutral threshold of 50, which indicates

that the majority of homebuilders are optimistic about the 

single-family market. The index also sits well above 48, its 

long-term average since the series' inception in 1985. The 

silver-lining was improvement in the future sales component, 

which ticked up to the highest reading this year. Continued 

tight supply of developed lots is a primary concern for builders

and helps explain the modest recovery in single-family 

homebuilding and lean inventories. The NAHB May 2015 

survey showed that 62 percent of builders noted that the 

supply of developed lots in their areas was low to very low, the 

largest share recorded since tracking began in 1997. On the 

consumer front, the NAHB reported that consumers demand 

prices below costs and are concerned about selling their 

existing home. And despite low mortgage rates, first-time 

buyers constitute only about half their normal share of new home purchases.
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In contrast to new home sales, existing home sales 

unexpectedly fell in April after a surge in the prior month, 

bucking healthy improvements in pending home sales and 

purchase mortgage applications. However, pending home 

sales, which lead closed sales by one to two months, 

continued to rise in April for the fourth consecutive month to 

the highest level since mid-2010. Furthermore, year-to-date 

purchase applications remain appreciably above the levels 

witnessed in 2013. We expect the April drop in existing home 

sales to be an aberration, and sales should resume rising in 

May, supporting our forecast of a broad-base improvement in 

housing activity in 2015. 

We appear to be in a sellers’ market this spring. According to 

the National Association of REALTORS® (NAR), the average 

time on the market for existing homes declined to just 39 days 

in April, the second shortest duration since tracking began in 

May 2011. About 40 percent of homes sold at or above their 

asking price, the highest share since NAR began tracking in 

December 2011. These developments are consistent with 

results from the May Fannie Mae National Housing SurveyTM.

The share of consumers believing that it is a good time to sell 

rose three percentage points to 49 percent, a record high 

since the inception of the survey in June 2010. Unlike the 

good time to buy share, which has moved within a relatively 

narrow range of between 63 and 76 percent over the past five 

years, the good time to sell share has gradually trended up

from a low of 8.0 percent in late 2011. These seller-friendly

market conditions should induce more homeowners to put 

their homes on the market. While the number of existing 

homes for sale rose in April, as it normally does in the spring, 

it remains slightly below the level of a year ago and is

historically low.

Lean inventories, low levels of new construction, and declining 

shares of distressed sales have helped boost home prices, but 

the pace of appreciation varies depending on the reported 

measure. For example, the Case-Shiller 20-city composite 

index and the FHFA purchase-only index showed annual 

appreciation stabilizing near 5.0 percent in March, slightly 

below the 5.4 percent gain in the CoreLogic Index. The latter 

improved further in April, posting the largest monthly increase 

since February 1978, pushing year-over-year price growth 

near 7.0 percent—the fastest annual appreciation since last 

June.

Yields on long-term Treasuries moved substantially higher 

during the first week of June in response to the first positive 

inflation figure since last November in the Eurozone and an 

upbeat May Jobs report. Bond yields rose sharply in core European economies. For the U.S., the yield on the 10-year 

Treasury Note rose nearly 30 basis points over the week to close at 2.41 percent on the day of the employment report and 

remained elevated at the time of this writing. Despite the recent pickup in long-term Treasury yields, our forecast for 

mortgage rates is little changed from the prior forecast, with 30-year fixed mortgage rates rising gradually from an average 

of 3.8 percent in the current quarter to 4.0 percent in the fourth quarter.
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We have noted in our previous forecasts that, as the Fed is preparing to normalize interest rates, volatility in mortgage 

rates poses downside risks to the housing market. As we saw in the taper tantrum during the summer of 2013, spikes in 

interest rates led to sharp declines in housing activity during the second half of the year. However, fundamentals for the 

housing market are more positive today than two years ago. Employment growth has been strong amid firming wage and 

income growth and a pickup in household formation. In addition, lending standards have gradually eased. Given uneven 

economic growth in the U.S. and events abroad, including a possible exit of Greece from the Eurozone and continued 

slow economic growth around the globe, interest rates are unlikely to surge and remain persistently high. Thus the 

housing market should be able to better withstand some headwinds from higher rates this year than in the past.

Housing activity continues to show improving trends. Year-to-date housing starts and total home sales through April were

up 5.5 and 6.4 percent, respectively, above the levels during the same period last year, in line with our expectations. Our 

forecast for housing and mortgage activity in 2015 is the same as the last forecast, with total housing starts and total 

home sales rising about 10 and 5 percent, respectively. We expect mortgage originations to increase approximately 23 

percent this year to $1.46 trillion, with a refinance share of 48 percent.

June 10, 2015

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.

Sources for chart data: Bureau of Economic Analysis, Energy Information Administration, Federal Reserve Board, Bureau of Labor Statistics, Census 

Bureau, National Association of Home Builders, Fannie Mae National Housing Survey, National Association of REALTORS®, Mortgage Bankers 

Association, CoreLogic.

Opinions, analyses, estimates, forecasts and other views of Fannie Mae's Economic and 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

Orawin T. Velz, Director 

Brian Hughes-Cromwick, Economist 

Mark Palim, VP 

Frank Shaw, Business Analyst

Richard Koss, Director

Hamilton Fout, Director