Economic Developments – August 2016 

© 2016 Fannie Mae. Trademarks of Fannie Mae. 8.18.2016 1 of 4 

Consumers Should Carry Growth Again in the Second Half

Our full-year 2016 real gross domestic product (GDP) growth forecast remains at 1.8 percent, despite underwhelming 

average annualized growth of just 1.0 percent during the first half. Second quarter growth disappointed, but the silver 

lining was that much of the unexpected weakness came from a surprising inventory drawdown, which we believe will 

change to a sustainable pace of inventory accumulation in coming quarters if incomes and consumer spending grow. 

Incoming data have largely been positive, reinforcing our expectation of a rebound in second half economic growth to a 

pace roughly 0.5 percentage points greater than we predicted in the prior forecast, keeping economic growth for all of 

2016 the same.

Second Quarter Growth Disappoints...

Economic growth came in at 1.2 percent annualized in the 

second quarter, more than 1.0 percentage point weaker than we 

had expected in the July forecast. While real consumer spending 

growth picked up strongly to 4.2 percent annualized, as we 

projected, and contributed 2.8 percentage points to GDP growth, 

the rest of the GDP components disappointed. Residential, 

nonresidential, and inventory investment, as well as government 

spending, slowed growth, with net exports the only other main 

category besides consumer spending adding to growth. Notably, 

business capital expenditures declined for the third consecutive 

quarter — a rare occurrence outside of a recession. Residential 

investment also fell during the quarter, largely due to weakness 

in single-family home building, subtracting 0.2 percentage points from growth. This marks the first time housing subtracted 

from growth since the first quarter of 2014. The biggest drag on growth in the second quarter was inventories, which 

declined for the first time since the third quarter of 2011 and subtracted 1.2 percentage points from the increase in GDP. 

...But the Upbeat July Jobs Report Helps 

Soothe Concern 

The July jobs report also supports a pickup in economic growth in 

the second half of the year. The 255,000 payroll gain and upward 

revisions in the prior two months put the average monthly job 

increase over the past three months at 190,000, a vast 

improvement in the hiring trend from just 118,000 in May. 

The report also points to improving income prospects for 

consumers in the near term. Annual growth in average hourly 

earnings remains at a seven-year best of 2.6 percent amid a 

longer workweek. The index of aggregate hours, which reflects the 

increases in both hours worked and the number of payrolls, rose 

0.5 percent, the largest gain in a year. Combined with a pickup in 

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0.5% Q1-2014 Q2-2014 Q3-2014 Q4-2014 Q1-2015 Q2-2015 Q3-2015 Q4-2015 Q1-2016 Q2-2016 Private Residential Fixed Investment: (Contribution to Real GDP %Chg, %Pt)

Housing Drags on Growth for the First Time since Q1 2014

-$225

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'07 '08 '09 '10 '11 '12 '13 '14 '15 '16

Real Change in Private Inventories

(SAAR, $2009 Billions)

Inventories Post a Rare Drop in the Current Expansion

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2.8%

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-2.0% -1.0% 0.0% 1.0% 2.0% 3.0% 4.0%

Government Consumption and

Investment

Net Exports of Goods and Services

Change in Private Inventories

Residential Fixed Investment

Nonresidential Fixed Investment

Personal Consumption Expenditures

GDP

Contribution to 2016 Q2 Real GDP Annualized % Change

Consumer Spending Drives Growth

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'14 '15 '16 SA, Thousands, Month-over-Month

Hiring Trend Rebounds Sharply

Change in Total Nonfarm Employment 3-Month Moving Average
© 2016 Fannie Mae. Trademarks of Fannie Mae. 8.18.2016 2 of 4 

average earnings, the report bodes well for gains in wage and salary income at the start of the third quarter. The 

household survey was also positive. The unemployment rate was unchanged because a strong employment gain offset a 

robust increase in the labor force. The labor force participation rate increased for the second consecutive month. 

The strengthening hiring trend should also help soothe concerns over 

the health of businesses, which have faced a lot of headwinds from 

lackluster profits and productivity and have been pulling back on 

capital expenditures. Given the acceleration in hours worked, 

productivity growth in the third quarter will likely remain 

weak. Productivity declined during the second quarter for the third 

consecutive quarter, marking the longest stretch of declines since 

1979. Over the past year, productivity fell 0.4 percent, the first drop in 

three years. Since the recession, the underlying trend in productivity 

growth has been at historically low levels. The annual benchmark 

revisions showed that the productivity numbers over the past year 

were even worse than previously reported. This could be the dark 

cloud in the silver lining of the recent acceleration in wage growth as 

productivity gains drive real income gains and are themselves driven 

by business investment, which has been falling. 

Consumer Spending Momentum Continues into the Third Quarter 

Momentum in consumer spending appears to be carrying into the third quarter. July auto sales picked up to the strongest 

pace since last November, putting sales 4.1 percent above their second quarter average, suggesting that durable goods 

spending is off to a strong start this quarter. The positive income picture from the July jobs report also points to future 

consumer strength. While we still expect a sizable moderation of real consumer spending growth to just 2.7 percent 

annualized this quarter, we did upgrade our forecast slightly due to 

the solid trajectory of spending through June. 

Credit expansion should continue to support consumer spending 

during the rest of year, when combined with improving labor market 

conditions and strengthening household balance sheets. Revolving 

consumer credit (largely credit card debt) jumped $7.7 billion in June 

from May, the second best monthly increase of the recovery. On a 

year-over-year basis, revolving credit growth has increased since mid2015 while nonrevolving credit (largely auto and student loans) growth 

has been moderating. The year-over-year growth rate in revolving 

credit should soon outpace that of nonrevolving credit, which has not 

yet happened in the current expansion. 

Strong consumer spending growth is crucial given that business 

investment is struggling. As oil prices stabilize, nonresidential 

investment in structures should begin to recover. However, the sustained decline in business investment in equipment 

over the past three quarters, which has been driven by the strong dollar, low energy prices and weak corporate profits, is 

worrisome as it has implications for labor productivity and the economy’s near-term potential growth. Core capital goods 

orders (excluding defense and aircraft), which are a leading indicator of business capital expenditures, rose 0.4 percent in 

June. The puny gain marks the first rise in three months, underscoring that the weakness in business equipment 

investment will persist. 

Stellar Jobs Report Supports Fed Officials Hoping to Raise Rates This Year

We expect that a few Federal Open Market Committee (FOMC) members will use the strong July jobs report to argue that 

the Fed should hike rates in September. However, most Committee members have expressed a desire to proceed 

cautiously and gradually with monetary policy. News on the inflation front tends to support those favoring patience, as the 

Fed’s favored measure of inflation – the Personal Consumption Expenditures (PCE) price index – continues to run below 

the 2.0 percent target. The annual change in the PCE deflator has trended down from 1.1 percent in January to 0.9 

percent in June, despite rising gasoline prices. Excluding food and energy items, the core PCE rose 1.6 percent in June 

from a year ago for the fourth consecutive month. Global uncertainties and anemic output growth also suggest no change 

in policy at the September FOMC meeting. 

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'50 '55 '60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '15 Total Nonfarm Productivity (Y-o-Y % Change)

Productivity Growth Remains Lackluster in the Current Expansion

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'05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16

Consumer Credit Outstanding (EOP, NSA, Year-over-Year % Change)

Annual Growth Rates in Revolving and Nonrevolving Consumer Credit Converge

Revolving Credit Nonrevolving Credit
© 2016 Fannie Mae. Trademarks of Fannie Mae. 8.18.2016 3 of 4 

While many of the financial impacts of Brexit have unwound, some, including the downward pressure on long-term 

Treasury yields, persist. Earlier this month, the Bank of England cut its key policy rate, expanded its quantitative easing 

program, and created a Term Funding Scheme aimed at providing up to £100 billion of additional funding to banks to help 

ease the strain of lower short-term rates. Given investors’ search for yield amid low or negative rates on sovereign debt 

elsewhere, we expect long-term Treasury yields to remain low. One concern that arises if the Fed raises interest rates 

when other major central banks are easing monetary policy is that the U.S. dollar could appreciate significantly, which 

could weigh on growth and delay inflation from returning to the Fed’s target in the medium turn as the Fed expects. We 

remain convinced that the Fed will hold the target rate steady this year. 

Housing Roundup 

Mortgage rates will likely remain supportive for the housing market this year, with projected 30-year fixed mortgage rates 

averaging just 3.4 percent during the fourth quarter of 2016, slightly lower than the prior forecast. Lending standards 

should also help marginally, with the Fed’s Senior Loan Officer Opinion Survey showing that banks loosened standards 

for residential mortgages in the three months ending in July. 

Home sales performed well during the second quarter. Both new and 

existing home sales rose in June to the highest levels of the 

expansion. Through the first six months of this year, new and 

existing home sales were nearly 11 percent and 5.0 percent, 

respectively, more than sales during the same period in 2015. 

Leading indicators suggest some near-term pullbacks, however, with 

pending home sales (contract signings of existing homes) little 

changed in June. After a surge in the first week of June, purchase 

mortgage applications rose in only one additional week through the 

end of July. 

Strengthening job and wage growth are positives for the demand 

side of the housing market, but weak single-family home building and 

soft construction hiring are worrisome from a supply perspective. Unlike home sales, which rose in the second quarter 

from the first quarter, single-family starts fell for the first time since the first quarter of 2015. Without relief from new 

construction, housing inventory will likely remain tight, continuing to boost home prices, especially at the lower end of the 

market. 

The rental market fared better during the second quarter, with multifamily starts in buildings of five or more units posting 

an increase for the first time in four quarters. However, year-to-date through June, multifamily activity has declined from its 

elevated levels during the same period last year. This reflects a mature stage of the multifamily expansion as a result of its 

rapid, V-shape recovery that has lifted activity above its prerecession levels. (For more information on rental market 

conditions, read the August 2016 Multifamily Market Commentary). By contrast, single-family starts and permits have 

improved only gradually, remaining historically low for an expansion. 

Meanwhile, demographic factors are positive, with household growth on a path to recovery following the severe downturn. 

Rental demand was robust in the second quarter, sending the rental vacancy rate to the lowest level in decades. While 

the homeownership rate dropped to 62.9 percent in the second quarter of 2016, the lowest level since 1965 when the 

Census Bureau began tracking the quarterly rate, we are finally seeing some tentative signs of a move by older 

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Single-Family Starts Multifamily StartsSingle-Family Permits Multifamily Permits June Year-to-Date Level (NSA, Thousands of Units)

Multifamily Activity Has Less Room to Grow But Should Stay Elevated

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2016

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'06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 Existing Home Inventory (Year-over-Year % Change)

Inventory of Homes for Sale Falls Annually Across All Tiers

Tier 1

Tier 2

Tier 3

Tier 4

Note: Tier 1: 0-75% of median, Tier 2: 75%-100% of median, Tier 3: 100%-125% of median, Tier 4: 125% + of median

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'05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 SAAR, Millions of UnitsSAAR, Millions of Units

Home Sales Rise to Expansion Highs

Existing Home Sales

New Home Sales (Right Axis)
© 2016 Fannie Mae. Trademarks of Fannie Mae. 8.18.2016 4 of 4 

millennials in the direction of homeownership. (See Fannie Mae’s Economic & Strategic Research Group’s Housing 

Insights from August 10 titled, Millennials Have Begun to Play Homeownership Catch-up).

Given weaker-than-expected single-family homebuilding activity in the 

second quarter, we revised lower single-family starts over the next 

four quarters. Meanwhile, existing home sales came in slightly 

stronger than expected and thus we revised higher the projected 

sales for the rest of this year. Projected mortgage originations are little 

changed from the July forecast. For all of 2016, we expect total 

mortgage originations to rise 3.0 percent from 2015 to $1.76 trillion, as 

the increase in purchase originations more than offsets the drop in 

refinance originations. The refinance share should drop 4.0 

percentage points from 2015 to 42 percent. 

Economic & Strategic Research (ESR) Group 

August 10, 2016 

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, Bureau of Labor Statistics, Census Bureau, Federal Reserve, National Association of 

REALTORS®, and CoreLogic 

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, Economist 

Hamilton Fout, Director 

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'65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '15 Hundreds NSA, %

Homeownership and Rental Vacancy Rates Slide to the Lowest Levels in Decades

Homeownership Rate

Rental Vacancy Rate (Right Axis)