Economic Developments – August 2018

© 2018 Fannie Mae. Trademarks of Fannie Mae. 8.10.2018 1 of 5

Growth Picks Up as Expected, No Thanks to Housing

Headline economic growth accelerated substantially in the second quarter, as predicted in our July forecast. However, the 

details underlying last quarter’s growth suggest an upgrade to our outlook for this quarter. As anticipated, consumer 

spending and net exports drove second quarter activity, but, contrary to our expectations, business inventories declined

and dragged sizably on growth. While incoming data support our view that consumer spending growth will slow and net 

exports will detract from growth in the current quarter, a swing from an inventory drawdown to restocking should outweigh 

weaknesses elsewhere. Thus, we upgraded our third quarter outlook and now expect full-year 2018 growth of 3.0 percent, 

compared with 2.8 percent in the prior forecast. As fiscal policy impacts fade and monetary policy continues to tighten, we 

project that growth will slow to 2.3 percent in 2019.

Trade policy remains a key source of downside risk to our

forecast. Trade tensions between the U.S. and the European 

Union appear to be de-escalating, but tensions with China have

intensified. If proposed U.S. tariffs, including a 25 percent levy on 

$200 billion in imported Chinese goods, take effect over the next 

several months, China will likely retaliate with tariffs and other 

measures that restrict trade. Although the direct cost of the 

already-imposed tariffs is small at the national level, indirect costs 

from uncertain trade policy are probably mounting. Uncertainty 

about access to imported inputs and foreign markets, as well as 

negative impacts from supply chain disruptions, are likely 

weighing on businesses’ decisions to invest and hire.

Consumer Spending Underpins Strong Growth

According to the Bureau of Economic Analysis’ advance estimate, 

real gross domestic product (GDP) grew 4.1 percent annualized in 

the second quarter, the best showing since the third quarter of 

2014. The GDP report included annual benchmark revisions for 

the past five years that put real GDP growth between 2012 and 

2017 at an average of 2.2 percent, unchanged from earlier 

releases.

Real consumer spending surged 4.0 percent annualized in the 

second quarter after a paltry 0.5 percent gain in the first quarter. 

Consumer spending added 2.7 percentage points to secondquarter growth, the biggest contribution since the end of 2014. 

The gains were solid across durables, nondurables, and services. 

Notably, durable goods spending rebounded strongly from the 

payback in the first quarter following a hurricane-induced surge in 

the fourth quarter of 2017. While quarter-to-quarter growth in real 

consumer spending has been quite volatile of late, year-over-year 

growth registered 2.7 percent last quarter, remaining within the 

narrow range of 2.4 percent to 2.8 percent since 2016. 

As part of the benchmark revision, nominal personal income was 

revised higher, resulting in a significant upward adjustment to the 

personal saving rate. For example, the saving rate was revised to 

7.2 percent in the first quarter of this year, more than doubling the 

initial estimate of 3.3 percent. Much of the upward revision to 

personal income was due to higher investment income, as 

proprietors’ income was upgraded significantly. However, over the 

last 18 months, changes to wages and salaries accounted for 

-1.5% 0.0% 1.5% 3.0% 4.5%

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 Real GDP Annualized % Change

Consumer Spending and Net Exports Propel Growth as Inventories Drag 

Q1 2018

Q2 2018

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

'06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 Personal Consumption Expenditures (SAAR, Chn. 2012$, Y-o-Y % Change)

Annual Growth in Consumer Spending Holds Within a Tight Range

0%

2%

4%

6%

8%

10%

12% Q1-2008 Q3-2008 Q1-2009 Q3-2009 Q1-2010 Q3-2010 Q1-2011 Q3-2011 Q1-2012 Q3-2012 Q1-2013 Q3-2013 Q1-2014 Q3-2014 Q1-2015 Q3-2015 Q1-2016 Q3-2016 Q1-2017 Q3-2017 Q1-2018 Personal Saving Rate (SA)

Revisions to the Personal Saving Rate Remove Much of the Declining Trend 

Post-Revision

Pre-Revision
© 2018 Fannie Mae. Trademarks of Fannie Mae. 8.10.2018 2 of 5

most of the upward revision to income, essentially revising away the initially reported sharp decline in the saving rate. 

Thus, the recent upgrade in the saving rate suggests that consumers have a better cushion to support future spending 

than previously believed.

Nonetheless, we expect real consumer spending growth to moderate to 2.6 percent annualized this quarter. An early 

consumer spending-related report for July supports this view, as auto sales fell 2.7 percent to a 16.8 million annualized 

pace, the first time sales have fallen below 17 million units since last August.

Other Growth Drivers Will Likely Show Mixed Results This Quarter

Net exports were the second largest contributor to growth last quarter, adding 1.1 percentage points to GDP growth and

marking the second largest contribution from trade in the expansion. Exports grew strongly, partly because businesses 

abroad rushed to import U.S. agricultural products, especially soybeans, ahead of recently implemented tariffs, while 

import growth decelerated. We expect the large contribution from trade to be a “one-off.” Monthly data already showed

evidence of a deteriorating trade balance, with the June deficit widening for the first time in four months as imports rose

while exports fell. Exports of petroleum goods rose to an all-time high, but nonpetroleum goods exports weakened almost 

across the board. We project that trade will revert to be a drag on growth in the third quarter as exports fall, reflecting both 

the expected reversal of a surge in soybean and other exports, as well as the negative effects of a rising dollar.

Government spending also posted a strong increase in the second quarter, boosted by an especially large gain in outlays 

on national defense. The government spending increase reflected the impact of this year’s budget act, which should 

continue to boost government expenditures through early next year before its effects start to fade. 

Nonresidential investment also helped spur growth, though its contribution was less than in the first quarter. Mining 

structure investment surged in the second quarter, thanks to the highest crude prices since the fourth quarter of 2014, and 

drilling activity should remain a tailwind for growth this year. However, business equipment investment, the expected 

prime beneficiary of the tax act’s enhanced depreciation allowances and the repatriation of profits, disappointed, rising at 

the slowest pace since the fourth quarter of 2016. Downward revisions in June core capital goods shipments (nondefense 

excluding aircraft), which are used to estimate business equipment investment, put equipment investment on a weaker 

trajectory heading into this quarter. Core capital goods orders, a forward-looking indicator, were also revised lower, 

suggesting no meaningful near-term pickup in growth in 

equipment investment, a key to improving productivity growth in 

the longer term.

Inventory Swing Should Help Boost Growth

The biggest drag on second quarter growth was inventories, 

which fell the most since 2009 and subtracted 1 percentage 

point from growth. The drawdown in inventories and the need for 

restocking bodes well for the near-term outlook. The only other 

drag on growth was residential investment (see more details in 

the housing section).

The Labor Market Remains Solid

Despite the weakening hiring headline in the July jobs report to 

157,000, upward revisions in the prior two months put the 3-

month average job gain at 224,000, near the upper end of the 

range seen so far this year. Furthermore, July’s job gain was weighed down by a drop in employment in sporting goods 

and hobby stores of 31,800 related to the bankruptcy of Toys R Us, which closed all of its remaining stores at the end of

June.

Other results from the establishment survey were largely unremarkable. The average workweek ticked down one-tenth to 

34.5 hours. Average hourly earnings increased 0.3 percent from June, but the annual gain showed no signs of breaking 

out of the tight range seen so far this year, remaining at 2.7 percent for a second consecutive month, one-tenth below the 

expansion best. Separately, the Employment Cost Index, which is considered a better measure of labor compensation,

pointed to stable annual wage gains. While the annual increase in total compensation rose to an expansion high of 2.8 

percent in the second quarter, the acceleration was solely because of a rise in the benefit component. The annual 

-$300

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-$100

-$50

$0

$50

$100

$150

$200

'07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18

Real Change in Private Inventories

(SAAR, Chn. 2012$, Billions)

Private Inventories Decline the Most in Nine Years
© 2018 Fannie Mae. Trademarks of Fannie Mae. 8.10.2018 3 of 5

increase in the wage and salary component was unchanged at an 

expansion best of 2.7 percent. Overall, incoming data painted a 

picture of muted wage pressures.

The jobs report’s household survey offered upbeat news, 

however. The unemployment rate ticked down one-tenth to 3.9 

percent as the gain in employment outpaced the increase in the 

labor force. The broadest measure of labor underutilization (U6) 

fell three-tenths to 7.5 percent, the lowest level in more than 17 

years. While the labor force participation rate remained flat at 62.9 

percent, the employment-to-population ratio rose to 60.5 percent, 

an expansion high. The continued strong job market has also 

benefited those workers with less than a high school degree, as 

their unemployment rate fell to a record low since the series 

began in 1992, while their employment-to-population ratio rose to 

tie the record high reached in 2007.

 

September Rate Hike Likely

Although annual wage growth has shown no signs of accelerating this year, inflation has picked up recently. The annual 

gain in the personal consumption expenditures (PCE) deflator—the Fed’s preferred measure of inflation—remained at 2.2 

percent in June, the fourth straight month at or above the Fed’s 2-percent target. The annual increase in the core 

(excluding food and energy) PCE deflator remained at 1.9 percent for the 

third consecutive month. In July, the core Consumer Price Index 

posted the biggest annual increase in this expansion of 2.4 

percent.

As expected, the Fed held the fed funds rate steady at 1.75 

percent to 2.00 percent at the August Federal Open Market 

Committee meeting. However, the statement following the 

meeting reflected the recent firming in inflation, noting that 

inflation has remained “near 2 percent,” a change from “moved 

close to 2 percent” in the June statement. Our forecast 

continues to call for rate increases in September and December 

of this year. However, if trade tensions intensify, weighing on 

consumer and business confidences and the equity market, the 

Fed could turn to a wait-and-see mode for the rest of the year.

Housing Roundup

While strong domestic demand from consumers and businesses helped drive second quarter GDP growth, residential 

investment dragged on growth for the fourth time in five quarters, subtracting 0.04 percentage points, due to lackluster 

homebuilding activity and home sales and, thus, brokers’ commissions. Housing activity weakened across the board at 

58%

59%

60%

61%

62%

63%

64%

65%

66%

67%

68%

'90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 SA, 16+ Years Old

Employment/Population Ratio Hits An Expansion-High Amid a Flat Participation Rate

Civilian Participation Rate

Employment-to-Population Ratio

35%

37%

39%

41%

43%

45%

4%

6%

8%

10%

12%

14%

16%

'92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 Hundreds Workers With Less Than a High School Diploma (SA, 25+ Years Old)

Unemployment Rate of Workers Without a High School Degree Falls To An All-Time Low

Unemployment Rate Employment/Population Ratio

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0

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20

'90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

Employees: Sporting Goods, Hobby, Book & Music Store (SA, Thous, M-o-M Change)

Toy Store Bankruptcy Weighs on July's Headline Employment 

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

'07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 Personal Consumption Expenditures: Chain Price Index (Y-o-Y % Change)

Headline Inflation Remains Above the Fed's 2 Percent Target

PCE: Price Index

PCE: Less Food and Energy

Federal Reserve Target
© 2018 Fannie Mae. Trademarks of Fannie Mae. 8.10.2018 4 of 5

the end of the second quarter. Total housing starts posted the largest monthly decline in June since November 2016, as 

both multifamily starts and single-family starts fell sharply, and new home sales fell to the lowest level since last October.

 

Existing home sales fell for the third straight month in June. The for-sale inventory of existing homes posted a year-overyear increase, ending three years of annual declines and pushing the months’ supply to the highest level in almost a year. 

However, tight inventory, rather than weakening demand, likely remains the primary factor restraining sales. According to 

the National Association of REALTORS®, homes for sale are going under contract very quickly, as properties typically 

stayed on the market for a record low 26 days for the third consecutive month. Tight supply continued to support an 

annual home price gain of more than 6 percent in May, according to the main measures of home prices. 

In contrast to a mostly contracting supply in the existing market, the 

new home inventory has increased on an annual basis every month 

for over five years, although it remains below historical norms 

seen during prior expansions. More new homes are being sold 

without yet being started. The share of new homes sold that are 

not yet started rose to 31 percent in June, the highest share 

since last November, underscoring the headwinds facing 

homebuilders from rapidly rising costs and shortages of skilled 

labor. The Job Openings and Labor Turnover Survey provided 

additional evidence of shortages of qualified construction 

workers, as construction job openings rose in June for the fourth 

consecutive month to reach an expansion best, but hiring fell for 

the first time in three months. 

Through the first half of the year, existing home sales were 

about 2.2 percent below the year-ago level, compared with an 

increase of 7.4 percent for new home sales. Leading indicators 

of home sales suggest little improvement in the near term. 

Pending home sales rose in June for the first time in 3 months, 

but purchase mortgage applications fell in July for the second 

time in 3 months. For all of 2018, we expect existing home sales 

to fall nearly 1 percent, the first annual drop in 4 years, versus 

an increase of 6.5 percent for new home sales. Because new 

home sales account for a very small share of total home sales, 

overall home sales should be little changed this year.

The Housing Vacancy Survey (HVS) offered some good news 

for the housing sector, particularly for owner-occupancy, during

the second quarter. Household growth is running well in excess 

-0.3%

-0.2%

-0.1%

0.0%

0.1%

0.2%

0.3%

0.4%

0.5% Q2-2016 Q3-2016 Q4-2016 Q1-2017 Q2-2017 Q3-2017 Q4-2017 Q1-2018 Q2-2018 Private Residential Fixed Investment: Contributon to Real GDP (SAAR, % Pt)

Residential Investment Subtracts from Growth Again

-30%

-25%

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-15%

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-5%

0%

5%

10%

15%

'07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18

Existing Homes Available for Sale (NSA, Year-over-Year % Change)

Existing Home Inventory Posts First Annual 

Increase in Three Years

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

Existing Home SalesNew Home SalesSingle-Family Housing Starts Multifamily Housing Starts Year-over-Year Change, %

Existing Home Sales Expected To Decline This Year

2018 Year-To-Date Actuals

Full-Year 2018 Forecast

10%

15%

20%

25%

30%

35%

40%

'06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 Share of New Homes Sold Not Yet Started (SA, %)

The Share of Homes Sold Not Yet Started Rises 

to Highest Level in Seven Months
© 2018 Fannie Mae. Trademarks of Fannie Mae. 8.10.2018 5 of 5

of 1 million units per year, with continued rapid growth in owner households and modest declines in renters. The 

homeownership rate (not seasonally adjusted) rose on an annual basis for the sixth consecutive quarter, increasing 0.6 

percentage points to 64.3 percent, the highest second quarter rate since 2014. The rate for households 35 years old or 

younger rose 1.2 percentage points from a year ago, marking the third straight quarter of annual increases at or 

exceeding 1 percentage point. In addition, both homeowner and rental vacancy rates remain at or near multi-decade lows. 

Despite the positive news from the HVS, the general weakening of housing conditions in the second quarter led us to 

lower slightly our projected mortgage purchase and refinance originations for this year. Total mortgage originations are 

expected to fall about 9 percent to $1.67 trillion in 2018, as a 28 percent drop in refinance originations swamps a 2 

percent increase in purchase originations. The refinance share is expected to decline to 28 percent this year from 36 

percent in 2017. 

 

For information on multifamily market conditions, read the August 2018 Multifamily Market Commentary.

Economic & Strategic Research (ESR) Group

August 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:, Bureau of Economic Analysis, Bureau of Labor Statistics, Census Bureau, National Association of REALTORS®, and Fannie 

Mae ESR

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 Hamilton Fout, Director

Rebecca Meeker, Business Analyst Eric Brescia, Economist

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2,500 Q1-'14 Q2-'14 Q3-'14 Q4-'14 Q1-'15 Q2-'15 Q3-'15 Q4-'15 Q1-'16 Q2-'16 Q3-'16 Q4-'16 Q1-'17 Q2-'17 Q3-'17 Q4-'17 Q1-'18 Q2-'18 Total Occupied Housing Units (Year-over-Year Change, Thous. of Units)

Surge In Household Formation Is Driven Entirely By Homeowner Households

Owner Households Renter Households Total Household Formation

33%

34%

35%

36%

37%

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40%

41%

42%

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44%

60%

61%

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63%

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68%

69%

70%

'94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 Hundreds Homeownership Rate (NSA, %)

Rising Homeownership Rate for Younger Households Helps Lift the Overall Rate

All Ages

Under 35 Years Old (Right Axis)