Economic Developments – March 2018 

© 2018 Fannie Mae. Trademarks of Fannie Mae. 3.12.2018 1 of 6 

Growth Downshift Expected to Be Temporary 

In our prior forecast we expected domestic demand growth would slow this quarter from last quarter’s unsustainable pace, 

but also that inventory investment would strengthen sufficiently to offset the decelerating domestic demand growth, 

leaving headline growth essentially unchanged. It now appears that first quarter economic growth will come in weaker 

than projected due to lackluster consumer spending and nonresidential and residential investment. Despite the first 

quarter markdown, we upgraded our full-year 2018 growth forecast one-tenth to 2.8 percent to reflect the impacts of new 

fiscal stimulus from the Bipartisan Budget Act of 2018, which will increase discretionary spending by nearly $300 billion 

over the next two years. We also raised our forecast of 2019 growth by two-tenths to 2.5 percent. The more optimistic 

growth outlook lowered the trough of our projected unemployment rate one-tenth to 3.6 percent. Finally, our inflation 

forecast for next year is slightly higher.

More rapid wage and inflationary pressures, which would likely lead the Fed to tighten monetary policy more aggressively, 

pose downside risks to our growth forecast. A key downside risk for the forecast is a loss in business and consumer 

confidence in the face of a more assertive U.S. trade policy and retaliatory actions by our trading partners. Trade tensions 

are likely to intensify with the ongoing North American Free Trade Agreement (NAFTA) negotiations. Meanwhile, the 

United States is approaching the August deadline regarding the pending investigation into China’s intellectual property 

policies. Earlier this month, the Administration imposed another round of tariffs, this time on steel and aluminum imports 

(with exemptions for Canada and Mexico), following last April’s lumber and January’s solar panels and washing machines. 

On the same day of the latest tariffs’ imposition, 11 nations signed a revised Trans-Pacific Partnership, a sweeping trade 

agreement that excluded the United States because the Administration withdrew from the discussions in January 2017. 

Consumer Spending Loses Steam 

The second print of fourth quarter gross domestic product (GDP) downgraded real GDP growth by one-tenth to 2.5 

percent annualized. Incoming data have shown weaker momentum in domestic demand, especially consumer spending. 

As a result, we have revised markedly lower our real consumer spending growth forecast for the first quarter to 2.2 

percent annualized from 2.7 percent in the February forecast. 

Real consumer spending fell 0.1 percent in January, the biggest monthly drop in a year. The Bureau of Economic Analysis 

(BEA) added an adjustment to wage and salary income to reflect one-time bonuses reported by many businesses in 

response to the corporate tax cuts in the Tax Cuts and Jobs Act; however, soft dividend and interest income largely offset 

gains elsewhere, resulting in flat real personal income. The BEA estimated a decline in personal taxes of 3.3 percent 

(regardless of whether employees adjusted their withholding schedules), the biggest drop since the recession, which 

boosted disposable personal income the most in a year. With the nominal disposable personal income gain significantly 

outpacing the nominal consumer spending increase, the saving rate surged seventh-tenths from an expansion low of 2.5 

percent in December. We expect the saving rate to continue to trend higher, as we expect a large share of income gains 

will likely be saved rather than consumed. 

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1.0% 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 SAAR, Billions $, M-o-M % Change

Tax Cuts Boost Disposable Income, With Gains Outpacing Consumer Spending Growth

Personal Consumption Expenditures Disposable Personal Income

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'02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18

Personal Saving Rate (SA, %)

The Saving Rate Rebounds From the Expansion Low
© 2018 Fannie Mae. Trademarks of Fannie Mae. 3.12.2018 2 of 6

January consumer credit data pointed to cautious consumers, with credit growth slowing for the second consecutive 

month. Revolving credit (largely credit card debt) was the culprit, rising just 0.8 percent, the smallest monthly gain since 

February 2015. February auto sales, which fell for the fourth time in five months, were consistent with soft consumer 

spending in the current quarter. However, we expect the lull in consumer spending to be transitory. The weakness early in 

the quarter was likely attributable to delayed issuance of income tax refunds through February, but incoming data showed 

that issuance has now caught up with historical norms. Thus, we expect consumer spending growth in coming months as 

workers receive their 2017 tax refunds and also have a better idea of their higher take-home pay as a result of the tax cut.

Other consumer fundamentals remained more positive over the 

past month. Household net worth—the value of assets minus 

liabilities—rose $2.1 trillion in the fourth quarter to another record 

high of $98.7 trillion, thanks to both stocks and real estate. The 

ratio of net worth to disposable income rose to a record high of 

679 percent, well above the peak prior to the 2007-09 recession

triggered by the housing boom.

Consumers also turned more upbeat. The Conference Board 

Consumer Confidence Index jumped in February to the highest 

reading since November 2000, boosted by both the present 

situation and expectations components. Notably, income 

expectations improved substantially, with the share expecting 

rising income over the next six months jumping to the highest 

level since 2001.

 

As-Good-as-It-Gets Jobs Report

Nonfarm payrolls increased 313,000 in February, the largest 

monthly job gain since July 2016. With upward revisions to the 

prior two months of 54,000 jobs, the average increase over the 

past three months rose to 242,000, the best showing since 

September 2016. In addition, the average workweek rebounded, 

rising one-tenth to 34.5 hours. 

The most highly anticipated aspect of the February jobs report was 

wages, following January’s jump in the year-over-year increase, 

which spooked markets and led to a spike in stock market 

volatility, rising inflation expectations and long-term interest rates, 

and a stock market correction. The markets breathed a sigh of 

relief, however, as average hourly earnings edged up just 0.1 

percent from January and 2.6 percent from a year ago. In addition, 

January’s reading on annual growth was revised down one-tenth 

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'00 '02 '04 '06 '08 '10 '12 '14 '16 '18 Conference Board (SA, 1985=100)

Consumer Confidence Jumps to a Seventeen-Year High

Consumer Confidence Present Situation Expectations

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Share of Consumers Expecting Incomes to Rise or Fall in the Next Six Months (%)

Share of Consumers Expecting Their Incomes 

to Rise Reaches An Expansion High

Consumers Expecting Income to Rise

Consumers Expecting Income to Fall

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'51 '56 '61 '66 '71 '76 '81 '86 '91 '96 '01 '06 '11 '16 Households & Nonprofit Org: Net Worth as a % of Disposable Personal Income 

Net Worth-Disposable Income Ratio Rises, Staying Well Above Pre-Recession Peak

Dot-Com Bubble

Housing Bubble

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

Annual Wage Growth Slows, Cooling Recent Inflation Fears
© 2018 Fannie Mae. Trademarks of Fannie Mae. 3.12.2018 3 of 6

to 2.8 percent. Despite the slowing wage gain in February, the pickup in job gains and the average workweek, as well as 

continued rising wages, translated into an improvement in labor income, a positive for consumer spending in February.

The breadth of employment gains in the February’s report was impressive. The diffusion index jumped to 68.6 percent, 

just 1 point below the expansion high reached at the beginning of 2012. A diffusion index reading of 50 indicates an equal 

balance between industries with increasing and decreasing employment. At the industry level, employment in goodsproducing industries (manufacturing, mining, and construction) rose 100,000 in February, the biggest gain since August 

1998. Of those, 61,000 were in the construction industry, the largest gain since March 2007. Residential construction 

payrolls increased 25,400, the best performance in more than a year. Since last October, residential construction 

employment has increased by more than 100,000 jobs, which bodes well for the future supply of housing. In the service 

sector, payrolls also remained healthy. Notably, retail trade added the most jobs in two years, and temporary help 

services, which tend to be a leading indicator of hiring, registered the biggest gain since September 2016.

 

The household survey component of the February jobs report also 

registered a stellar performance, showing a massive gain in 

employment amid a three-tenths rise in the labor force 

participation rate, the biggest one-month jump since April 2010. 

As a result of the strong employment and labor participation 

increases, the unemployment rate remained unchanged at 4.1 

percent for the fifth consecutive month. The net growth in the 

labor force, not seasonally adjusted, jumped to 1.457 million, 

compared with an average of only 500,000 for the last five 

Februarys. This February’s gain set a record for the month since 

the inception of the series in 1948. Despite the February 

improvement, the overall labor force participation rate reached 

just 63.0 percent and has largely trended sideways over the past 

two years, weighed down by retiring baby boomers. However, the 

prime age (25-54 years old) labor force participation rate has 

visibly trended up during the same period, with the rate rising fourtenths in February to the highest level in seven years.

At his inaugural semi-annual monetary policy testimony before 

Congress earlier this month, Fed Chair Powell said he believes 

slack remains in the labor market, which should allow the Fed to 

gradually raise interest rates even though the unemployment rate 

is at a 17-year low. He noted that the labor force participation rate 

for prime-age males is well below the level at the onset of the 

recession. However, the rate has jumped sharply over the past 

several months, which supports the view that the labor market is 

not yet at full employment and there is more room to improve 

without overheating the economy.

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Diffusion Index: Employees on 

Private Nonfarm Payrolls (%)

February Jobs Report Shows Nearly the Most Broad-Based Job Gain in the Expansion

Equal balance between number of industries 

increasing/decreasing employment

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Change in Goods-Producing Employment (SA, Thous) 

Goods-Producing Sector Employment Performs the Best in Decades

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'70 '75 '80 '85 '90 '95 '00 '05 '10 '15 Hundreds Labor Force Participation Rate (SA, %)

Prime-Age and Overall Labor Force Participation Rates Rise

16 Years and Older

25-54 Year Olds (Right Axis)

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'00 '02 '04 '06 '08 '10 '12 '14 '16 '18 Labor Force Participation Rate (SA, %)

Labor Force Participation Rate of Prime-Age Males Has Jumped in Recent Months

Women: 25-54 Years

Men: 25-54 Years (Right Axis)
© 2018 Fannie Mae. Trademarks of Fannie Mae. 3.12.2018 4 of 6

The Fed Has Reasons to Be Patient

During his Congressional testimony, Fed Chair Powell was upbeat about the economy and noted that recent data 

increased his confidence that inflation will move toward the two-percent target. When asked whether the median fed funds 

rate forecast in December (which implied three hikes in 2018) was still appropriate, Powell said that his “personal outlook” 

for the economy has strengthened since December, partly because of more stimulative fiscal policy and continued strong 

global growth. He noted further that he would be “taking into account everything that’s happened since December” when 

he submits his updated projections at the next Federal Open Market Committee (FOMC) meeting on March 20-21. 

So far, inflation has not flashed any warning signs. The Fed’s favored measure of inflation, the Personal Consumption 

Expenditures (PCE) deflator, jumped 0.4 percent in January; however, the 12-month increase was unchanged at 1.7 

percent for the third consecutive month. Core PCE (excluding food and energy) rose 1.5 percent from a year ago for four 

straight months. Regarding the other Fed mandate on full employment, we view the cooling of February’s wage gains and 

the pickup in the labor force participation rate consistent with three rate increases this year. We continue to expect the first 

rate increase of the year in March, with risks to the forecast tilted toward four hikes this year.

Business Investment Turns Bearish Amid Worsening Trade

Business investment in equipment has cooled following robust growth in the third and fourth quarters. The factory orders 

report showed that core (nondefense excluding aircraft orders) capital goods shipments, an input to estimate the business 

equipment spending component in GDP, fell in January for the first time in a year, and core capital goods orders, a 

forward-looking indicator, registered back-to-back drops for the first time since May 2016. Another source of weakness 

this quarter is trade. The trade deficit widened in January, reaching the biggest trade gap of the expansion. The real 

goods deficit, used in the calculation of net exports in GDP, widened to the largest level in 11 years, suggesting trade will 

drag on GDP for the second consecutive quarter. Residential investment should also act as a drag on economic growth 

(see the housing section). The main GDP components offsetting those weaknesses include inventory investment and 

government spending, which has been boosted by the Budget Act. Considering the overall impacts of these components, 

we revised lower our forecast of first quarter GDP growth by six-tenths to 2.1 percent annualized. We expect the 

slowdown in economic growth to be transitory and expect a pickup in growth to at least 3.0 percent annualized over the 

next three quarters.

 

Housing Roundup

Homebuilding activity was mixed at the start of 2018. Single-family starts 

partially recovered from the double-digit percent drop in December, while 

multifamily starts surprised to the upside, surging to the highest level since 

the end of 2016, with permits rising for the first time in three months. The 

marked improvement led us to revise higher our forecast for multifamily 

starts to a slight gain this year from the modest drop predicted in our prior 

forecast.

For information on multifamily market conditions, read the March 2018

Multifamily Market Commentary.

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'15 '16 '17 '18 Nondefense Capital Goods ex Aircraft (SA, Month-over-Month % Change)

Core Capital Good Shipments and Orders Take a Breather

New Orders Shipments

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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.$)

Trade Deficit Reaches Widest Level of the Expansion

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Housing Starts (SAAR, Thousands of Units)

Single-Family Starts Partially Rebound as Multifamily Starts Hit a 13-Month High

Single-Family Multifamily (Right Axis)
© 2018 Fannie Mae. Trademarks of Fannie Mae. 3.12.2018 5 of 6

Home sales performed poorly to start the year. Existing home sales fell in January for the second consecutive month and 

posted the largest year-over-year drop in more than three years. Tight inventory continued to weigh on sales as real 

estate agents noted strengthening buyer traffic in most areas. The sharp drop in year-over-year inventory continued 

unabated. Pending home sales, a forward-looking indicator of existing home sales, declined sharply in January, 

suggesting sales will likely decrease further in the near term. New home sales tumbled in January, but sizable upward 

revisions to prior months tempered the weakening trend. While the for-sale inventory of new homes has fared better than 

that for existing homes, it remains near the levels generally seen during prior recessions. Overall, the slower pace of 

home building activity and declining home sales (and thus brokerages fees) in January should result in a decline in 

residential investment this quarter following a strong gain in the prior quarter.

 

Home price appreciation remained robust at the end of 2017, with the main price measures exhibiting more than 6 percent 

year-over-year gains in December. While strong home price appreciation impedes sales and erodes home purchase 

affordability, it helps boost homeowner equity. During the fourth quarter of 2017, homeowners’ equity as a share of real 

estate value continued to rise, reaching the highest level in nearly 12 years.

 

 

Our housing activity and mortgage rate forecasts have not materially changed over the past month. We project that 

purchase mortgage originations will rise about 5 percent from 2017 to $1.19 trillion in 2018, while refinance originations 

will drop about 30 percent to $498 billion. Single-family mortgage debt outstanding grew 2.8 percent annualized during the 

fourth quarter, the slowest pace in three quarters, but for all of 2017, it increased 3.0 percent, the biggest annual gain 

since 2007.

Economic & Strategic Research (ESR) Group

March 12, 2018

For a snapshot of macroeconomic and housing data between the monthly forecasts, please read ESR’s Economic and 

Housing Weekly Notes

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Existing Home Sales Market Slumps to Start 2018

Existing Home Sales (Left Axis)

Pending Home Sales (Right Axis)

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'00 '02 '04 '06 '08 '10 '12 '14 '16 '18 Millions Existing Homes Available for Sale (NSA)

Inventory of Existing Homes for Sale Deteriorates Further

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'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 House Price Indices (Year-over-Year Growth, %)

Annual Home Price Appreciation Remains Above Six Percent in December

FHFA House Price

Index: Purchase Only CoreLogic: US National S&P/Case-Shiller: US National

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'02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17

Homeowners’ Equity as a Share of Real Estate Value

Homeowners' Equity Share of Real Estate Value Climbs to Highest Level Since Q1 2006
© 2018 Fannie Mae. Trademarks of Fannie Mae. 3.12.2018 6 of 6

Data source for charts: Bureau of Economic Analysis, Federal Reserve Board, Conference Board, Bureau of Labor Statistics, Census Bureau, 

National Association of REALTORS®, Federal Housing Finance Agency, Standard & Poors, 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 and Deputy Chief Economist

Orawin T. Velz, Director Frank Shaw, Economist 

Hamilton Fout, Director Rebecca Meeker, Business Analyst