Economic Developments – November 2016

© 2016 Fannie Mae. Trademarks of Fannie Mae. 11.18.2016 1 of 5

Uncertainty Changes But Continues Post-Election

At the beginning of 2016, we noted the maturing of the U.S. expansion as well as housing inventory problems. Since then, 

the economy appears to have transitioned to a late-cycle phase, with a slowdown in job growth and business investment 

amid compressed corporate profit margins. The housing inventory problem continues unabated as demand from first-time 

buyers has increased with household formation and at a faster pace than supply, leading to strong real and nominal price 

increases and affordability challenges for entry-level buyers.

While the late stages of an economic cycle can last several years, growth tends to moderate over time, making the 

economy more vulnerable to shocks. The forthcoming change in the administration alters the aspect of uncertainty from 

one of an unknown election outcome to one of unknown legislative and regulatory priorities and their probability of 

enactment. Therefore, there may be increased market volatility in the medium term. Given campaign themes, we may see

some changes in policies regarding corporate and individual tax rates, infrastructure investment, government spending, 

health care, and immigration.

At this point, we haven’t changed the general tone of our forecast, but will incorporate new policy assumptions as they 

become more concrete. We continue to expect economic growth to pick up in the second half of the year, averaging 2.4 

percent, following 1.1 percent growth during the first half. Our full-year 2016 growth forecast remains at 1.8 percent, and 

we expect to see a similar pace of growth in 2017. Depending on the incoming President’s policy priority, our forecast for 

2017 is subject to both upside and downside risks. For example, if there are tax cuts and spending increases, that would 

be expected to boost near-term growth, but if new policies result in sharply higher tariffs on China and Mexico, rethinking 

the Trans-Pacific Partnership, and renegotiating the North American Free Trade Agreement (NAFTA), that would be 

expected to drag on growth.

As with the Brexit vote, the outcome of the presidential election was not priced in by the financial markets. The immediate 

impact – an equity sell-off pushing S&P 500 futures down by 5.0 percent overnight – was reversed, and the stock market 

managed to trade higher by the next morning, a rare phenomenon. The 10-year Treasury yield jumped 20 basis points, 

the biggest one-day increase since July 2013, reaching 2.06 percent and closing above 2.0 percent for the first time since 

January. The 30-year Treasury yield jumped 23 basis points, the largest increase in more than five years, reaching 2.85

percent. At the time of this writing, the 10-year yield rose to 2.15 percent, bringing the two-day cumulative increase to 30

basis points. With the spike in long-term Treasury yields, the yield curve has steepened, with the gap between the 10- and 

2-year Treasury yields widening to 124 basis points – the biggest difference since January.

Break-even inflation rates, a measure of expected inflation derived from Treasury Constant Maturity Securities and 

Treasury Inflation-Indexed Constant Maturity Securities of the same maturity, have moved higher following the election, 

reaching 1.91 percent on November 10, the highest level since July 2015. It is possible that the markets overreacted, and 

we will have to wait and see what the lasting impact on market conditions will be.
© 2016 Fannie Mae. Trademarks of Fannie Mae. 11.18.2016 2 of 5

Strong GDP Headline Masks Weakening Domestic Demand

Looking back to the third quarter, while headline economic growth 

picked up to 2.9 percent annualized, more than doubling the pace in the 

second quarter, much of the improvement came from an inventory

investment swing and from trade. Inventory building resumed in the 

third quarter following the drawdown in the second quarter, adding 0.6 

percentage points to gross domestic product (GDP). Net exports added 

another 0.8 percentage points to GDP, largely due to a surge in 

soybean exports that is now fading. However, final sales to domestic 

purchasers, which is GDP excluding the impact from net exports and 

inventories, grew just 1.4 percent – one percentage point lower than the 

prior quarter – pointing to weakening underlying domestic demand.

Consumers became significantly more cautious last quarter, with real 

consumer spending growth moderating substantially to 2.1 percent 

annualized from 4.3 percent in the second quarter. Business investment 

in structures increased last quarter for the first time in seven quarters, as oil and gas mining activity recovered. However,

business investment in equipment contracted for the fourth consecutive quarter, which is unprecedented in an expansion. 

Meanwhile, housing remained in the red, as residential investment declined for the second consecutive quarter – the first 

such occurrence since late 2013 and early 2014, and only the second back-to-back drops in the current expansion.

Underlying Growth Should Strengthen

Our forecast points to a slowdown in real GDP growth to 1.9 percent 

annualized this quarter. An expected swing from a large, 

unsustainable increase in net exports during the third quarter to a 

large decline in the fourth quarter is the primary factor accounting for 

the expected slower economic growth. Despite moderating headline 

growth due to the expected drag from net exports, we expect final 

sales to domestic purchasers to strengthen in the fourth quarter.

Business investment in equipment should rebound, given a recent 

improving trend in core durable goods orders – its forward-looking 

indicator. However, we do not anticipate a substantial turnaround 

going forward given enhanced uncertainty of government policy 

facing businesses. We also expect that residential investment will no 

longer drag on GDP, as single-family construction spending showed 

signs of stabilizing amid continued improving multifamily construction 

spending in September. Inventory investment should again drive 

growth as the inventory building phase is expected to continue. 

Consumer spending is also expected to drive growth. Real consumer spending ended the third quarter on a positive note, 

largely offsetting the drop in August. An upside surprise at the start of the fourth quarter was the pickup in auto sales to 18 

0%

1%

2%

3%

4%

5%

Q3-'14Q4-'14Q1-'15Q2-'15Q3-'15

Q4-'15Q1-'16

Q2-'16Q3-'16

Real Annualized GDP Growth 

(SAAR, Chn.2009$)

Stronger Headline Growth Masks Weakening 

Domestic Demand

Final Sales to Domestic Purchasers

Gross Domestic Product

Note: Final sales to domestic purchasers is gross domestic purchases less 

net exports and change in private inventories.

-50%

-25%

0%

25%

50%

75%

'47 '52 '57 '62 '67 '72 '77 '82 '87 '92 '97 '02 '07 '12

Business Fixed Investment: Equipment 

(SAAR, Chn.2009$)

Business Equipment Investment Shows 

Unprecedented Declines in an Expansion

-10%

-5%

0%

5%

10%

15%

20%

Q4-'13Q1-'14Q2-'14Q3-'14Q4-'14Q1-'15Q2-'15Q3-'15Q4-'15Q1-'16Q2-'16Q3-'16

Private Residential Fixed Investment 

(SAAR, Chn.2009$)

Residential Investment Posts 

Back-to-Back Drops
© 2016 Fannie Mae. Trademarks of Fannie Mae. 11.18.2016 3 of 5

million units annualized, suggesting another increase in durable 

goods spending in October. Nonetheless, we expect consumers to 

remain cautious, given recent weakening in real disposable income.

However, the October jobs report points to a decent gain in income. 

Nonfarm employment rose 161,000 on the heels of upward revisions

of 44,000 jobs in the prior two months. The average workweek was 

unchanged, but average hourly earnings for all private workers rose 

0.4 percent from September and 2.8 percent from last October, the 

strongest year-over-year rise since June 2009. While the 

unemployment rate ticked down to 4.9 percent, it was because the 

decline in the labor force outweighed the drop in household 

employment. On a positive note, the two-tenth drop in the broadest 

measure of labor underutilization – the U6 – to more than an eightyear low of 9.5 percent should overcome any concern that significant 

labor market slack remains.

The Fed Stands Ready for a December Rate Hike

As widely expected, the Fed kept the fed funds rate steady at the 

November Federal Open Market Committee (FOMC) meeting. The 

statement following the meeting noted that the case for a rate hike 

“continued to strengthen” and that the Fed will wait to see just “some 

further evidence of continued progress toward its objectives” before 

raising the target rate. We believe that the October jobs report 

provided “some further evidence” for a rate increase in December.

One notable removal from the November FOMC statement was the 

phrase that inflation is expected to remain low in the near term, in 

part because of earlier declines in energy prices. With this change, 

the Fed appears to be acknowledging that the disinflationary 

pressures from past declines in energy prices have run their course 

and that inflation will gradually pick up. Inflation has firmed since earlier this year, but remains below the Fed’s twopercent target. The personal consumption expenditures (PCE) deflator – the Fed’s favored inflation measure – posted the 

highest annual growth rate since November 2014 in September, boosted by a jump in energy prices, while annual growth 

in the core PCE remained at a two-year best of 1.7 percent.

Given the October jobs report, we moved our expectation of the Fed’s next rate hike to this December from June 2017 in 

our October forecast. We still believe that rate increases in coming years will be gradual – one hike every nine months. 

However, if there is fiscal stimulus in the near term from proposed tax cuts and infrastructure and defense spending 

increases, that would likely raise inflation expectations, potentially resulting in more frequent rate increases than our 

current assumption.

Housing Roundup

Recent housing activity has been mixed. Single-family starts rose 

only modestly in the third quarter after dropping in the second 

quarter, while multifamily starts fell for the third time in the last four 

quarters. Through the first three quarters, single-family starts rose 

nearly 9.0 percent from the same period in 2015, compared with a 

decline of about 5.0 percent for multifamily starts. Permits data 

suggest more room to grow for the single-family segment as year-todate permits are about 8.0 percent above last year’s level. By 

contrast, year-to-date multifamily permits are about 12 percent below 

the level during the same period in 2015. (For more information on 

multifamily market conditions, read the November 2016 Multifamily 

Market Commentary.)

-2%

-1%

0%

1%

2%

3%

4%

5%

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

Personal Consumption Expenditures: 

Chain Price Index (Y-o-Y % Change)

Inflation Has Gradually Trended Up But 

Remains Below Target

PCE: Price Index

PCE: Less Food and Energy

Federal Reserve Target

3.2%

13.4%

8.6%

-5.2%

2.5%

15.9%

7.5%

-2.8%

1.6%

15.5% 14.8%

10.0%

-10%

-5%

0%

5%

10%

15%

20%

Existing Home

Sales

New Home

Sales

Single-Family

Housing Starts

Multifamily

Housing Starts

Year-over-Year % Change

Housing Market Should Continue to Expand 

Through the Rest of the Year and in 2017

2016 YTD 2016 Forecast 2017 Forecast
© 2016 Fannie Mae. Trademarks of Fannie Mae. 11.18.2016 4 of 5

Home sales during the third quarter were also mixed compared with the 

second quarter, with existing home sales declining but new home sales 

rising. Year to date, new and existing home sales have risen 

approximately 13 percent and 3.0 percent, respectively, compared with

last year’s levels. 

One of the biggest challenges for housing remains the extremely lean 

inventory of homes for sale. The number of existing homes for sale 

declined 6.8 percent in the third quarter from a year ago, marking the 

sixth consecutive quarter of year-over-year decreases and the largest

drop since the second quarter of 2013. CoreLogic data by price tier 

continued to show tighter supply and more rapid price gains in the lower 

tiers of the home sales market. For example, in September, inventories 

of homes for sales were below their year-ago levels in all price tiers,

except the highest one. Meanwhile, annual home prices for the lowest 

price tier (up to 75 percent of the median price) and second lowest price 

tier (between 75 percent of the median and the median price) grew 8.8 

percent and 7.6 percent, respectively – faster than the national average 

of 6.3 percent gain. 

Tight inventory and strong home price appreciation at the lower end of 

the housing market will remain the biggest challenges for recently formed 

renter households to move into homeownership. Home purchase 

affordability will be constrained further if the recent pickup in mortgage 

rates persists, which would present a downside risk to our forecast of 

housing and mortgage activity. Lending standards for mortgages remain 

supportive, however. The Federal Reserve Senior Loan Officers Survey 

showed that lending standards for government-sponsored enterprise 

(GSE) and jumbo mortgages eased over the three months ending in 

October, while lending standards for government and subprime loans 

were unchanged. Encouragingly, the homeownership rate has recently 

shown signs of stabilization. The rate rose 0.6 percentage point in the 

third quarter, offsetting the drop in the prior quarter, and stood two-tenths 

below the rate in the third quarter of 2015. 

We expect long-term interest rates to be volatile in the near term. While 

our mortgage rates forecast moved higher, our forecast for housing 

activity for 2016 is little changed, and we continue to expect improvement 

in housing starts and home sales in 2017. For mortgage production, we 

revised higher our projected refinance originations this year, largely in our 

estimate for the third quarter. For all of 2016, we expect total mortgage 

originations to increase about 8.0 percent to $1.88 trillion with a refinance 

share declining one percentage point to 46 percent. Mortgage 

originations are projected to decline in 2017, falling about 14 percent to 

$1.61 trillion, as a result of a drop in refinance originations, sending the 

refinance share lower to 34 percent.

Economic & Strategic Research (ESR) Group

November 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: Federal Reserve Board, Bureau of Economic Analysis, Bureau of 

Labor Statistics, National Association of REALTORS®, Census Bureau, CoreLogic, and 

ESR forecast. 62%

63%

64%

65%

66%

67%

68%

69%

70%

'65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '15

Homeownership Rate (NSA, %)

Homeownership Rate Shows Signs of 

Stabilization

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

'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, 

Except for the Upper Tier

Tier 1

Tier 2

Tier 3

Tier 4

National

Note: Tier 1: 0-75% of median, Tier 2: 75%-100% of median, 

Tier 3: 100%-125% of median, Tier 4: 125% + of median

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

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

Corelogic House Price Index

(Jan '00=100, Year-over-Year % Change)

Home Price Growth for Starter Homes 

Accelerates Faster than the Rest of the Market

Tier 1

Tier 2

Tier 3

Tier 4

National HPI

Note: Tier 1: 0-75% of median, Tier 2: 75%-100% of median, 

Tier 3: 100%-125% of median, Tier 4: 125% + of median

-10%

-5%

0%

5%

10%

15%

Q4-'15 Q1-'16 Q2-'16 Q3-'16

Quarter-over-Quarter % Change

Housing Activity Shows Mix Results 

Existing Home Sales

New Home Sales

Single-Family Housing Starts

Multifamily Housing Starts
© 2016 Fannie Mae. Trademarks of Fannie Mae. 11.18.2016 5 of 5

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 Michael T. Vangeloff, Strategic Planning Analyst III