Economic Developments – March 2017

© 2017 Fannie Mae. Trademarks of Fannie Mae. 3.10.2017 1 of 5

Fed Signals It Won’t be Behind the Curve

Our growth forecast has remained unchanged over the past month, with full-year growth of 2.0 percent still expected for 

2017. Given current developments, we’re comfortable with our assumption that materially positive impacts from any new 

fiscal stimulus will be limited in 2017. We are also aware that some potential new policies could be detrimental to growth.

Our view is consistent with the Fed’s discussion in the minutes of the January 31-February 1 Federal Open Market 

Committee (FOMC) meeting. FOMC participants view potential expansionary fiscal policy as presenting upside risks to 

their forecasts, with some noting that several potential policy changes could pose downside risks. Thus, we note both 

downside and upside risks to our two-percent growth forecast this year.

Between the release of the FOMC meeting minutes on February 22 and the end of the month, fed funds futures’ odds of a 

March rate hike was a tossup. However, subsequent hawkish remarks from Fed officials, including those by Fed Chair 

Janet Yellen on March 3, led the futures market to quickly reprice its expectations, with odds of a March hike reaching 100 

percent on March 8. Yellen noted that if the Fed waits too long to withdraw monetary stimulus, it runs the risk of having to 

raise rates more rapidly down the road. Overall, Fed officials’ remarks suggest that employment and inflation 

environments have recently evolved in a way that supports a rate hike. Even without more clarity on fiscal policy, the Fed 

appears ready to continue monetary normalization this month. Meanwhile, the Fed’s favored measure of inflation—the 

Personal Consumption Expenditures (PCE) deflator—jumped 0.4 percent in January from the prior month and 1.9 percent 

from last January, the strongest annual rise since October 2012 and just one-tenth below the Fed’s target. Excluding food 

and energy items, core inflation was relatively stable, rising 1.7 percent from a year ago for the fifth time in six months.

 

Measures of inflation expectations have also risen over the past month. For example, the 5-year Breakeven Rate trended

up to around a two-year high at the time of this writing. Treasury yields have also moved higher, with the yield on 2-year 

Treasuries rising to an expansion high. Overall, we see developments in the job market and inflation consistent with 

hawkish remarks from the Fed, and we expect to see a rate hike next week followed by two additional rate increases this 

year.

 

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100% Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Fed Funds Futures Odds of a March Rate Hike

Futures Market Fully Prices in a Fed Funds Rate Hike at the March FOMC Meeting 

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'12 '13 '14 '15 '16 '17 Personal Consumption Expenditures: Chain Price Index (Y-o-Y % Change)

Fed’s Favored Inflation Measure Approaches 

the Target

PCE: Price Index

PCE: Less Food and Energy

Federal Reserve Target

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2.2% Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 U.S. 5-Year Breakeven* Rate

Inflation Expectations Hover Near a Two-Year High

*The difference between the nominal yield on the 5-year Treasury and the yield on 5-year Treasury Inflation-Protected Securities.

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

U.S.Treasury Yields Rise in Preparation for a March Fed Funds Hike

UST 10-Year Yield

UST 2-Year Yield
© 2017 Fannie Mae. Trademarks of Fannie Mae. 3.10.2017 2 of 5

First Quarter Growth Poised to Slow Again

First quarter economic growth will likely slow from the final quarter of last year, marking the fourth consecutive time that 

growth has decelerated to start the new year. In the prior forecast, we expected real gross domestic product (GDP) 

growth this quarter to be little changed from last quarter, which remained at 1.9 percent annualized in the government’s 

second estimate. However, incoming data suggest that our previous forecast was too optimistic, leading us to revise lower 

our current-quarter economic growth forecast to 1.6 percent. The main culprit was consumer spending. Despite half a 

percentage point upgrade in real consumer spending in the fourth quarter to 3.0 percent annualized in the second print of 

fourth quarter GDP, January real consumer spending fell 0.3 percent, the biggest drop in three years, amid flat real 

personal income. Some of the weakness came from a downturn in utility spending, which should reverse if more 

seasonable temperatures return. In addition, some analysts argued that later-than-usual tax refunds, due to additional 

vetting to prevent fraud, may have depressed consumer spending in January. February consumer-related data showed 

that auto sales edged down to a 17.6 million annualized pace. Given the drop in January consumer spending and flat

February auto sales, we downgraded first quarter real consumer 

spending growth by half a percentage point to 1.9 percent.

While hard data on consumer spending disappointed, surveys of 

consumer confidence remained upbeat. The Conference Board 

consumer confidence index rose in February to the highest level since 

July 2001. Meanwhile, the University of Michigan consumer sentiment 

index dropped only modestly in February from an expansion high in 

the prior month. The February Fannie Mae National Housing Survey® 

continued to show post-election bullishness, with the share of 

consumers saying the economy is on the right track rising for the third 

straight month to reach the highest level since the survey’s inception 

in 2010. The share of consumers saying the economy is on the wrong 

track also fell for the third straight month to a fresh survey low.

Despite signs of a marked slowdown this quarter, consumer spending should continue to drive growth this year, supported

by improving labor market conditions. The February jobs report showed back-to-back strong job gains, with nonfarm 

employment rising 235,000 on the heels of modest revisions to the prior two months. The three-month average job gain 

climbed to more than 200,000, the best showing since last September, and annual growth in earnings rebounded to 2.8 

percent, just below the expansion high of 2.9 percent seen at the end of last year. The strong headline job gain in 

February was boosted by the largest monthly increase in total construction payrolls since 2007, thanks to the 

unseasonably warm weather during the month. Residential construction payrolls also posted a solid gain, extending a 

string of at least 18,000 jobs added per month since last November. The household survey showed the unemployment 

rate edged down to 4.7 percent despite a large jump in the labor force, and the broadest measure of the unemployment 

rate (U-6) fell two-tenths to 9.2 percent, tying an expansion low. 

In addition to improving labor market conditions, rising household net worth should help support consumers. According to 

the Fed’s Financial Accounts of the U.S., household and nonprofit organization net worth—the value of assets minus 

liabilities—increased $2.0 trillion in the fourth quarter of 2016 to a record high of $92.8 trillion, boosted by gains in both 

housing and stocks. Notably, net worth as a share of disposable income rose to 650 percent, also a record high. 

 

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'06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17

Construction Employment (SA, Month-over-Month Change, Thous.)

Construction Sector Sees Largest Payroll Gain Since 2007

Residential Construction Employment

Total Consruction Employment

Note: Residential Construction Employment combines 

construction of buildings and specialty trade contractors

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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 

Household Net Worth as a Percentage of Personal Income Hits a New Record High

Dot-Com Bubble

Housing Bubble

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'10 '11 '12 '13 '14 '15 '16 HPSI: Respondents Who Think the Economy is on the Right/Wrong Track 

Consumers Have a Change of Heart Over the Outlook for the Economy

Right Track Wrong Track
© 2017 Fannie Mae. Trademarks of Fannie Mae. 3.10.2017 3 of 5

Incoming data on factory orders and manufacturing surveys suggest continued improving manufacturing activity and 

business investment in equipment. Residential construction spending data point to a second consecutive quarter of solid 

growth in residential investment. The trade sector is likely to remain the only drag on growth this quarter and will likely

remain a headwind for the rest of the year. Inventory investment should add to GDP this quarter but should be neutral for 

all of 2017.

Housing Roundup

After declining during December, home sales beat expectations in January, with existing sales showing a sizable gain to 

the strongest pace since 2007 and new home sales partially recapturing ground lost in the prior month. However, leading 

indicators point to near-term weakness. Pending home sales, which record contract signings of existing homes and 

typically lead closings by one to two months, declined in January for the second time in three months to reach a 12-month 

low. Furthermore, purchase mortgage applications dropped on average during February, ending a stretch of three 

consecutive monthly gains. 

 

The weakness in these leading indicators supports our view that 

some of the improvement in home sales at the start of the year 

was likely the result of a rush to enter the market before 

mortgage rates could rise further. One positive piece of forwardlooking news is that housing sentiment moved higher in February 

along with sentiment regarding the economy. The Fannie Mae 

Home Purchase Sentiment Index® increased in February for the 

second consecutive month, reaching the highest level since data 

collection began in 2010.

Inventory remains very tight, especially in the existing home 

market, as the number of homes for sale has fallen year-overyear for nearly two years. In January, the existing homes 

inventory reached the lowest level for any January since the 

inception of the series in 1999.

Scarce inventory has maintained upward pressure on home prices. 

At the end of last year, the principal measures of house prices

recorded the strongest annual appreciation since 2013. The 

CoreLogic house price index strengthened further in January, with 

year-over-year growth of 6.9 percent compared with 6.3 percent in 

December. The Fed uses this measure of home prices to estimate 

the value of household real estate in the Financial Accounts of the 

U.S. For the fourth quarter, household net equity in residential real 

estate increased $0.5 trillion, resulting in a cumulative increase of 

$7.1 trillion over the past five years. Home equity as a percent of real 

estate value increased to 57.8 percent last quarter from a record low 

of 36.0 percent in the first quarter of 2009. Meanwhile, the share of 

residential properties with negative equity continued to trend down, 

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'06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 SAAR, Millions of UnitsSAAR, Millions of Units

Home Sales Beat Expectations

Existing Home Sales

New Home Sales (Right Axis)

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'11 '12 '13 '14 '15 '16 '17

Leading Indicators Point to Near-Term Headwinds for Home Sales Mortgage Applications for Purchase Index Pending Home Sales Index (Right Axis)

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

Home Price Indices Post Strongest December-over-December Gain Since 2013

FHFA House Price

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

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'55 '60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '15 Homeowners’ Equity as a Share of Real Estate Value

Homeowners' Equity Share of Real Estate Value Climbs to Highest Level Since Q2 2006
© 2017 Fannie Mae. Trademarks of Fannie Mae. 3.10.2017 4 of 5

reaching 6.2 percent in the fourth quarter of 2016, compared with a peak of 26.0 percent seven years earlier, according to 

CoreLogic. 

While strong home price gains are a positive for existing home owners, they create a challenge for potential first-time 

homebuyers. However, demographics should be a positive factor for the first-time homebuyer market: the large Millennial 

generation is moving full-force into the age groups (late twenties 

through mid-30s) where first-time home buying is common; the most 

recent data from the Census Bureau show strong real income gains 

for households in the prime ages for first-time home purchase; and 

our research indicates that homeownership rate gains have 

accelerated in recent years for young adults aging through their late 

twenties and early thirties. 

Another positive for the mortgage market is that consumers believe 

that it’s easier to get a mortgage than in the past. The February 

Fannie Mae National Housing Survey® showed that the share of 

consumers who believe that it is easier now to get a mortgage 

exceeded those who believe it is more difficult by the greatest 

margin in six years. 

However, very tight starter home supply is weighing against first-time homebuyers. CoreLogic data show that for-sale 

inventory in the lowest tier of the home price distribution is extremely lean. Because listings are not keeping pace with 

demand for starter homes, prices for lower-tier homes have appreciated at a much faster pace than prices for higher-end 

homes. 

 

Tight inventory and strong home price appreciation bode well for 

homebuilding activity. In January, single-family starts rose modestly 

as multifamily activity fell sharply. Homebuilders remained optimistic 

in February, with confidence just four points below the eleven-year 

high reached in December.

Our outlook for mortgage rates, housing activity, and mortgage 

originations is little changed from the prior forecast. Total mortgage 

originations should drop about 19 percent this year to $1.57 trillion, 

as a decline in refinance originations outpaces a rise in purchase 

originations. The refinance share should decline 15 percentage 

points from 2016 to 33 percent. Single-family mortgage debt 

outstanding continued to heal from the massive decline stemming 

from the housing crisis, rising 2.7 percent annualized in the fourth 

quarter from the prior quarter and 2.3 percent from a year ago.

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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, 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

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Corelogic House Price Index (Jan '00=100, Year-over-Year % Change)

Home Price Growth Accelerates, Especially for 

the Lower-Price Tiers of Homes

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Tier 4 National HPI

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'10 '11 '12 '13 '14 '15 '16 HPSI: Respondents Who Think It Would be Easy/Difficult to Get a Mortgage 

Consumers Believe It Is Easier to Get a Mortgage

Difficult Easy

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'06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 Mortgage Debt Oustanding (1-4 Units, NSA, Y-o-Y % Change) 

Single-Family Mortgage Debt Outstanding Posts Best Annual Growth in Eight Years
© 2017 Fannie Mae. Trademarks of Fannie Mae. 3.10.2017 5 of 5

Economic & Strategic Research (ESR) Group

March 10, 2017

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: Bloomberg, Bureau of Economic Analysis, Federal Reserve Board, Fannie Mae, National Association of REALTORS®, Census 

Bureau, Mortgage Bankers Association, 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 Michael T. Vangeloff, Strategic Planning Analyst III