Economic Developments – May 2018

© 2018 Fannie Mae. Trademarks of Fannie Mae. 5.11.2018 1 of 5

Boost from Fiscal Policy to Fade in 2019

First quarter economic growth of 2.3 percent annualized is now in the rearview mirror. It was the slowest pace in a year, 

down from 2.9 percent in the final quarter of 2017. We expect a pickup in growth during the rest of the year based on last 

December’s Tax Cuts and Jobs Act and this February’s Bipartisan Budget Act of 2018, which should boost consumer 

spending, business investment, and government outlays. Our full-year 2018 forecast remains at 2.7 percent, unchanged 

from our prior forecast. We lowered 2019 growth projections by two-tenths to 2.3 percent, as we now expect the stimulus

from fiscal policy to fade and the labor market to tighten more than we did previously.

The mostly cheery first paragraph should not obscure the downside 

risks to our forecast, including the continued rise of oil prices. 

Declining global stocks of crude oil amid strong demand and rising 

geopolitical uncertainty have pushed crude prices higher by about 

$11 per barrel since December to reach $71 per barrel at the time of 

this writing. Rising gasoline prices decrease disposable income and 

are therefore likely to negate some of the increase in disposable 

income from the tax cuts. Furthermore, higher gasoline prices put 

upward pressure on headline inflation and could lead the Fed to raise

interest rates more quickly than currently anticipated. Meanwhile, 

protectionist trade policy remains a headwind to growth.

Despite Tax Cuts, Spending Falters in Early 2018

The main factor behind disappointing first quarter real gross domestic product (GDP) growth was consumer 

spending. After increasing 4.0 percent annualized in the prior quarter, real consumer spending grew just 1.1 percent in the 

first quarter, contributing only 0.7 percentage points to GDP growth, compared with a 2.8 percentage point contribution in 

the prior quarter. Spending on motor vehicles and parts was largely responsible for the marked slowdown. Following a 

fourth quarter surge as consumers replaced vehicles destroyed by the hurricanes, real spending on motor vehicles and 

parts posted the third largest drop of the expansion and subtracted 0.4 percentage points from first quarter growth, 

virtually offsetting its contribution to growth in the prior quarter.

 

Monthly data show that real consumer spending increased 0.4 percent in March, the first rise in three months, as tax 

refunds caught up to historical norms and most households realized lower withholdings due to the Tax Act. Disposable 

income gains lagged behind spending increases, pushing the saving rate two-tenths lower to 3.1 percent, the first drop 

this year, although the rate remains well above the expansion low of 2.4 percent reached last December. Meanwhile, 

consumers remained cautious with their credit card usage. While growth in nonrevolving debt (largely auto and student 

loans) held steady in March for the third straight month, revolving credit posted back-to-back drops for the first time in 

almost five years. Lending standards for credit card debt also tightened further. The Federal Reserve Senior Loan Officer 

Opinion Survey on Bank Lending Practices for the three months ending in April showed that banks tightened lending 

standards for credit card loans as they increased minimum required credit scores.

-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 Real GDP Annualized % Change

Consumer Spending's Contribution to Growth Weakens; Inventories and Net Exports Step Up

Q4 2017

Q1 2018

0

0

0

0

0

1

1

1

1

1

1

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

'07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 Real PCE: Motor Vehicles & Parts (SAAR, 2009$, Annualized % Change)

Motor Vehicles and Parts Drag on Overall Spending

 $-

 $20

 $40

 $60

 $80

 $100

 $120

 $140

 $160

 $-

 $0.50

 $1.00

 $1.50

 $2.00

 $2.50

 $3.00

 $3.50

 $4.00

 $4.50

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

West Texas Intermediate, Avg, $/BarrelRegular Grade, Avg Dollars per Gallon

Rising Gasoline Prices Will Likely Temper Tax Cut Benefits

Retail Gasoline Price Crude Oil Price (Right Axis)
© 2018 Fannie Mae. Trademarks of Fannie Mae. 5.11.2018 2 of 5

The rebound in real consumer spending in March suggests increased 

momentum heading into this quarter, setting the stage for a sizable 

pickup in spending and thus GDP growth. However, higher gasoline 

prices, which have risen nearly 40 cents per gallon so far this year,

when combined with declining equity values since late January, could 

lead consumers to be more cautious. Thus, we revised lower our 

prediction for real consumer spending growth in 2018 by three-tenths 

to 2.1 percent.

Measures of consumer confidence are at historically high levels amid 

healthy labor market conditions. The April jobs gain came in on the 

soft side, with nonfarm payrolls increasing 164,000. However, a net 

upward revision of 30,000 in the prior two months helped to keep the 

three-month average gain at more than 200,000. Wage pressures 

continued to be muted, as the annual rise in average hourly earnings

held at 2.6 percent for the third consecutive month following a 

downward revision the prior month. 

The household survey showed that the unemployment rate fell for the 

first time in six months to 3.9 percent from 4.1 percent as a result of 

the second straight drop in the labor force participation rate. One 

bright spot from the survey was the decrease in the broadest 

measure of labor underutilization (U-6 unemployment rate) to 7.8 

percent, the lowest level in nearly 17 years. 

The March Job Openings and Labor Turnover Survey (JOLTS) 

pointed to an extremely tight labor market. The job openings rate (as 

a share of total employment) jumped three-tenths in March for the 

second time in three months to 4.2 percent, the highest level since 

the series began in December 2000. The hires rate remained slightly 

below its expansion high. The quits rate, a gauge of workers’ 

confidence in the labor market, ticked up to 2.3 percent, tying the 

expansion high.

The JOLTS results were consistent with the National Association of 

Independent Business Small Business Economic Trends Report, 

which showed that the Small Business Optimism Index rose slightly 

in April. The share of firms with job openings held steady at the 

expansion high of 35 percent. Labor quality remains the top concern, 

cited by 22 percent of small business owners, tying an expansion 

high. 

Although steady wage growth amid a tight labor market should ease 

concerns of runaway inflation, the Fed will watch other measures of 

rising labor costs, such as the Employment Cost Index (ECI). Unlike 

the average hourly earnings data of the monthly jobs report, the ECI is free from the influence of employment shifts across

occupations and industries. The year-over-year rise in the ECI reached an expansion high in the first quarter, thanks to 

the biggest annual increase in wages and salaries of the expansion amid an accelerating annual rise in benefit costs.

Business Equipment Investment Growth Slows

Real nonresidential investment grew during the first quarter at a pace in line with the quarterly gains seen throughout 

2017, driven by the strongest growth in real investment in structures in a year. However, real investment in equipment 

disappointed, growing at less than half the pace of the prior two quarters, despite the Tax Act’s full expensing provision. In 

addition, core (nondefense excluding aircraft) capital goods orders, a forward-looking indicator of equipment investment, 

fell in March for the third time in four months, suggesting that equipment spending growth could slow further this quarter.

Our expectation for improving GDP growth this year depends, in part, on a pickup in business equipment investment, 

which could help spur productivity growth from the current anemic pace. During the first quarter, nonfarm productivity rose 

-10%

-5%

0%

5%

10%

15%

20%

'12 '13 '14 '15 '16 '17 '18

Consumer Credit (EOP, SAAR, %Chg)

Consumers Remain Cautious on Credit Card Debt

Revolving Credit

Nonrevolving Credit

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

'00 '02 '04 '06 '08 '10 '12 '14 '16 '18 JOLTS Rate (Level as a %of Total Employment)

Record High Job Openings Rate—Exceeding Hires Rate—Suggests Very Tight Labor Market

Job Openings

Hires

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

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

Employment Cost Index (SA, Dec-05=100, Y-o-Y % Change)

Workers’ Compensation Has Trended Up Amid Tighter Labor Market

Wages & Salaries of Civilian Workers

Benefits of Civilian Workers
© 2018 Fannie Mae. Trademarks of Fannie Mae. 5.11.2018 3 of 5

just 1.3 percent from a year ago, roughly the same pace seen over the past year. An acceleration in productivity growth is 

needed to help keep unit labor costs contained amid late cycle fiscal stimulus. This would help businesses maintain profit 

margins, allowing them to continue to invest and hire.

 

Domestic Demand Growth Moderates

As expected, inventory investment and government spending contributed to first quarter GDP growth. One surprising 

driver of first quarter growth was trade. The nominal trade deficit narrowed in March for the first time since August 2017, 

falling by the largest amount since February 2009, as exports rose and imports declined. The overall decline in imports 

reflected a sharp reversal in imports of services following a spike in February related to spending on broadcasting rights 

for the Winter Olympics. Imports of goods also declined in March, but reversed only a fraction of a large run-up since 

August 2017. We expect the marked improvement in March to be an aberration, with net exports dragging on growth 

during the rest of the year. A gauge of strength in domestic demand and a better measure of the underlying growth—final 

sales to domestic purchasers (GDP minus trade and inventories)—grew at the slowest pace in two years, after surging at 

the end of 2017 to the fastest growth since 2010.

 

The Fed May Temporarily Tolerate Above-Target

Inflation

Inflation picked up in March. The Fed’s preferred measure of 

inflation, the personal consumption expenditures (PCE) deflator, rose 

2.0 percent annually in March after four consecutive months of 1.7 

percent gains, as core PCE posted a 1.9 percent year-over-year rise. 

As universally expected, the Federal Open Market Committee

(FOMC) voted at its May meeting to hold rates at 1.50 percent to 

1.75 percent. The statement following the meeting reflected the 

acceleration in inflation, as the FOMC noted that headline and core 

inflation “moved close to” the 2 percent target, a change from 

“continued to run below” in the prior statement. Another notable 

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14% Q2-'16 Q3-'16 Q4-'16 Q1-'17 Q2-'17 Q3-'17 Q4-'17 Q1-'18 Business Fixed Investment: Equipment (SAAR, 2009$, Annualized % Change)

Business Equipment Spending Growth Slows

-2.0%

0.0%

2.0%

4.0%

6.0%

'68 '73 '78 '83 '88 '93 '98 '03 '08 '13 Nonfarm Business Sector: Real Output Per Hour, All Persons (Y-o-Y % Change)

Productivity Growth Remains Anemic

-$70

-$65

-$60

-$55

-$50

-$45

-$40

-$35

-$30

-$25

-$20

'00 '02 '04 '06 '08 '10 '12 '14 '16 '18 Trade Balance: Goods and Services (BOP Basis, SA, Bil.$)

Trade Deficit Narrows Sharply

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6% Q1-'10 Q3-'10 Q1-'11 Q3-'11 Q1-'12 Q3-'12 Q1-'13 Q3-'13 Q1-'14 Q3-'14 Q1-'15 Q3-'15 Q1-'16 Q3-'16 Q1-'17 Q3-'17 Q1-'18 Real Annualized GDP Growth (SAAR, Chn.2009$)

Domestic Demand Growth Slows to Worst Pace in Two Years, Following a Surge the Prior Quarter

Final Sales to Domestic Purchasers Gross Domestic Product

-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)

Inflation Picks Up

PCE: Price Index

PCE: Less Food and Energy

Federal Reserve Target
© 2018 Fannie Mae. Trademarks of Fannie Mae. 5.11.2018 4 of 5

modification in the statement was that inflation is “expected to run near the Committee’s symmetric 2 percent objective 

over the medium term.” The introduction of the word “symmetric” could be a signal that the Fed will tolerate inflation 

temporarily overshooting the target. The FOMC also dropped the language that it is “monitoring inflation developments 

closely,” hinting that it is more confident in the near-term inflation outlook. The statement’s somewhat dovish tone and the 

April jobs report support our view of a June rate hike followed by only one more increase this year.

Housing Roundup

First quarter housing activity was lackluster, and as a result real residential investment made no contribution to growth in 

the first estimate of GDP. Homebuilding activity was mixed during the quarter, with multifamily starts posting the largest 

quarterly increase since the second quarter of 2015 amid a slight decline in single-family starts. Meanwhile, new home 

sales increased while existing home sales, which account for nearly 90 percent of total home sales, fell during the quarter. 

 

The for-sale inventory of existing homes has remained below yearago levels for nearly three years, thereby restraining sales and 

boosting prices. Main measures of home prices—the S&P CoreLogic 

Case-Shiller, CoreLogic, and FHFA Purchase-Only home price 

indices—showed strong annual home price gains between 6.3 

percent and 7.2 percent for the nation in February. 

Leading indicators suggest an improving outlook for home sales going 

into the spring selling season: pending home sales rose in March for 

the second consecutive month and purchase applications increased

in April for the second straight month. We continue to expect total 

home sales to rise about 2.5 percent this year. 

The Housing Vacancy Survey (HVS) offered some good news in the 

owner-occupied sector for the first quarter. While the homeownership 

rate (not seasonally adjusted) stayed flat at 64.2 percent, it increased 

on an annual basis for the fifth consecutive quarter. In addition, the 

annual increase in owner households exceeded one million for the 

third time in four quarters and significantly outpaced the drop in renter 

households, which posted a year-over-year decline for the fourth 

consecutive quarter.

Meanwhile, in another sign of constrained supply in the for-sale 

market, the HVS homeowner vacancy rate fell two-tenths from the 

level a year ago to 1.5 percent, the lowest for the first quarter reading 

since 2001. The rental vacancy rate was unchanged from a year ago, 

remaining at 7.0 percent.

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30% 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 Housing Starts (SAAR, Quarter-over-Quarter % Change)

Multifamily Starts Post Strongest Quarterly Rise Since 2015, as Single-Family Starts Slip 

Single-Family Multifamily

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12% 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 SAAR, Quarter-over-Quarter % Change

Existing Home Sales Fall in the First Quarter, as New Home Sales Post Meager Gain

Total Existing Home Sales New Single-Family Home Sales

62%

63%

64%

65%

66%

67%

68%

69%

70%

'80 '85 '90 '95 '00 '05 '10 '15 Homeownership Rate (NSA, %)

Homeownership Rate Continues to Increase From Last Year’s Levels

-1,000

-500

0

500

1,000

1,500

2,000

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 Total Occupied Housing Units (Year-over-Year Change, Thous. of Units)

Annual Increase in Owner Households Again Outweighs Declining Renter Households

Owner Households

Renter Households
© 2018 Fannie Mae. Trademarks of Fannie Mae. 5.11.2018 5 of 5

We have updated our estimate of single-family (1-4 unit properties) 

mortgage originations for the prior year based on our annual 

benchmarking to the newly released Home Mortgage Disclosure Act 

(HMDA) data. We revised higher our estimated purchase originations 

by $42 billion and revised lower our estimate of refinance originations 

by $58 billion, which resulted in a net decline in total mortgage 

originations of $16 billion to $1.83 trillion in 2017. As a result of the 

benchmarking, the refinance share was revised lower by 2

percentage points from the prior estimate to 36 percent.

For 2018, we expect total mortgage originations to decline 

approximately 9 percent from 2017 to $1.67 trillion, as a 26 percent 

drop in refinance originations outpaces a 1 percent rise in purchase 

originations. We expect the refinance share to fall 7 percentage 

points from 2017 to 29 percent.

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

Economic & Strategic Research (ESR) Group

May 11, 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: Bloomberg, Energy Information Administration, Bureau of Economic Analysis, Federal Reserve Board, Bureau of Labor 

Statistics, Census Bureau, National Association of REALTORS®, ESR Group

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

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

Pre-Revision Post-Revision Projected Projected

'17 '18 '19

Single-Family Mortgage Originations (NSA, $Billions, 1-4 Units)

2017 HDMA Release Leads to Downward Revisions on Net to Originations Estimates

Purchase Refinance