Economic Developments – May 2019

© 2019 Fannie Mae. Trademarks of Fannie Mae. 5.10.2019 1 of 5

Growth Exceeds Expectations, but a Slowdown Is Likely

First quarter growth in real gross domestic product (GDP) surprised to the upside at 3.2 percent annualized, accelerating from the 

fourth quarter pace of 2.2 percent. While this was the strongest first quarter growth in four years, details showed deceleration in 

both household and business spending growth. Half of the headline growth was due to increases in net exports and business 

inventories, which we believe are unsustainable. Thus, despite the strong first quarter pace, we expect full-year 2019 growth at

2.3 percent, just one-tenth higher than forecasted previously. For 2020, we believe growth should revert closer to trend at about

1.8 percent as fiscal policy impacts fade, with government spending no longer boosting growth in the second half of the year. 

Risks to our forecast are roughly balanced. U.S.-China trade tensions will likely continue to be a headwind, while elevated 

corporate debt with lower credit quality remains a concern as it makes nonfinancial corporations more susceptible to external 

shocks. Offsetting these downside risks are slightly more sanguine prospects for global demand, stronger productivity growth,

and an improved investment climate due partly to a now firmly “patient” Fed and equity valuations holding near all-time highs.

While residential investment dragged on growth for the fifth consecutive quarter to start the year, we expect to see an 

improvement this quarter. The spring home-buying season has been stronger than we expected, thanks to lower mortgage rates, 

and thus we revised higher our 2019 total home sales forecast from flat to a modest gain of 1.0 percent. 

Temporary Strength: Trade and Inventories

For the first time in this expansion, the largest contributor to first 

quarter growth was net exports, which contributed 1.0 percentage 

point to real GDP. Even though exports rose for the eighth time in 

nine quarters, much of the net gain in trade was due to the largest

decline in imports since 2009. This could be a symptom of 

weakening domestic demand. Our forecast calls for net exports to 

drag on growth during the second half of the year.

Inventories were another contributor to first quarter growth that we 

expect to reverse for the rest of the year. Business inventories 

increased at the fastest pace in nearly four years, adding to growth 

for the third straight quarter. As with net exports, however, we 

expect inventories to turn into a drag on growth as businesses bring

the pace of inventory building more in line with growth in final sales. Supporting that view, the National Federation of 

Independent Businesses reported in March that small businesses were concerned about excess inventories due to weaker sales. 

The net share of businesses planning to add to inventories turned negative for the first time since December 2017.

Final sales to domestic purchasers, a better gauge of the strength of domestic demand than headline GDP, rose 1.4 percent 

annualized in the first quarter, the slowest pace in more than three years. While we expect the measure to pick up this quarter, 

the expected drags on growth from trade and inventories should 

lead to moderating growth in the coming quarters. 

Abroad, first-quarter growth also beat expectations. The Euro Area 

grew at a 1.5 percent annualized pace, accelerating from the fourth 

quarter and above the European Central Bank (ECB)’s projected 

growth of 1.1 percent for all of 2019. While manufacturing activity 

shrank in the Euro Area and uncertainty over Brexit continues to 

loom over the continent, fiscal policy should help boost growth in 

the near term. France has pledged tax cuts in response to 

widespread protests, Germany has announced tax cuts and 

expenditure increases, and Italy is spending heavily on 

infrastructure. 

-0.7% 0.0% 0.7% 1.4% 2.1% 2.8% 3.5%

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

Net Exports Are the Largest Contributor to Growth 

for the First Time of the Expansion

Q1 2019

Q4 2018

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Euro Area (Chn $2010

EUR)

U.S. (Chn $2012 USD) China (Chn $2015

Yuan) Real GDP (SAAR % Change)

First Quarter Growth Accelerates Across the U.S., 

China, and Europe

Q1 2018 Q2 2018 Q3 2018 Q4 2018 Q1 2019
© 2019 Fannie Mae. Trademarks of Fannie Mae. 5.10.2019 2 of 5

Meanwhile, China grew at 6.9 percent in the first quarter, significantly above its 2019 target of 6.0 to 6.5 percent. Despite a variety 

of stimuli, including tax cuts, increased government spending, and relaxed bank reserve requirements, downside risks to Chinese 

manufacturing have emerged and a gauge of Chinese factory activity fell sharply in April, suggesting the policies may not be 

enough to ensure sustained growth. Additionally, U.S.-China trade tensions escalated in early May when the U.S. unexpectedly 

hiked an existing 10 percent tariff on $200 billion of Chinese goods to 25 percent and threatened to impose the same tariff on an 

additional $325 billion in Chinese goods. Equity markets pulled back sharply in response not merely to the U.S.-China 

disagreement but also out of concern that it might portend a similar escalation in U.S.-Europe trade tensions.

Consumer Spending Growth Poised to Pick Up

Personal consumption expenditures (PCE) grew just 1.2 percent 

annualized in the first quarter, the weakest pace in a year. Monthly 

data, however, showed that real consumer spending ended the 

quarter on a strong note, posting the largest monthly gain in two 

years in March. Strong PCE increases amid flat personal income

pushed the saving rate eight-tenths lower to 6.5 percent, well below 

the nearly three-year high of 7.7 percent seen in December. 

However, consumers were cautious with credit card usage in March: 

while growth in nonrevolving credit (largely auto and student loans) 

held steady, revolving credit (largely credit card debt) declined for 

the first time in three months. Meanwhile, the Federal Reserve 

Senior Loan Officer Opinion Survey on Bank Lending Practices for 

the three months ending in April showed that the net share of banks 

tightening lending standards for credit card loans rose to the highest 

level since the end of 2009. 

The March Job Openings and Labor Turnover Survey pointed to an 

extremely tight labor market, which should support continued 

strength in consumer spending. The job openings rate rose to 4.7 

percent, just shy of January’s all-time high, while the hires rate 

remained at 3.8 percent. The job openings rate has exceeded the 

hires rate for more than two years, and the number of openings has 

exceeded the number of unemployed persons for 12 straight 

months. The quits rate, a gauge of workers’ confidence in the labor 

market, held steady at an expansion best of 2.3 percent for the tenth 

straight month.

 

The April jobs report confirmed the strength in the labor market, with nonfarm payrolls increasing by 263,000 jobs to continue its 

rebound from February’s anemic gain. The stronger-than-expected gain helped boost the average monthly job gain for this year 

to 205,000, though this remains slightly below the average 2018 gain of 223,000. The U-6 rate, a broad measure of labor market 

slack, held steady for the third straight month at 7.3 percent, the 

lowest level in 18 years. Other details of the April jobs report, 

however, were less rosy. The average workweek fell while the annual 

change in average hourly earnings has moved sideways in recent 

months after climbing steadily over 2018. The household survey 

results were mixed: the drop in the unemployment rate to its lowest 

level since 1969 came only because a drop in household employment 

was outpaced by a decline in the civilian labor force, pushing the 

labor force participation rate down to a seven-month low.

The first quarter Employment Cost Index, a measure of labor 

compensation that is free from the influence of employment shifts 

across occupations and industries, edged down one-tenth of a 

percent on an annual basis from the expansion high of 2.8 percent as 

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'07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 Revolving Consumer Credit Outstanding (EOP, SA, MoM % Change)

Consumers Take on Less Credit Card Debt 

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'07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 ECI: Compensation: Civilian Workers (NSA, Dec-05=100, Y-o-Y % Change)

The Annual Rise in the Employment Cost Index 

Slows, Suggesting No Significant Wage Pressure

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'00 '02 '04 '06 '08 '10 '12 '14 '16 '18 JOLTS Rate

Job Openings Rate Remains Elevated Compared to Hires Rate, Suggestive of a Tight Labor Market

Job Openings (Openings/(Employment+Openings)*100) Hires (Hires/Employment*100)
© 2019 Fannie Mae. Trademarks of Fannie Mae. 5.10.2019 3 of 5

growth of the wages and salaries component as well as the benefits component slowed, indicating no significant wage pressure 

despite the tight labor market.

Consumers appear to remain upbeat. The University of Michigan Consumer Sentiment index declined modestly in April but has 

essentially moved sideways at elevated levels since the presidential election. When asked about financial prospects for the year 

ahead, 44 percent of surveyed consumers anticipated improvements compared with just 8 percent who expected worsening 

finances, marking the best net improvement share since 2004. 

The jump in March consumer spending suggests increased momentum heading into the second quarter. Recognizing this 

strength combined with historically elevated consumer confidence levels and healthy labor market conditions, we expect real 

consumer spending growth to pick up noticeably this quarter.

Business Fixed Investment and Productivity Growth

While trade and inventories exceeded our expectations, 

nonresidential fixed investment disappointed. Nonresidential fixed 

investment grew at a modest 2.7 percent annualized in the first 

quarter, driven almost entirely by investment in intellectual 

property products. Structures spending fell for the third straight 

quarter and equipment spending was essentially flat, edging up only 

two-tenths, the slowest pace in more than two years. While 

incoming data were mixed, we believe business investment growth 

will accelerate this quarter due to improved financial conditions and 

corporations’ desire to increase productivity in response to tight labor 

market conditions.

Productivity growth has helped to keep per unit labor costs contained. Productivity jumped 3.6 percent annualized over the first 

quarter, the biggest gain since the third quarter of 2014, and registered more than 2.0 percent annual growth for the first time 

since 2010. The rise in productivity during the first quarter applied downward pressure on the growth in unit labor costs, pushing 

down its annual growth to the slowest pace since the end of 2013.

We remain cognizant of several downside risks to nonresidential investment. The most prominent is the continuation of U.S.-

China trade tensions, which may lead businesses to defer capital investments. Elevated levels of riskier corporate debt are also a 

concern as they make corporations more vulnerable to market shocks. The ratio of outstanding debt to GDP among nonfinancial 

firms is now near its all-time high. Not only is the nonfinancial corporate sector highly leveraged by historical standards, but 

credit quality in this space is also riskier than during past cycles. About half of outstanding bonds in 2018 were rated BBB, the 

lowest investment grade tier, up from one-third in 2000. As a result, a historically large portion of corporate borrowers may be 

susceptible to interest rate or liquidity shocks due to rising risk premiums or downgrades, potentially harming real economic 

activity.

The Fed Struggles to Hit Its 2.0 Percent Inflation Target

Inflation pressures remain muted, thanks in part to productivity gains 

balancing out wage growth. The annual gain in the PCE deflator, the 

Fed’s preferred measure of inflation, accelerated in March for the first 

time in eight months, though it remains one-half percentage point 

below the Fed’s 2.0 percent target, and well below the six-year high 

reached last July. First quarter headline PCE averaged 1.4 percent, 

the slowest pace since the third quarter of 2016. 

The statement following the May Federal Open Market Committee 

(FOMC) meeting acknowledged that both headline and core inflation 

“have declined and are running below 2 percent.” In the post-meeting 

press conference, Fed Chair Powell attributed the recent slowdown in 

inflation to “transitory factors,” such as portfolio management 

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'07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 Q1

'19 Personal Consumption Expenditures (PCE) Chain Price Index (YoY %Change)

Since the Recession, the Fed Has Struggled to Hit 

the 2.0 Percent Target Rate

PCE Index Core PCE Index Fed Target

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Annual Growth in Productivity Accelerates While Unit Labor Costs Are Essentially Flat

Nonfarm Productivity

Unit Labor Costs
© 2019 Fannie Mae. Trademarks of Fannie Mae. 5.10.2019 4 of 5

service fees and apparel prices, but inflation below 2.0 percent has been more of a norm than an exception in the current 

expansion. Since the expansion began, headline PCE averaged above or at 2 percent twice, while core PCE has always averaged 

below the 2.0 percent target. 

Sustained below-target inflation will likely make it difficult for the Fed to raise the federal funds rate any further this year. 

Additionally, while we had been hopeful for a U.S.-China trade deal to boost growth in the second half of the year, that hope

appears less likely, suggesting that the Fed will not see the substantial pickup in growth needed to justify a rate hike. Thus, we 

changed our call from a rate hike in December to no more hikes expected within our forecast horizon. This is consistent with 

statements from the Fed, such as Powell reiterating that the FOMC is comfortable with its patient stance and does not “see a 

strong case for moving in either direction.”

Housing Drags, but We Expect a Rebound

Residential fixed investment fell during the first quarter for the fifth 

straight quarter, driven by the decline in spending on new singlefamily structures. While single-family starts increased during the first 

quarter, the spending on the construction of these structures fell as 

the average price declined. Improvement spending rose during the

quarter and exceeded investment in single-family structures for the 

first time since 2013.

Brokers’ commissions, a part of residential investment, rose in the 

first quarter, thanks to a jump in new home sales and the first rise in 

existing home sales in five quarters. New single-family sales rose 

almost 15 percent over the quarter and were up slightly on an 

annual basis. The strong pace of new home sales was supported by 

drawing down inventories of already-started homes that had built up as sales slowed in 2018 in the face of higher mortgage rates. 

However, after peaking last November at an average of 4.87 percent, the 30-year, fixed mortgage rate has pulled back, falling 

about 70 basis points to 4.14 percent in April. The full effect of declining mortgage rates is likely still working its way through the 

market, adding further support for buyers. Builders likely still have a few months to go before inventories are back to their preslowdown trend, which should support new home sales in the second quarter, even if starts remain lackluster. 

Another positive development for affordability and good news for entry-level homes is that builders are increasingly focused on 

more modest-sized homes. After peaking at more than 2,500 square feet in the first quarter of 2015, the median size of singlefamily starts trended down to about 2,300 square feet at the end of 2018. As the share of low- and moderate-priced new homes 

sold in the first quarter increased, the median price for new home sales fell 7.1 percent. 

For existing homes, annual home price gains continued to 

moderate, with the CoreLogic National House Price Index rising 3.7 

percent in March, the slowest pace since May 2012.

Overall, leading indicators suggest that the spring home-buying 

season will be solid, as we expected. Pending sales, a leading 

indicator of existing sales, jumped 3.8 percent in March, suggesting 

continued strength into April. Purchase mortgage applications have 

also been on the rise, increasing strongly in March and April. Thus, 

we revised upward our home sales forecast for the second quarter to 

show a solid rebound from the first quarter. When combined with 

our more optimistic view of new home sales for the year, total sales 

for 2019 were also revised upward seven-tenths from our prior 

forecast to a modest gain of 1.0 percent from 2018. 

According to the Fannie Mae Home Purchase Sentiment Index, April survey respondents walked back some of their buying 

optimism from March, as an increasing share of respondents reported it was a bad time to buy (due largely to high home prices). 

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1971 1976 1981 1986 1991 1996 2001 2006 2011 2016 Residential Fixed Investment Components as Percentage of Nominal GDP

Improvements Spending Surpasses Single-Family 

Investment For the First Time Since 2013

Single-family Multifamily

Improvements Brokers' commissions

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Home Sales Are Projected to Pick Up Further in the 

Second Quarter After Rising in the First

Existing Home Sales New Home Sales (RS)
© 2019 Fannie Mae. Trademarks of Fannie Mae. 5.10.2019 5 of 5

This mixed housing sentiment, the continued tightness in housing inventories, and elevated home prices relative to incomes will 

likely weaken sales momentum in the latter half of this year. Thus, after a solid rebound in the first half, total home sales are 

expected to moderate and level out by the end of the year, especially as economic growth slows heading into 2020.

The Housing Vacancy and Homeownership Survey showed a three-tenths decline in the homeownership rate in the first quarter 

to a seasonally-adjusted rate of 64.3 percent, the first quarterly decline since 2016. The annual pace of total household formation 

growth remained steady at 1.3 percent, bolstered by renter households that grew at the fastest pace since the end of 2016. 

Vacancy rates for multifamily rental units in the first quarter were unchanged from the year prior, indicating that supply growth 

matched demand growth. 

For more information on multifamily market conditions, please see the May 2019 Multifamily Market Commentary.

To be consistent with incoming applications data, we revised upward both our purchase and refinance mortgage originations

forecasts for 2019, pushing expected total originations volume from $1.62 trillion to $1.66 trillion. We continue to expect purchase 

originations to rise given modest increases in home sales and continued, but slowing, home price growth. With mortgage rates 

beginning to stabilize at much lower levels than in 2018, we expect less of a decline in refinance volumes and have revised our 

forecast for 2019 refinance mortgage originations from a 2.2 percent annual decline to a 1.2 percent decline.

Economic & Strategic Research (ESR) Group

May 10, 2019

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, Statistical Office of the European Communities, China National Bureau of Statistics, Federal Reserve, Bureau of 

Labor Statistics, National Association of REALTORS®, Census Bureau, Fannie Mae 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 

Brad Case, Director Hamilton Fout, Director

Rebecca Meeker, Business Analyst Eric Brescia, Economist

Richard Goyette, Business Analyst