Economic Developments – May 2017

© 2017 Fannie Mae. Trademarks of Fannie Mae. 5.10.2017 1 of 5

It’s Déjà Vu All Over (and Over) Again

For the fourth consecutive year, first quarter economic growth 

slowed from the fourth quarter. We expect history to also repeat 

itself with a second quarter growth rebound, which occurred in the 

last three years. Thus, we are keeping our full-year 2017 growth 

projection at 2.0 percent. Health care and tax legislation may be 

enacted in late 2017 or early 2018, but we will await the details 

before incorporating their impact on growth. 

“Special Factors” Weighed on First Quarter 

Growth

Real gross domestic product (GDP) grew 0.7 percent annualized in 

the first quarter in the Bureau of Economic Analysis’ (BEA) first 

estimate, slowing from 2.1 percent in the fourth quarter. Since the 

last recession, first quarter growth has tended to be understated 

due to residual seasonality, which the BEA defines as lingering 

seasonality in data that have already been adjusted to remove 

seasonal effects. Over the past two years, the BEA attempted to 

address the issue, but it appears that seasonal biases remain. An 

alternative way to assess the well-being of the economy in the first 

quarter is to look at year-over-year growth, which showed a 1.9 

percent increase, in line with trend growth in the current expansion

and our forecast.

The two main components of GDP that subtracted from first quarter 

growth were the change in private inventories and government 

consumption and investment. While the decline in inventory 

investment to just $10 billion subtracted nearly one percentage point 

from first quarter GDP, it has a positive implication for this quarter 

because businesses will need to increase production to build up 

inventory from an unsustainably low level.

However, the main culprit for the slowdown in first quarter growth was consumer spending, which has typically been the 

biggest driver of growth during this expansion. Real consumer spending grew 0.3 percent annualized and added only 0.2 

percentage points to GDP, the smallest contribution since the end of 2009. A pullback in motor vehicle sales from an 

expansion high at the end of 2016 and the unseasonably warm winter weather, which depressed utilities spending, 

weighed heavily on overall spending last quarter. 

Monthly data showed that nominal consumer spending was flat in

March as personal income rose 0.2 percent. As a result, the saving 

rate rose for the third consecutive month to a seven-month high. 

However, the personal consumption expenditures (PCE) deflator fell in 

March for the first time in more than a year, largely driven by an 

outsized drop in wireless telephone services. After adjusting for 

inflation, real consumer spending rose 0.3 percent in March following 

back-to-back drops in the prior months, implying strong momentum for 

real consumer spending this quarter. We expect real consumer 

spending growth to accelerate to 3.0 percent annualized this quarter,

but then slow modestly in the second half of the year. While auto sales 

increased in April for the first time in four months, they remained 1.5 

million units below the level in December 2016, which likely marked the 

peak for the current expansion. The Senior Loan Officer Opinion 

Survey for the three months ending in April showed that banks continued to tighten lending standards on auto loans, a 

-2%

-1%

0%

1%

2%

3%

4%

5%

6% Q3:2009 Q4:2009 Q1:2010 Q2:2010 Q3:2010 Q4:2010 Q1:2011 Q2:2011 Q3:2011 Q4:2011 Q1:2012 Q2:2012 Q3:2012 Q4:2012 Q1:2013 Q2:2013 Q3:2013 Q4:2013 Q1:2014 Q2:2014 Q3:2014 Q4:2014 Q1:2015 Q2:2015 Q3:2015 Q4:2015 Q1:2016 Q2:2016 Q3:2016 Q4:2016 Q1:2017Real Annualized GDP Growth (SAAR)

Q1 Economic Growth Slows From Prior Quarter for the Fourth Straight Year

-3.0% -2.0% -1.0% 0.0% 1.0% 2.0% 3.0%

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

Sluggish Consumer Spending Growth Hampers Economic Growth

Q4 - 2016

Q1 - 2017

-0.4%

-0.2%

0.0%

0.2%

0.4%

0.6%

0.8% Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Personal Consumption Expenditures (SAAR, Chn.2009$, M-o-M % Change)

Real Personal Consumption Expenditures 

(PCE) Rebound as PCE Deflator Falls
© 2017 Fannie Mae. Trademarks of Fannie Mae. 5.10.2017 2 of 5

reasonable response to other sources of data showing rising auto delinquency rates, which could further weigh on sales.

Used car prices are also in decline and days of inventory are lengthening.

The bright spot for first quarter GDP was a broad-based improvement in private fixed investment across structure, 

equipment, and residential components. Notably, the biggest contribution to growth came from nonresidential investment 

in structures, which contributed 0.6 percentage points to growth, thanks to a 450 percent annualized surge in oil and gas 

well drilling. Housing was another bright spot in first quarter GDP. Real residential investment posted the first double-digit 

gain since the end of 2015 and added 0.5 percentage points to growth, the most in nearly two years. We expect the 

outsized contributions to growth from nonresidential and residential investment to moderate this quarter. We also expect 

trade, which added slightly to first quarter GDP, to drag on growth this quarter and the rest of the year.

Recent developments in the labor market displayed late-cycle 

characteristics. The April jobs report showed that nonfarm payrolls 

increased 211,000, supporting our view that March’s paltry gain of 

79,000 was a weather-related blip. So far this year, payroll growth has

averaged 185,000 a month, helping to propel the labor market further 

into full employment territory. The unemployment rate dipped to an 

expansion low of 4.4 percent, the lowest reading since May 2007. 

More importantly, the broadest measure of labor underutilization, 

which includes discouraged workers and part-timers who prefer fulltime jobs, fell for the sixth time in the past seven months to 8.6 

percent, the lowest level since November 2007. While the labor force 

participation rate ticked down to 62.9 percent, part of the decline is 

driven by demographics, as older baby boomers are retiring. The rate 

for prime working-age adults (25-54 year olds) has trended up since 

its recent trough in September 2015, which matched the expansion low in October 2013.

The jobs report showed that the average workweek edged up one-tenth and average hourly earnings increased 0.3 

percent from March, suggesting a solid start for wage and salary income gains this quarter. Over the past year, average 

hourly earnings rose 2.5 percent, four-tenths below the expansion best reached at the end of 2016. While it appears that 

the low unemployment rate hasn’t led to increased wage pressures, other labor cost indicators have recently picked up. 

For example, the Employment Cost Index rose 0.8 percent in the first quarter (not annualized), the biggest rise of the 

expansion. The index rose 2.4 percent from a year ago, the biggest annual increase in two years. In addition, the 

productivity report for the first quarter showed that hourly compensation grew 3.9 percent from a year ago, the strongest 

rise in three years. We believe that the message is clear: The labor market is extremely tight. Unless productivity growth 

breaks out from its average annual pace of only about 0.5 percent over the past six years, labor costs will continue to 

trend upward.

 

Survey data offered evidence that businesses are having a difficult time finding workers, which could put additional 

upward pressure on compensation. The National Federation of Independent Business’ small business survey showed that 

the share of firms saying it’s hard to fill job openings rose to 33 percent in April, the highest reading since November 2000. 

0.0%

0.1%

0.2%

0.3%

0.4%

0.5%

0.6%

0.7%

0.8%

0.9%

1.0%

0.0%

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

ECI: Wages & Salaries: Civilian Workers (SA, Dec-05=100)

Growth in Workers' Wages and Salaries Picks Up

Year-over-Year % Change

3-Month % Change (Right Axis)

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

'07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 Total Nonfarm Productivity (SA, Year-over-Year % Change)

Productivity Growth Has Been Anemic Through Most of the Expansion

75%

76%

77%

78%

79%

80%

81%

82%

83%

84%

85%

86%

62%

63%

64%

65%

66%

67%

68%

'80 '83 '86 '89 '92 '95 '98 '01 '04 '07 '10 '13 '16 Hundreds Civilian Labor Force Participation Rate (SA, 16 yr +, %)

The Labor Force Participation Rate of Prime Working Adults Trends Upward

16+ Year Olds

25-54 Year Olds (Right Axis)
© 2017 Fannie Mae. Trademarks of Fannie Mae. 5.10.2017 3 of 5

In addition, the share reporting that finding qualified labor was their 

most important problem held at 16 percent for the second consecutive 

month, near its expansion high of 17 percent. Taxes remained the most 

important issue for small businesses, followed by government 

requirements, cited by 21 percent and 17 percent of firms, respectively.

Fed Is On Track for Monetary Policy Normalization

As universally expected, the Fed held the fed funds rate steady at the 

May Federal Open Market Committee meeting. The statement following 

the meeting indicated that the committee downplayed the first quarter 

growth slowdown, viewing it as transitory. Tight labor market conditions 

and recent communications from Fed officials support our expectation 

for rate hikes in June and September and for a change in the Fed’s 

reinvestment policy to start shrinking the balance sheet in December.

Housing Roundup

Household formation has gradually improved since the recession, with the number of households increasing by 1.2 million 

in the first quarter from a year ago. The homeownership rate showed signs of stabilization, ticking up 0.1 percentage 

points from a year ago to 63.6 percent in the first quarter. 

 

One likely reason for the improving homeownership rate trend is that young adults finally appear to be releasing some of 

their pent-up housing demand as their employment situation brightens. During early stages of the recovery, the 

unemployment rate for 25-34 year-olds, a prime age group for first-time homebuyers, substantially exceeded the rate for 

all workers. However, over the past year, the 25-34 year-old rate has fallen to match the overall rate, with both dropping to

levels last seen prior to the recession. Notably, the employment-to-population ratio for the 25-34 year-olds has also 

improved significantly, rivalling that of all prime working-age adults (25-54 year olds) so far this year for the first time since 

the early 2000s. While the rate has ascended rapidly over the past year, it remains below pre-recession levels.

 

62%

63%

64%

65%

66%

67%

68%

69%

70%

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

Homeownership Rate Shows Signs of Stabilization

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

'10 '11 '12 '13 '14 '15 '16 '17 Total Occupied Housing Units (Break-adjusted, Thous, Y-o-Y Change)

Household Formation Bounces Back

3%

4%

5%

6%

7%

8%

9%

10%

11%

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17

Unemployment Rate (%, SA)

Unemployment Rates for Millennials and Entire Labor Market Drop to Expansion Lows

Total

25-34 Year Olds

73%

74%

75%

76%

77%

78%

79%

80%

81%

82%

83%

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17

Civilian Employment-to-Population Ratio (%, SA)

Employment Gains for 25-34 Year Olds Outpace Those for Prime Working-Age Adults

25-34 Year Olds

25-54 Year Olds

0

5

10

15

20

25

30

35

40

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17

NFIB Small Business Survey (SA, 1986=100)

Small Businesses Have Had the Greatest Difficulty Filling Job Openings Since 2000

Percent of Firms with Hard to Fill Job Openings
© 2017 Fannie Mae. Trademarks of Fannie Mae. 5.10.2017 4 of 5

Our research shows that millennials are starting to leave the parental home and are advancing into homeownership more 

quickly. (Read Starting to Launch: Millennials Are Leaving Mom and Dad's Basement, Fannie Mae Housing Insights, April 

27, 2017, and Millennials Have Begun to Play Homeownership Catch-Up, Fannie Mae Housing Insights, August 10, 

2016.) However, extremely lean inventory and rapid home price appreciation in the lower-end of the market remain 

challenges for potential first-time homebuyers. 

Single-family construction took a step back at the end of the first 

quarter, as starts declined from an expansion high reached during the 

unusually warm February. Permits also fell in March from an expansion 

best the prior month. Multifamily starts dropped during the month but 

permits rebounded. Through the first quarter of the year, single-family 

starts are 6.0 percent higher than during the same period last year. 

However, the level of single-family construction has remained 

historically low for an expansion. Surveys of home builders continue to 

indicate that access to labor remains a top business challenge, in line 

with government surveys suggesting a competitive market for 

construction workers. The Job Openings and Labor Turnover Survey 

showed that the quits rate, which is a gauge of workers’ confidence in 

the jobs market, has been trending up over the past year for 

construction workers, compared with a relatively stable rate for all 

workers. The quits rate for the construction industry rose in March to 

an expansion high of 2.5 percent. 

Meanwhile, home sales performed quite well in March. New home sales 

climbed for the third straight month to a level just shy of the expansion 

best, while existing sales jumped to a decade-high. Notably, the months’ 

supply of existing homes for sale has been below four months since last 

December. The dearth of existing homes for sale acts as a tailwind for 

home prices. The FHFA and the Case-Shiller home price indices showed 

a pickup in annual appreciation in February, and the CoreLogic annual 

home price gain accelerated further in March.

Whereas tight inventory has supported robust price gains, it remains a 

headwind for sales. Leading indicators of home sales were mixed. 

Pending home sales pulled back in March, but the average number of 

purchase applications rose in April for the second consecutive month, thanks in part to the decline in mortgage rates 

between mid-March and mid-April. The average 30-year fixed mortgage rate hovered around four percent during the first 

week of May. We expect mortgage rates to rise very modestly during the remainder of the year, averaging 4.10 percent in 

the fourth quarter. We anticipate about a three percent increase in total home sales for all of 2017. 

We revised higher our estimate of 2016 total mortgage originations by about $90 billion to $2.05 trillion, reflecting our 

ongoing benchmarking process to internal and external data, which will conclude with the expected release of the 2016 

Home Mortgage Disclosure Act data this September. For 2017, we upwardly revised our forecast for purchase mortgage 

originations slightly in response to stronger home sales data and increased near-term momentum. Total mortgage 

originations should drop about 22 percent this year to $1.59 trillion as a decline in refinance originations outpaces an 

increase in purchase originations, driving the refinance share lower from 48 percent in 2016 to 32 percent in 2017.

Economic & Strategic Research (ESR) Group

May 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: Bureau of Economic Analysis, Bureau of Labor Statistics, The National Federal of Independent Business, Census Bureau, The

National Association of REALTORS®, 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 3

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-30% 14

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

'00 '02 '04 '06 '08 '10 '12 '14 '16 NSA, Year-over-Year Change, %

Tight Months’ Supply Puts Upward Pressure on Home Prices

CoreLogic National House Price Index Months' Supply of Existing Homes (Inverted, Right Axis)

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

'07 '09 '11 '13 '15 '17 JOLTS Quits Rate (Level as a Percent of Total Employment)

Quits Rate for Construction Hits Expansion High Amid a Flat Rate for All Industries

Construction Total
© 2017 Fannie Mae. Trademarks of Fannie Mae. 5.10.2017 5 of 5

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