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2015 Expected Growth Forecast Receives a Downgrade, But Housing Is On A Better Path

We expect a rebound in growth in the current quarter, as transitory adverse impacts dissipate, though we don’t see quite 

as large a snapback in growth as the one witnessed a year ago, when the economy grew 4.6 percent annualized in the 

second quarter following the first-quarter decline. Our forecast points to a pickup in economic growth to 2.4 percent in the 

second quarter and further acceleration in the second half of the year to slightly more than 3.0 percent. For all of 2015, we 

project that the economy will grow 2.3 percent, a downgrade of 0.5 percentage points from the prior forecast and similar to 

the pace witnessed in 2014.

The initial print of first-quarter gross domestic product (GDP) 

showed that the economy barely grew, increasing just 0.2 

percent. The slump is reminiscent of last year, when the first 

reading of the first quarter came in at 0.1 percent, only to be 

revised down in subsequent reports, finally coming in as a 2.1

percent decline. Data for the first quarter of 2015 released 

after the GDP report suggest that downward revisions are 

likely and real GDP may have actually contracted. 

Transitory factors were partially to blame, both for this year 

and last. Aside from the weather, the West Coast port 

shutdown contributed to some adverse impacts. The economy 

faced more than just transitory headwinds this year, however. 

Negative economic fundamentals, including a much stronger 

dollar, have significantly hurt manufacturing and net exports. 

Net exports shaved 1.3 percentage points off first quarter GDP 

growth—the second consecutive quarter that trade subtracted at least one percentage point from growth—and will likely 

be a drag to the economy going forward. Declining energy-related investment in equipment and structures also weighed 

meaningfully on growth amid low oil prices and falling oil rig counts. Meanwhile, the unsustainable pace of real inventory 

investment, which exceeded $100 billion for only the fourth time since 2000, bodes poorly for near-term growth as a likely 

inventory drawdown will act as a drag to GDP in coming quarters.

Underlying Domestic Demand Also Falters

With businesses cutting investment and consumers 

slowing spending, growth in underlying private demand, as 

measured by real final sales to private domestic 

purchasers (GDP less inventories, net exports, and 

government spending), sharply moderated to 1.1 percent

from 4.5 percent in the fourth quarter. The pace of 

underlying demand growth was similar to that during the 

first quarter of 2014, but we expect it to strengthen through 

the rest of this year.

Will Consumer Spending Rev Up To Be A Stronger 

Engine Of Growth? 

Our improving outlook hinges on a meaningful pickup in 

consumer spending growth following a lackluster 1.9 

percent annualized pace in the first quarter. So far, 

incoming data support our view. Personal consumption expenditures (PCE) strengthened at the end of the first quarter 

against flat personal income. As a result, the saving rate dropped in March for the first time in four months, falling 0.4 

percentage points from a two-year high to 5.3 percent, and signaling that consumers have begun to spend some of the 

additional disposable income from declining energy prices that was previously saved. Although retail gasoline prices have 

risen since February, the average price has been about $1.15 below the same period a year ago. 

Adjusted for inflation, real personal income fell for the first time since December 2013, with weakness concentrated in 

dividend income. Meanwhile, real PCE posted the biggest rise since last November, pointing to a solid trajectory heading 

into the current quarter. However, auto sales disappointed, edging down in April. Still, we expect real PCE growth to 

accelerate sizably in the second quarter.
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Real personal disposable income also dropped slightly in March; however, the 6.2 percent annualized gain for the quarter 

marks the strongest quarterly growth since the fourth quarter of 2012, when bonus and investment income was pulled 

forward to avoid higher taxes in 2013. Among several measures of income, real personal disposable income has a good 

track record as a driver of consumer spending. 

Other consumer fundamentals are also positive. Household balance sheets are in good shape, with net worth rising for six 

consecutive years to a level that is 22 percent higher than its pre-recession high. With home prices continuing to rise at a 

healthy clip, housing wealth is rising along with financial wealth, and fewer homeowners have negative equity positions. 

Meanwhile, the share of income used to service debt payment is near a 35-year low, which may allow consumers to incur 

more debt to finance their spending going forward. Thus, we remain comfortable with our forecast of a pickup in consumer 

spending.

Manufacturing Will Likely Remain Under Pressure

Spending on business equipment barely eked out a gain 

during the first quarter; however, we can hardly blame 

transitory factors for the weakness as core capital goods 

orders, a forward-looking indicator, have trended down 

substantially after their recent peak in August 2014. Core 

capital goods orders edged up 0.1 percent in April, the first rise 

in seven months. The last time we saw similar weakness was 

in March 2012, amid the political gridlock and looming fiscal 

cliff that eroded business confidence, resulting in seven 

consecutive monthly declines in core orders. In the current 

period, the culprits weighing on business capital 

expenditures—the strong dollar and declining energy prices—

will likely have a lingering impact for some time, and thus a 

strong snapback as witnessed at the beginning of 2013 is 

unlikely. 

The industrial production report corroborated the impact of the headwinds from the strong dollar and low energy prices. 

Mining output fell in March for the third consecutive month and the fifth time over the last six months, while manufacturing 

output edged up during the month, posting the first rise since last November. 

Surveys of purchasing managers suggest limited improvement in manufacturing activity in the near term. The Institute for 

Supply Management (ISM) manufacturing index was flat in April, remaining slightly in expansion territory (a reading of 50 

or more indicates expanding manufacturing activity). The index has not posted a gain since last October. Anecdotal 

evidence in the comment section pointed to unwinding impacts of the port shutdown, which was consistent with the jump 

in the exports index, which crossed over into expansion territory for the first time this year.
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Service Industry Marches on

By contrast, the ISM nonmanufacturing index rose in April, 

reaching the highest level since last November. Since the 

service industry accounts for the bulk of overall economic 

activity, the improvement in the nonmanufacturing index 

supports a rebound in economic growth. One notable 

weakness in the survey was a sharp drop in the export orders 

index, which fell into contractionary territory and the lowest 

level in more than a year, suggesting that exports will likely 

weaken in coming months.

Job Growth Back on its Feet after March Stumble

The rebound in nonfarm payroll growth in April to 223,000 

suggests that the anemic increase in March, which was 

revised lower to 85,000, was an aberration. The 

unemployment rate ticked down to 5.4 percent amid the uptick 

in the labor force participation rate to 62.8 percent. Wage 

gains remain muted, with average hourly earnings increasing 

just 0.1 percent on the month while the year-over-year gain 

remains trend-like at 2.2 percent. The trend in average hourly 

earnings has not yet followed the wages and salaries 

component in the Employment Cost Index (ECI), a broader 

measure of labor compensation, which tracks both wages and 

salaries (including bonuses, incentive earnings, and 

commission payments) and controls for the mix of employment 

by occupation and industry. In the first quarter of 2015, the ECI 

rose 0.7 percent from the fourth quarter. The year-over-year 

gain of 2.6 percent, the biggest rise in six years, was 

significantly stronger than the roughly 2.0 percent annual gains 

recorded between the second quarter of 2010 and the second 

quarter of 2014. The wages and salaries component has 

moved similarly.

Odds of a Later Liftoff Rise

In its statement following the April Federal Open Market Committee (FOMC) meeting, Fed officials acknowledged 

weaknesses in economic activity during the first quarter but largely attributed it to “transitory factors.” The statement noted 

that inflation should climb gradually as the impact of declines in energy and import prices fades. The mention of import 

prices was new in the April statement—an explicit reference to the appreciation in the dollar. The Fed’s favored inflation 

measure—the PCE price index—showed stabilization in the pace of inflation, albeit at an anemic rate. It advanced 0.1 

percent in March and 0.3 percent from a year ago, the second consecutive rises for both the month-over-month and yearover-year gains. The core PCE price index, which excludes food and energy prices, edged up 0.1 percent from February 

and rose 1.3 percent year-over-year for the fourth consecutive month.

The forward-looking FOMC statement was unchanged, confirming that policy decisions will be made on a meeting-bymeeting basis. Other central banks were more active than the Fed. Sweden’s Riksbank held its main policy rate steady at 

negative 0.25 percent at its April meeting while increasing its bond purchases. The People’s Republic of China cut interest 

rates and the reserve requirement ratio in March and May, respectively, and we expect more to come. 

While inflation continues to run below the Fed’s target, it appears to have bottomed as crude oil prices have trended up

from their lows in January 2015. Meanwhile, the pickup in the ECI and the continued decline in the unemployment rate 

point to a tighter labor market. Thus, we continue to hold our call for a September liftoff in the fed funds rate but see risks 

skewed toward a later hike, given the loss of momentum in economic activity in the first quarter. 

Long-term interest rates have moved up in recent weeks in response to external events, including the German bund 

selloffs and rising crude prices. We expect increased volatility in interest rates in coming months as financial markets 

anticipate tightening U.S. monetary policy. However, continued monetary policy easing by many central banks around the 

globe should provide ample liquidity to the market, keeping fixed mortgage rates mostly below 4.0 percent this year. 
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Housing Builds Momentum

Home sales were mixed during the first quarter. Existing home sales jumped in March to the highest level since mid-2013 

when the “Taper Tantrum” choked off budding housing market activity. Despite the strong showing at the end of the 

quarter, existing home sales fell slightly from the fourth quarter of 2014. New single-family home sales pulled back in 

March but closed the first quarter with the strongest pace since 2008. Leading indicators suggest a strong spring season. 

Pending home sales increased in March for a third consecutive month amid upward revisions to an already strong 

increase in February. Another leading indicator of home sales—purchase mortgage applications—edged up during the 

first week of May to a fresh high since June 2013.

One soft spot is single-family homebuilding. After contracting 

sharply in February, housing starts rebounded only slightly in 

March, and following nearly six years of recovery, spending on 

private single-family construction remains stuck near 1998 

levels. Poor performance for homebuilding and existing home 

sales led to a relatively flat contribution of residential 

investment to GDP in the first quarter. However, builder 

confidence picked up in April, and the inventory of new homes 

for sale remains lean. Combined with continued declining 

distressed sales, the tight inventory has helped support strong 

home price gains. Following moderating price growth reported 

for much of 2014, the budding acceleration in annual home 

price appreciation in January and February witnessed in many 

home price measures firmed in March, according to CoreLogic.

We expect these conditions to lead to increased residential 

construction in coming months.

Strong home price gains have helped improve equity positions 

and loan performance of single-family residential properties. 

The Mortgage Bankers Association (MBA) National 

Delinquency Survey showed that delinquency rates and the 

share of loans in foreclosure continued to improve during the 

first quarter, with many measures at or approaching 

prerecession levels. Foreclosure starts ticked down to 0.45 

percent, which, according to the MBA, is at its long-run 

average. Early stage delinquency edged down to the lowest 

level since 1972, reflecting tightening labor market conditions 

and the overall current quality of mortgage debt outstanding.

Lending standards continue to show signs of modest easing. 

Consistent with recent policy changes for the Federal Housing 

Administration (FHA) and the Government-Sponsored 

Enterprises (GSEs), the Federal Reserve Board Senior Loan 
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Officer Opinion Survey showed continued loosening in mortgage lending standards in the three months ending in April, 

with the exception of subprime mortgages. A large majority of banks indicated loosening lending standards for GSE and 

government mortgages. The first quarter Fannie Mae Mortgage Lender Sentiment SurveyTM showed that the majority of 

lenders surveyed believed that the GSEs’ 97 percent LTV products and the reduction in FHA’s mortgage insurance 

premiums (MIP) will benefit consumers and lenders, with about two out of three lenders surveyed expecting that these 

changes will somewhat increase mortgage originations.

As we mentioned earlier, despite economic growth grinding to a 

halt, real disposable income growth picked up during the first 

quarter, and we expect ongoing improvement to help boost 

household formation and lift housing activity. After rising by 1.7

million in the fourth quarter of 2014 from a year earlier, the 

number of households posted another strong year-over-year 

increase of 1.5 million in the first quarter of 2015. However, with 

all of the net increase coming from renters, the homeownership 

rate declined a remarkable 1.1 percentage points over the past 

year to the lowest reading since the early 1990s—fully erasing 

the gains witnessed between 1995 and 2005.

With strong demand for rental properties, construction activity 

responded, reflected in the V-shape rise in multifamily starts in 

contrast to the L-shape trend in single-family starts in the current 

expansion. Multifamily starts rebounded sharply after the 

recession ended, rising to prerecession levels during last summer 

but pulling back this year. We expect the recent drop in 

multifamily starts to be temporary. Rents have been rising at a 

healthy clip and should help to support the sector. (For more 

information on multifamily market conditions, read the May 2015 

Multifamily Market Commentary.)

Millennials—those who are currently aged 15-34 years old—are 

facing a lot of headwinds, including student loan debt, sluggish 

income growth, and relatively tight lending standards, to switch 

their tenure choice from renting to owning. According to the 

Fannie Mae National Housing Survey, young renters age 18-39 

chose renting to owning for many reasons, both economic and 

non-economic. For the third year in a row, the number one 

primary reason for renting is to prepare financially to own a 

home, suggesting that young renters still aspire to 

homeownership. The Census Bureau American Community 

Survey indicated that millennilals’ rental preference is broadbased across single-family homes and apartments.

The recent faster pace of household formation, even if all the 

gains are in renter households, is encouraging. If income growth 

continues to improve as we expect, many households should, at 

some point, switch from renting to owning, especially considering 

that mortgage rates remain historically low and underwriting 

standards are becoming more favorable for first-time 

homebuyers.

Despite some disappointment during the first quarter, housing 

indicators performed better this year than last year, when the 

weather weighed heavily on activity. Single-family starts, 

multifamily starts, new home sales, and existing home sales were 

4.4, 2.9, 10.6, and 6.6 percent, respectively, stronger than in the 

first quarter of 2014. So far, housing activity is in line with our 

forecast of a moderate but broad-based improvement in 2015.
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While our forecast of total home sales is little changed, the outlook for mortgage production continues to be more upbeat, 

given strong incoming data for both purchase and refinance originations. We expect mortgage originations to increase 

approximately 23 percent this year to $1.46 trillion—an upgrade from an expected increase of about 14 percent in the 

prior forecast. We expect the refinance share to rise to 48 percent from our estimate of 43 percent for 2014.

 

May 11, 2015

Economic & Strategic Research (ESR) Group

For a snapshot of macroeconomic and housing data between the monthly forecasts, please read ESR’s Economic and Housing Weekly 

Notes.

Sources for chart data: Bureau of Economic Analysis, Census Bureau, Institute for Supply Management, Bureau of Labor Statistics, National 

Association of REALTORS, Mortgage Bankers Association, S&P/Case-Shiller, Federal Housing Finance Agency, CoreLogic, Zillow, Fannie Mae 

National Housing Survey.

Opinions, analyses, estimates, forecasts and other views of Fannie Mae's Economic and 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.
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ESR Macroeconomic Forecast Team

Doug Duncan, SVP and Chief Economist

Orawin T. Velz, Director 

Brian Hughes-Cromwick, Economist 

Mark Palim, VP 

Frank Shaw, Business Analyst

Richard Koss, Director

Hamilton Fout, Director