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Growth Stalls as Underlying Demand Stumbles

Consumer and business spending as well as net exports came in below expectations in the first quarter of 2016, causing 

us to lower our economic growth estimate to 1.2 percent annualized. In recent years, the first quarter appears to have 

suffered from residual seasonality issues—the display of seasonal patterns in data that have already been seasonally 

adjusted. We do not view weakness in the first quarter as the start of deteriorating economic activity and expect slightly 

better growth this quarter. Our view for growth for the rest of the year is little changed, as we expect full-year 2016 growth 

to register 1.9 percent.

Financial conditions, which deteriorated earlier in the year, 

have largely reversed course, with rebounds in major stock 

indices and commodity prices, narrowing risk spreads, and 

a decline in the trade-weighted value of the dollar. Because 

weakness in manufacturing largely reflects the impacts of 

the stronger dollar and declining energy prices, these 

improvements, if sustained, should help turn the factory 

sector around. However, because of the lagged impact of 

the dollar on trade, even if the dollar were to continue 

weakening, net exports should still subtract from growth 

through the rest of the year.

Growth Weakens Despite a Resilient Labor Market

Fourth quarter annualized gross domestic product (GDP) 

grew at a 1.4 percent pace. Thus, over the past two 

quarters, the economy grew at just above stall speed. 

Corporate profits dropped for the second consecutive 

quarter, and fell 11.5 percent from the fourth quarter of 

2014. Profits from domestic industries posted the largest

quarterly drop since early 2011, which bodes poorly for 

business spending and the hiring outlook. So far this year, 

hiring has been solid despite weak economic activity, which 

underscores the ongoing problem of lackluster productivity 

growth. During the current expansion, annual productivity 

growth has averaged less than 1.0 percent, the worst 

performance for any expansion in the past 60 years.

Our material downward revision for first quarter real GDP 

growth largely stemmed from a sizable downward revision 

in consumer spending. Real consumer spending increased 

0.2 percent in February as expected, but the January figure 

was revised lower to unchanged from an initially reported 

0.4 percent increase. Income growth was higher than

spending growth, pushing the saving rate up to 5.4 percent, 

the highest reading in a year. Incoming data for March were bearish, as auto sales dropped sharply to the weakest pace 

in more than a year. These developments led us to downgrade our estimate for real consumer spending for the first

quarter to 1.7 percent annualized from 3.0 percent in the March forecast. However, we look for consumer spending 

growth to pick up somewhat over the rest of the year given healthy labor market conditions and an elevated saving rate. 

Full-year real spending growth is expected to moderate to 2.2 percent from 2.7 percent in 2015.

Payroll employment increased by a solid 215,000 in March, despite weakness in the manufacturing and mining industries. 

The most positive aspect of the jobs report came from the household survey, which showed the labor force participation 

rate reached 63 percent after the fourth consecutive monthly increase. Since last September, the participation rate has 

risen 0.6 percentage points, the largest six-month increase since the early 1990s, as 2.4 million people on net joined the 

labor force. Most of the increase in the participation rate has occurred among prime age workers, those between 25 and 

54 years old, who saw a 0.7 percentage point gain over the past six months. At the same time, the unemployment rate 

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'04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 KR-CRB Spot Commodity Price Index: All Commodities (1967=100) Nominal Trade-Weighted Exch Value of US$ vs Major Currencies (Mar-73=100)

Manufacturing Headwinds Should Slowly Dissipate

U.S. Dollar Weighted Exchange Value Commodity Price Index

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'48 '54 '60 '66 '72 '78 '84 '90 '96 '02 '08 '14 Corporate Profits (SAAR, $, Year-over-Year % Change)

Double-Digit Declines in Profits during Expansions Are Rare
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was just 0.1 percentage points higher. Expansion of the 

labor force amid solid job growth has helped arrest the

decline in the unemployment rate, and, combined with 

anemic productivity growth, may help explain the failure of 

wages to accelerate more rapidly. The rise in the 

participation rate is consistent with Fed Chair Yellen’s view 

that meaningful slack remains in the labor market. This

view suggests the normalization of monetary policy will be 

gradual.

The February factory orders report included a downward 

revision and argued for a lower estimate for first quarter 

economic growth. Core capital goods shipments — a proxy 

for the business equipment spending component in GDP —

fell more than previously estimated. The leading indicator

for shipments, core capital goods orders, also received a 

downgrade. Since reaching an expansion high in 

September 2014, when crude oil prices began their descent and the dollar started to surge, core capital goods orders 

have fallen by 9.5 percent, sending a gloomy signal regarding the outlook for business capital spending. Recent trends in 

core orders suggest that business equipment spending likely declined in the first quarter for a second consecutive quarter, 

which would mark the first back-to-back drops since mid-2013.

Results from purchasing manager surveys were more upbeat, however. The Institute for Supply Management 

manufacturing survey showed activity moved into expansionary territory in March for the first time in six months. The new 

orders component posted the biggest jump since August 2009. Despite the survey’s improving outlook, we believe that it 

is premature to declare that manufacturing has turned the corner.

In addition to weakening consumer and business capital spending, trade, inventory, and business investment in structures

likely weighed sizably on first quarter GDP. The February trade deficit was wider than anticipated, and the January figure 

was revised to be wider than previously reported. Incoming data on inventory investment also underscored the painful 

correction process from last year’s unsustainable inventory accumulation, but less inventory build in the first quarter also 

suggests better prospects for growth in the second quarter. While crude oil prices are off their lows, with West Texas 

Intermediate oil prices hovering near $40 per barrel at the time of this writing, non-residential investment in mining 

exploration, shafts, and wells will likely remain a drag on growth for some time through lingering pass-through from still 

low oil prices. The number of active rotary rigs fell 60.8 percent at an annual rate in the first quarter, and more declines 

are expected in the current quarter, albeit at a more modest pace. Combined, net exports, inventory investment, and nonresidential investment in structures should shave more than 1.0 percentage point from real GDP in the first quarter.

The Fed Proceeds Slowly

The minutes from the March 15-16 Federal Open Market Committee meeting highlighted downside risks to global 

economic and financial developments as well as lower inflation expectations as reasons for a cautious approach to rate 

hikes. An April rate hike is off the table as several members were concerned that it would convey an inappropriate “sense 

of urgency.” Recent speeches by Fed officials, including the Chair and New York Fed President William Dudley, struck a 

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Nondefense Capital Goods Orders ex. 

Aircraft (SA, Billions of $)

Oil Price Collapse and Rising Dollar Trigger Downtrend in Core Durable Goods Orders 

9.5% Decline

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ISM Manufacturing Index (SA, +50 = Expansion)

Purchasing Manager Survey Points to 

Improving Manufacturing Activity

Overall Manufacturing Activity

New Orders

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63.4% 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

Participation Rate Spike Helps Arrest the Downtrend in the Unemployment Rate

Civilian Labor Force Participation Rate

Civilian Unemployment Rate (Right Axis)
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dovish tone, noting that the risks to the outlooks for growth and inflation are tilted to the downside. The uptrend in the 

labor force participation rate and subdued wage pressure suggest Fed leadership feels less urgency for the second fed 

funds rate hike. While core inflation has picked up recently, the Fed will look for more concrete evidence that such firming 

will be sustained. The downward pressure on inflation from commodity prices is fading. However, the increase in the rent 

components of consumer prices, which were the single-biggest contributors to accelerating core inflation in the past year, 

should moderate going forward as new supply mitigates a shortage of rental housing. We now expect only one rate hike in 

2016, most likely in September, compared with an expectation of two hikes in our March forecast. The vote on the U.K. 

referendum to leave the European Union, which will occur only a week after the June 14-15 Federal Open Market 

Committee meeting, presents meaningful event risk. Thus, we believe a June rate hike is highly unlikely given the Fed’s 

emphasis on global stability. Fed funds futures do not price in a 25 basis point hike until the second half of 2017.

Housing Affordability Constrains

Housing indicators continue to be mixed. On the negative side, existing home sales dropped sharply in February, and new 

home sales rebounded only modestly following a steep decline in January. Over the past year, new home sales have 

moved sideways after gradually trending up in the prior years. Home builders’ sentiment, which has declined from a 

recent peak last October, held steady in March at the lowest reading since May 2015. The forward-looking component, 

sales expectations over the next six months, fell sharply in March to the lowest reading in a year. 

On the positive side, housing starts rose in February for the first time in three months, driven by strength in the singlefamily segment, which has been trending up over the past year. Meanwhile, multifamily starts have been moving lower 

since reaching an expansion high in June 2015. Overall, the trend in the multifamily segment remains positive, especially 

in some of the energy-dependent metropolitan areas, which have seen elevated levels of new supply complete and come 

online just as some of these local economies are getting 

hit by lingering low oil prices. (For more information on 

rental market conditions, read the April 2016 Multifamily 

Market Commentary).

Some of the softness in home sales likely reflects the lack 

of supply of homes for sale, especially in the lower-priced 

segment. The inventory of completed new homes remains 

extremely low by historical standards, which may have 

restrained buyer traffic. While single-family housing 

completions have gradually trended up since reaching

their lows in 2010, the increase has been concentrated in 

large, less affordable homes.

For existing homes, inventory at the lower end is also 

quite lean. Listings are not keeping pace with demand, 

which has boosted lower-tier home prices by more than 

for higher-end homes, according to data from CoreLogic 

and Case-Shiller.

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'11 '12 '13 '14 '15 '16 SA, Thousands Home Builders Index SA, All Good = 100

Builders’ Outlook for Home Sales Continues to Dip as Sales Trend Sideways

Single-Family Sales: Next Six Months

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Single-family Starts Gradually Trend Up

Single-Family

Mulitfamily (Right Axis)

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Single-Family Housing Completions by Square Feet of Floor Area (Thous.)

New Home Construction Is Skewed towards Larger Homes

Under 1,600 ft. 1,600-1,999 ft.

2,000-2,399 ft. 2,400-2,999 ft.

3,000 ft. or More
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Despite historically low mortgage rates, strong home price appreciation is eroding home purchase affordability for 

potential first-time homebuyers, whose income gains lag behind home price appreciation. A great deal of pent-up housing 

demand exists among young adults, many of whom still live with their parents. These young adults will likely rent rather 

than buy when they can afford to establish their own households. We noted earlier that rent increases are poised to 

moderate going forward, taking some pressure out of core inflation. This is especially true for rents in Class A properties, 

which have a substantial supply pipeline. However, supply is tighter for more affordable Class B and Class C properties, 

which will likely command higher rent increases than Class A properties, especially for new tenants. Elevated rental cost 

burdens will hurt purchase affordability by inhibiting renters’ abilities to save for down payments. 

Labor market news has been positive for potential first-time homebuyers. Employment among those aged 25 to 34 years 

old has increased at a healthy pace, and their employment as a share of total labor force has risen to the highest reading 

since 2002, though part of the increase is attributable to the large number of young adults as a share of the population. A 

sustained increase in income among young adults, more construction of starter homes, and continued introduction of new 

loan products geared towards those with low down payments would go a long way toward bringing more potential 

homebuyers into the housing market. More first-time homebuyers should lead to more trade-up buyers, spurring organic 

housing demand amid declining investor and international demand. 

Our forecasts for mortgage rates, housing activity, and mortgage originations are little changed. We expect total mortgage 

originations to decline about 9.0 percent in 2016 to $1.56 trillion, with a refinance share of 40 percent. We expect total 

originations to decline further in 2017, as a drop in refinance originations should outpace an increase in purchase 

originations. We project total production volume to be $1.43 trillion in 2017 with the refinance share dropping to 31 

percent.

April 8, 2016

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.

Data source for charts: Federal Reserve Board, Commodity Research Bureau, Bureau of Economic Analysis, Bureau of Labor Statistics, Census 

Bureau, The Institute for Supply Management, National Association of Home Builders, Lawler Associate and Housing Consulting, National Association of 

REALTORS®, 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

Orawin T. Velz, Director Frank Shaw, Analyst 

Hamilton Fout, Director

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'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 Inventory of Homes by Price Tier (Year-over-Year Change, %)

Housing Inventory Is Tight, Especially for LowerTier Homes

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Tier 4

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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'00 '02 '04 '06 '08 '10 '12 '14 '16 Percent Employed Between 25 to 34 Years Old as Share of Total Labor Force

Employment for Key First-time Homebuyers Group Has Recovered Well