Economic Developments – October 2016

© 2016 Fannie Mae. Trademarks of Fannie Mae. 10.17.2016 1 of 4

A decent but not great second half

We expect economic growth to average 2.4 percent in the second half of the year, up from 1.1 percent in the first half, but 

at a slightly slower pace of growth than we predicted in our prior forecast. However, because of a modest upgrade to 

second quarter growth in the government’s final estimate, our full-year 2016 growth forecast remains at 1.8 percent. 

Economic growth appears to have picked up in the third quarter as we expected, though not all data are in yet. Much of 

the improvement came from a swing in inventory investment and from trade. Inventory building resumed in the third 

quarter following the drawdown in the second quarter. We estimate that the change in inventories added about half a 

percentage point to third quarter gross domestic product (GDP), reversing some of the 1.2 percentage point drag in the 

second quarter. Net exports provided a bigger boost to growth last quarter, following a positive contribution in the second 

quarter. However, domestic demand, including consumer spending and residential investment, appears to have 

weakened last quarter more than we had anticipated. 

Despite signs of weakening private domestic demand, long-term 

Treasury yields have moved higher recently. Long-term sovereign 

yields in the U.S. and other developed markets have increased as 

investors perceive that global central banks, including the European 

Central Bank and the Bank of Japan, are tapering their quantitative 

easing (QE) programs. Meanwhile, financial markets are convinced, 

at the moment, that incoming data in the U.S. support an increase in 

the Fed’s target rate this year. Fed funds futures odds of a 

December rate hike hovered around 65 percent at the time of this 

writing. However, a lot of key data, including two jobs reports, will 

be released between now and the Federal Open Market Committee 

meeting on December 13-14. Thus, we continue to hold our call of 

no rate hike this year.

The good, the bad, and the steady

Recent economic data have been mixed. Good news came from the 

third print of second quarter GDP, which showed that the economy grew 

1.4 percent annualized, three-tenths higher than in the second estimate. 

One key upward revision came from nonresidential fixed investment, as 

both business investment in structures and in equipment were revised 

to show smaller declines. Growth in intellectual property investment 

outweighed the drops in the other two components, leading overall 

business fixed investment to contribute slightly to growth in the third

estimate, whereas it had subtracted from growth in prior estimates.

Incoming data on the trade deficit have also been positive. The real 

goods deficit, which is used in the calculation of net exports in the 

GDP estimate, narrowed in August for the second consecutive 

month, suggesting that net exports likely contributed to growth in the 

third quarter after adding 0.2 percentage points to second quarter

GDP. In addition, the Institute for Survey Management (ISM) surveys 

of manufacturing and service sectors also rebounded in September. 

The Manufacturing Index indicated expansion after dipping into 

contraction territory in August, while the Service Index jumped to an 

11-month high. Lastly, auto sales also bounced back in September, 

nearly reversing the drop in the prior month, though fleet sales and 

heavy end of year discounts bumped numbers up and we expect flat 

to lower sales in the months ahead. 

The biggest dose of bad news came from consumer spending, the 

linchpin of economic growth. After a solid increase of 0.3 percent in 

-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 Q2 2016 Real GDP Annualized % Change

In Final Estimate, Business Investment 

Contributes to Growth

Advance Estimate

Second Estimate

Third Estimate

15.0

15.5

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18.5

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Total Light Vehicle Retail Sales 

[Imported+Domestic] (SAAR, Mil. Units)

Auto Sales Nearly Reverse the Prior Month’s 

Drop

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Yields on 10-Year Government Bonds

Yields on 10-Year Government Bonds Rise 

Over the Past Month

United States Germany

Japan United Kingdom
© 2016 Fannie Mae. Trademarks of Fannie Mae. 10.17.2016 2 of 4

July, real consumer spending pulled back in August, edging down 0.1 percent, marking the first drop since January. The 

saving rate edged up for the second consecutive month, suggesting increased caution among consumers. While we 

expect that real consumer spending growth moderated in the third quarter from an unsustainable pace of 4.3 percent 

annualized in the second quarter, the expected downshift to a still solid 2.7 percent was slightly less than we anticipated in 

the September forecast. We expect a further softening in consumer spending growth this quarter, which is a main reason 

we expect moderating economic growth from the third quarter.

Bad news also came from the report on construction spending, which weakened more than expected in August on the 

heels of downward revisions for July. Private nonresidential construction spending, which had been upbeat recently, fell in 

August for the first time in four months. Despite the August decline, the report supported our expectation that 

nonresidential investment in structures likely increased in the third 

quarter, partly because of some improvement in the depressed

energy extraction sector. Separately, the increase in weekly rig 

counts in the third quarter also supported a mild turnaround in the 

sector.

Spending on new private residential construction continued to be 

lackluster, driven by the ongoing decline in new single-family 

construction spending, which dropped in August for the sixth 

consecutive month and fell from a year ago for the first time in five 

years. Meanwhile, new multifamily construction spending continued to 

post annual gains, but the increase has moderated to the weakest 

pace since October 2011. (For more information on multifamily

market conditions, read the October 2016 Multifamily Market 

Commentary.)

Two factors are driving the downward trend in new single-family construction spending this year: lackluster single-family 

starts (see the housing section below) and a continuation of the decline in the average cost per single-family start that 

began late last year. While we had expected in the prior forecast that residential investment fell in the third quarter, the 

August construction spending report suggests that the drop was steeper than previously believed. State and local 

government construction spending was also another weak spot, decreasing during the month and leading us to lower our 

estimate of government consumption and gross investment growth in the third quarter.

The factory orders report was also negative, showing that core 

(nondefense excluding aircraft) capital goods shipments, a proxy for 

business investment in equipment, declined in August for the fourth 

consecutive month, albeit at a more moderate pace. Meanwhile, core 

capital goods orders, a forward-looking indicator, increased during 

the month for the third straight month. We now expect that business 

investment in equipment fell in the third quarter for the fourth 

consecutive quarter, but the improving trend in core capital goods 

orders suggests business capital investment should edge higher this 

quarter.

The steady news comes from the labor market. Nonfarm payrolls 

rose 156,000 in September, slightly below consensus. Notably, the 

three-month average gains in both nonfarm payrolls and private 

payrolls were exactly the same as in September 2015, a couple of 

months before the first rate hike this cycle. 

Goods-producing industries added 10,000 jobs on net, thanks to the increase of 23,000 in construction payrolls. This 

included a 15,700 gain in residential construction employment, the biggest increase since January, which suggests a 

near-term improvement in housing supply. Mining and logging payrolls were flat during the month, ending a streak of 23 

consecutive monthly declines, supporting our view that the energy sector is regaining its footing.

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Change in Total Employment

(SA, Thousands, 3-Month MA)

Hiring Trends Echo Last Year

Private NonfarmSept

Sept

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'05 '07 '09 '11 '13 '15

Private Residential Construction 

Spending (NSA, Y-o-Y % Change)

New Single-Family Construction Spending 

Drops Annually As Multifamily Gains Moderate

Single-Family

Multifamily
© 2016 Fannie Mae. Trademarks of Fannie Mae. 10.17.2016 3 of 4

Other details conveyed decent labor market conditions. Average hourly earnings rose 0.2 percent on a monthly basis and 

were up 2.6 percent from last September, a pick-up from 2.4 percent in the prior month but slightly below the expansion 

best. Meanwhile, the average workweek rebounded from the drop the prior month. The unemployment rate edged up onetenth to 5.0 percent, but for a good reason – a large number of people joined the labor force, slightly outweighing a solid 

gain in household employment. Overall, labor market conditions by themselves are not a hurdle for the Fed to raise the 

fed funds rate this year, although our forecast points to a slowdown in 

economic growth to just about 2.0 percent this quarter.

Housing roundup

One positive housing news item was emerging signs of improvement in 

homeownership demand in 2015. According to American Community 

Survey data released last month, owner household growth exceeded 

renter household growth in 2015 for the first time since the onset of the 

2007-09 recession. In another encouraging sign for owner-occupancy, 

and in particular for the first-time buyer market, the same survey 

showed that the homeownership rate for households under age 35, 

which declined substantially and relentlessly between 2006 and 2014, 

finally stabilized in 2015. 

However, in recent months, housing activity has clearly lost

momentum. Existing home sales fell in August for the second 

consecutive month, reaching the lowest level since February. Their 

forward-looking indicator – pending home sales, or contract signings 

on existing homes – dropped in August for the third time over the last 

four months, sending pending sales to the lowest level since January.

New home sales declined sharply in August, but from an expansion 

best in the prior month. Single-family housing starts also decreased

sizably during the month. The recovery in single-family homebuilding 

has been very gradual, partly because of land and labor constraints. 

The shortage of skilled labor is reflected in the Job Openings and 

Labor Turnover Survey, which showed that the construction job 

openings rate jumped in July to tie an expansion best, while the rate 

of hiring remained low for an expansion. 

On a positive note for young homebuyers, builders appear to be increasing their focus on the entry-level market. After 

rising sharply at the end of the recession, the typical size of new single-family homes stabilized in 2014 and 2015 and 

began to decline in the fourth quarter of 2015, according to data from the Census Bureau. The median square footage of 

new single-family homes continued to shrink in the second quarter. As builders adjust their production in response to 

rising demand for entry-level homes, typical new home size is likely to trend lower going forward, which should help to 

sustain the fledgling recovery in homeownership.

Another leading indicator of home sales – purchase mortgage 

applications – dropped in August for the second consecutive month, 

suggesting continued weakness in existing home sales in the near term. 

However, purchase applications rebounded in September, giving some 

hope that home sales would recover in late 2016. Meanwhile, refinance 

mortgage applications moved lower in September for the second 

consecutive month after a surge in July.

One of the biggest challenges for housing remains the extremely lean 

inventory of homes for sale. The number of existing homes for sale 

declined 10.1 percent in August from a year ago, marking the largest 

annual drop since 2013. The lean inventory for the existing home 

market is partly attributable to the fact that homeowners are remaining 

in their homes longer. Data from CoreLogic showed that the median 

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SAAR, Index

SAAR, Thousands of Units

Pending and Existing Home Sales Retreat 

From Recent Expansion Highs

Existing Home Sales (Left Axis)

Pending Home Sales (Right Axis)

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New Single-Family Starts and Home Sales Fall

Single-Family Starts

New Single-Family Home Sales

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Mortgage Loan Applications

(SA, Mar-16-90=100, Monthly Average)

Purchase Applications Bounce Back While 

Refinance Activity Drops for a Second Time

Purchase

Refinance (Right Axis)
© 2016 Fannie Mae. Trademarks of Fannie Mae. 10.17.2016 4 of 4

number of years that home sellers had owned their home roughly 

doubled between 2007 and 2015, from five years to 10 years. 

Separately, data from government surveys show that mobility rates 

have been declining. If these trends continue, we should expect a 

lower rate of housing turnover, and thus home sales, than in the past. 

This will be challenging for the housing and mortgage market, 

especially in a rising mortgage rate environment where lenders have 

to rely more on purchase mortgage originations. Tight supply and 

rapid price gains in the lower tiers of the home sales market are 

increasingly hampering first-time home buyer affordability and 

endangering the budding recovery in young-adult home buying

demand. 

Our mortgage rate forecast hasn’t changed as we don’t expect the 

recent rise in long-term interest rates to be sustainable. Our forecast 

of a 3.6 percent increase in total home sales for this year is also little 

changed from the September forecast, but it includes weaker existing 

home sales and stronger new home sales.

In October of each year, we update our estimate of single-family (1-4 

unit properties) mortgage originations for the prior year as a result of 

our annual benchmark to the newly released Home Mortgage 

Disclosure Act (HMDA) data. We revised slightly higher our estimated 

purchase and refinance originations by $6 billion and $13 billion, 

respectively, putting total 2015 mortgage originations at $1.73 trillion. 

The refinance share edged up one percentage point higher than the 

prior estimate to 47 percent. We also upgraded our projected 

mortgage originations for 2016 by $30 billion to $1.83 trillion, with 

refinancing accounting for much of the upgrade. This marks an 

increase of about 6.0 percent in total expected originations in 2016 

from 2015. For 2017, we expect total originations to decline by 

approximately 15 percent due to a sizable decline in refinance originations.

Economic & Strategic Research (ESR) Group

October 10, 2016

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, Bureau of Economic Analysis, Autodata, Census Data, Bureau of Labor Statistics, National Association of 

REALTORS®, Mortgage Bankers Association, and ESR forecast.

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

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'06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16

Existing Homes Available for Sale

(NSA, Year-over-Year % Change)

Inventory of Existing Homes for Sale 

Deteriorates Further

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Pre-Revision Post-Revision

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Single-Family Mortgage Originations 

(NSA, $Billions, 1-4 Units)

2015 HDMA Release Leads to Slight Upward 

Revisions to Originations Estimates

Purchase

Refinance