Economic Developments – December 2018

© 2018 Fannie Mae. Trademarks of Fannie Mae. 12.10.2018 1 of 5

Economic Growth Expected to Slow and Housing to 

Stabilize in 2019

The U.S. economy is expected to grow 2.6 percent annualized in the fourth quarter, a slowdown from the 3.5 percent rate 

of growth in the prior quarter, as growth in consumer spending moderates. For all of 2018 we project economic growth to 

reach 3.1 percent, the fastest pace of the current expansion, before slowing to 2.3 percent in 2019 as the boost from 

federal fiscal policies wanes, the trade deficit widens, and growth in business investment slows. 

In the face of slower economic growth and the absence of a break-out in inflation, we expect both mortgage rates and 

home sales to stabilize. The rise in for-sale inventories to date should contribute to a moderation in home price 

appreciation, which we forecast to be 5.4 percent in 2018 and 4.1 percent in 2019. Purchase mortgage originations are 

expected to climb over 2 percent in 2019 but refinance originations should fall nearly 11 percent, resulting in a small 

decline in total originations to $1.605 trillion. 

Increases in government spending and business fixed investment are expected to be positive contributors to economic 

growth in the fourth quarter. However, our forecast of fourth quarter business fixed investment was revised downward 

partially in response to softness in core capital goods orders and lower oil prices. Continued growth of business 

investment is key to sustaining the expansion. Over the fourth quarter, we now expect residential investment to be a drag 

on the economy as we downgraded our home sales and housing starts projections. We also anticipate that trade will likely 

drag on growth for the second consecutive quarter. The labor market should continue to improve in 2019, with sufficient 

job growth to bring the unemployment rate lower than in 2018. Our outlook for mortgage originations suggests that lender 

margins will remain under pressure in 2019 and we will likely see further consolidation. Key risks to our forecast include 

the uncertainty from trade negotiations between the U.S. and China, the trajectory of oil prices, and stock market volatility.

Consumer Spending Growth Strengthens

Consumer spending accounted for the largest contribution to headline gross domestic product (GDP) growth in the third 

quarter. Incoming data suggest that it will continue to play a leading role in the fourth quarter. Real personal consumption 

expenditures (PCE) rose by 0.4 percent in October, the largest monthly gain since March, with broad-based gains across

durable and non-durable goods as well as spending on services.

Light vehicle sales slipped slightly in November following a modest rise in the prior month. Since 2015, sales of light 

vehicles have remained relatively steady, despite rising interest rates. Looking “under the hood,” the stability in light 

vehicle sales reflects growth in sales of light trucks amid 

declining auto sales. Light vehicle sales could come under 

pressure if short-term interest rates continue to climb, raising 

financing costs.

Consumer confidence remains near an 18-year high, despite a 

small dip in November. Confidence in the present situation rose 

to a level that was just shy of the expansion high set in August. 

However, these gains were offset by a slight dampening in 

expectations for the next six months. The drop in the 

expectations component was led by a decline in the net shares 

of consumers expecting improving business conditions and 

incomes. These results suggest that the trade tensions between 

the U.S. and China, as well as stock market volatility, so far have 

had a minor impact on consumer confidence.

 

Government Spending Will Contribute to Growth

Increases in local, state, and federal spending contributed to headline GDP growth in the third quarter. The spending and 

investment support at the federal government level is due in large part to the Budget Reconciliation Act passed earlier this

year. Its positive effects on GDP growth are expected to peak this quarter and wane in 2019 through the first half of 2020

before subtracting from growth in the second half of 2020.

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Business Conditions %Better - %WorseIncome %Increase - %DecreaseEmployment %More Jobs - %Fewer Jobs Consumer Confidence Expectations in the Next Six Months (%) 

Expectations of Business Conditions and 

Incomes Worsen on Net

Oct-18 Nov-18
© 2018 Fannie Mae. Trademarks of Fannie Mae. 12.10.2018 2 of 5

Business Fixed Investment Growth Expected to Tick Up

Despite an upward revision in the second estimate of third quarter GDP, business fixed investment growth still slowed

markedly. The minutes from the November Federal Open Market Committee (FOMC) meeting revealed that some 

participants cited anecdotal evidence of higher tariffs and uncertainty about trade policy, slowing global demand, rising 

input costs, and rising interest rates as possible culprits behind the deceleration in business fixed investment growth.

Despite these concerns, encouraging news in the manufacturing sector bodes well for business fixed investment growth 

this quarter. The Institute for Supply Management manufacturing index rose in November, indicating a faster pace of 

expansion than in October. Higher readings on new orders, production, employment, and inventories all contributed to the 

uptick in the headline reading; supplier deliveries was the only subcomponent to register a monthly decline. 

Small business sentiment has trended down from its record high in August, though it remains historically elevated. 

Several factors may restrain business fixed investment growth in the near term. Core capital goods orders, the forwardlooking indicator of equipment spending, were unchanged in October after two consecutive drops in the prior months. 

Spending on structures related to oil and exploration will likely be constrained by lower oil prices. Additionally, many of the 

risks cited by participants at the last FOMC meeting are unlikely to be resolved soon and may delay investment in 

business projects.

 

Trade Deficit and Inventory Investment Will Weigh on Growth

After shaving off 1.9 percentage points from GDP growth in the third quarter, the U.S. trade deficit is on pace to drag on 

broader economic growth over the current quarter as well. The U.S. real goods trade deficit, which is used in the estimate 

of GDP, widened to $87.9 billion in October, the worst trade gap since the series began in 1994. The expansion of the 

U.S. trade deficit partly reflected a decline in exports, especially to China, and a rise in imports. Going forward, we expect 

a stronger dollar and weaker global growth to weigh on the U.S. trade balance and partially offset strength in other areas 

of the economy.

Following a decline in the second quarter, a jump in private 

inventories contributed 2.3 percentage points to growth in the 

third quarter. Over the month of October, wholesale inventories 

rose 0.8 percent, suggesting that inventory investment will 

remain solid in the fourth quarter. However, the pace of inventory 

investment is expected to slow from its strong third quarter rate,

implying a modest drag on fourth quarter economic growth. 

 

Job Growth Underwhelms, but Other Labor 

Market Indicators Remain Solid 

The economy added 155,000 jobs in November, significantly

fewer than the 237,000 jobs added in October. However, the 

pace of job growth in October may have been artificially high due 

to the recovery from the natural disasters that struck in 

September. The annual growth in average hourly earnings 

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3% Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nondefense Capital Goods ex Aircraft (SA, Month-over-Month % Change)

Core Orders Signal Weak Business Equipment 

Investment Going into 2019

New Orders Shipments

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Spending on Oil and Exploration Will Likely Be Constrained by Lower Oil Prices

Real Private Investment: Petroleum & Natural Gas ($Bil) Crude Oil Price (Right Axis)

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Job Growth Slows in November, While Unemployment Remains at the Expansion Low

Change in Payroll Employment Unemployment Rate (Right Axis)
© 2018 Fannie Mae. Trademarks of Fannie Mae. 12.10.2018 3 of 5

stabilized at the expansion peak set in October. The unemployment rate held steady at 3.7 percent for the third 

consecutive month, a level last seen in 1969, and the labor force participation rate was unchanged at 62.9 percent.

Trade Tensions, Stock Market Volatility, and Oil Prices Pose Risks to Forecast

Trade issues present uncertainty to our forecast. The U.S. and China agreed to a 90-day truce beginning on December 1, 

which will freeze the tariff rate on $200 billion in Chinese imports at 10 percent instead of increasing to 25 percent on 

January 1 as planned. In light of these circumstances, many of the downside risks to economic growth are temporarily 

removed, but the uncertainty of whether a final agreement could be reached may dampen business or consumer 

confidence and derail some spending and investment activity.

Following a sharp decline in oil prices in November, members of 

the Organization for the Petroleum Exporting Countries (OPEC) 

and a Russia-led contingency agreed to curb oil output by 1.2 

million barrels per day for the first six months of 2019. Crude oil 

prices initially rose on news of the agreement. Lower oil prices 

generally benefit U.S. consumers as the reduction in prices acts as 

a tax cut that boosts disposable income. However, lower prices 

can also weigh on business investment as expectations of less 

revenue from oil production dissuade the capital investment 

needed for exploration. Expectations of slower economic growth 

around the world may dim the outlook for oil demand, potentially 

offsetting the price impact from lower supply.

Stock market volatility returned in October and has continued to the time of this writing as concerns that economic growth 

is slowing weigh on the market. However, the extent of volatility, as measured by the Chicago Board Options Exchange 

(CBOE) Volatility Index, has not been as extreme as it was earlier in the year. Nevertheless, equity market volatility has 

the potential to lower consumer confidence and weigh on consumer 

spending.

Fed Rate Hikes Likely to Continue in December

as Measures of Inflation Remain Near the Fed’s 

Target

The annual growth in the PCE index, the Fed’s preferred measure 

of inflation, held steady at the 2.0 percent target for the second 

consecutive month in October, while core PCE inflation 

decelerated to 1.8 percent. The recent decline in oil prices, as well 

as a rise in the dollar making U.S. imports less expensive to 

American consumers, should put downward pressure on inflation.

In early December, the spread between the 5-year and 2-year 

Treasury yields inverted for the first time since 2007, triggering 

recession concerns across the market. The recent inversion, stock 

market volatility, and weakness across the housing industry have 

sparked speculation that the Fed may pause its current tightening 

cycle in 2019. In a speech given on November 28, Fed Chairman 

Powell noted that “Interest rates are still low by historical 

standards, and remain just below the broad range of estimates of 

the level that would be neutral for the economy,” which seems to 

be a departure from an earlier comment that interest rates were “a 

long way from neutral.” He also acknowledged that the “economic 

effects of our gradual rate increases are uncertain, and may take a 

year or more to be fully realized.” These statements suggest that 

the FOMC is likely to grow increasingly data-dependent during its 

deliberations. 

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'07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 Personal Consumption Expenditures: Chain Price Index (Y-o-Y % Change)

Headline Inflation Holds Steady at Fed's Target Rate While Core Inflation Slows

PCE: Price Index

PCE: Less Food and Energy

Federal Reserve Target

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The 5 year - 2 year Treasury Spread Temporarily Inverts

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Stock Market Volatility Returns As Concerns Over Slowing Economic Growth Abound 

S&P 500 Stock Price Index (1941-43=10) CBOE Market Volatility Index (Right Axis)
© 2018 Fannie Mae. Trademarks of Fannie Mae. 12.10.2018 4 of 5

Despite the slowdown in job creation in November, labor market and broader economic conditions remain solid and the 

pace of inflation is at or near the Fed’s target. While market commentary has shifted to the potential for a pause, we 

maintain our call for two rate hikes in 2019 and one more this month, unchanged from our prior forecast.

Housing Roundup

Home sales were mixed in October with existing home sales rising modestly while sales of new homes fell sharply. 

However, year-to-date total home sales fell amid a sharp rise in mortgage rates. In October, the average 30-year fixed 

mortgage rate had increased 92 basis points from its year-ago levels, 

according to Freddie Mac. Meanwhile, the latest data from the 

National Association of Realtors showed that the Affordability 

Index fell 8.4 percent in September from a year ago. In a 

positive development for homebuyer demand, mortgage rates 

stabilized in November, with the monthly average rising only 4 

basis points to 4.87 percent.

Amid rising mortgage rates, pending home sales, which 

represent contract signings of existing homes and precede 

closings of existing homes by a month or two, fell by 2.6 

percent in October. While average monthly purchase 

applications also fell in October, they struck a more positive 

note in November, registering a 2.5 percent increase as mortgage 

rates were nearly flat.

Measures of house price growth have slowed. For example, the annual growth in the Federal Housing Finance Agency’s 

Purchase-Only House Price Index slowed to 6.0 percent in September, its slowest rate since January 2017. Home price 

expectations have also moderated significantly, according to the home price expectation component in Fannie Mae’s 

Home Purchase Sentiment Index. The net share of consumers expecting prices to increase dropped in November to the 

lowest reading since October 2016.

While housing demand has moderated, for-sale inventories have risen. In October, the inventory of existing homes grew

2.8 percent annually at the current sales pace, compared with 18.0 percent for new homes. The increase in the for-sale 

inventory, driven by interest rate-induced declines in demand, has resulted in an increase in the months’ supply of both 

existing and new homes over the past 12 months. The months’ supply of existing homes rose to 4.3 months in October 

from 3.9 months last year. Readings below 6 months suggest that supply remains below the long-term average level. The 

large decline in new home sales and the significant increase in for-sale new home inventory pushed the months’ supply of 

new homes higher from 5.9 months in October 2017 to 8.1 

months in October 2018.

As the inventory of homes for sale has increased substantially 

over the past year, the level of single-family starts fell 1.8 

percent in October from September and 1.5 percent from a year 

ago. Leading indicators of single-family production suggest that 

construction will remain modest over the remainder of the year. 

Single-family permits fell in October, while the National 

Association of Home Builders/Wells Fargo Housing Market 

Index (HMI) dipped 8 points in November to a reading of 60. 

Readings above 50 indicate that more builders view the housing 

market as good than poor, but the decline in the HMI to its

lowest level since August 2016 underscores significant

affordability challenges faced by potential buyers.

We expect residential fixed investment to fall in the fourth quarter, the fourth consecutive quarterly decrease. For 2019, 

we expect home sales to be little changed and project that single-family construction will continue to grow. Mortgage rates 

are expected to stabilize in 2019, allowing potential homebuyers time to adjust to the higher rate levels and should, in 

combination with a slower pace of house price growth, support affordability. At the same time, the labor market should 

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Builders’ Confidence Falls to a 2-Year Low as Single-Family Building Continues to Languish

Single-Family Starts NAHB Housing Market Index (Right Axis)

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Housing Affordability Index 

(Composite, Y-o-Y % Change)

Housing Affordability Continues to Decline Amid Rising Mortgage Rates
© 2018 Fannie Mae. Trademarks of Fannie Mae. 12.10.2018 5 of 5

remain solid as job growth is expected to keep the unemployment rate near historically low levels which is positive for 

income growth. 

We lowered our purchase mortgage originations forecast by $4 billion in 2018 and $11 billion in 2019 due to weaker-thanexpected incoming data for average home sale prices and the downward revision of our existing home sales and singlefamily starts forecast. We continue to expect purchase originations for 2018 to be slightly lower than 2017 volumes ($1.17

trillion vs $1.18 trillion), with a recovery into 2019 and 2020 ($1.19 trillion and $1.25 trillion, respectively). We have revised 

up slightly our refinance originations forecast for 2018, 2019, and 2020 as actual data came in higher than expected and 

our projection of mortgage rates was revised lower than in the prior forecast. We continue to expect refinance originations 

to decline over the forecast horizon, dropping from $461 billion in 2018 to $413 billion in 2019 and $404 billion in 2020.

 

For information on multifamily market conditions, please see the December 2018 Multifamily Market Commentary.

 

Economic & Strategic Research (ESR) Group

December 10, 2018

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: The Conference Board, Census Bureau, Bureau of Economic Analysis, Energy Information Administration, Chicago Mercantile 

Exchange, Bureau of Labor Statistics, Financial Times, Wall Street Journal, Chicago Board Options Exchange, Federal Reserve, National Association of 

REALTORS®, National Association of Home Builders

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

Hamilton Fout, Director Michael Neal, Director

Eric Brescia, Economist Rebecca Meeker, Business Analyst