Economic Developments – September 2016 

© 2016 Fannie Mae. Trademarks of Fannie Mae. 9.19.2016 1 of 5 

Growth on the Upswing, With a Few Emerging Soft Spots

Early estimates of annualized third quarter growth are in the area of 3.0 percent. This has got the Federal Reserve Board 

members chattering about fed funds target rate increases. The market is assessing the odds of an increase as having 

risen but not yet likely in September. At present, market expectations suggest a potential increase in December, but 

several months of data will be revealed before then and we remain skeptical. Economic growth is poised to accelerate to 

2.6 percent in the second half of the year from 1.0 percent in the first half of the year, putting our full-year 2016 growth 

forecast at 1.8 percent, the same view we’ve held since July. We expect consumer and government spending to add to 

growth, inventory investment and net exports to drag on growth, and nonresidential and residential investment to be 

neutral for the year. Still, at less than 2.0 percent real annual growth, this is a weak economy and downside risks 

predominate. 

For the current quarter, we project real gross domestic product (GDP) growth to accelerate to 2.9 percent annualized, with 

much of the pickup reflecting a rebound in inventory investment from an unsustainably low level during the first half of the 

year. While consumer spending is expected to remain the biggest driver of growth, another contributor should be 

nonresidential fixed investment, which we expect to post a modest increase following three consecutive quarterly 

declines. Unfortunately, we now expect residential investment to decline for the second consecutive quarter, the first such 

occurrence since late 2013 and early 2014. 

The View in Rearview Mirror Still Looks Gloomy 

The second print of second quarter gross domestic product (GDP) 

showed a one-tenth downgrade of economic growth to 1.1 percent 

annualized, largely because downward revisions to state and local 

government spending and inventory investment and a higher 

estimate for imports outweighed upward revisions to consumer 

spending and nonresidential investment. One piece of good news 

from the second estimate was a sizable upgrade to personal income 

growth. On a downbeat note, the report offered the first glimpse of 

corporate profits, which fell 1.2 percent (not annualized) after rising 

3.4 percent in the first quarter. This marks the fifth quarterly drop 

over the last six quarters. Profits from domestic industries drove the 

decline while profits from the rest of the world increased, the reverse 

situation from the first quarter. From one year ago, corporate profits 

fell 4.9 percent, the fifth consecutive annual decline. Such a long string of profit declines has occurred only one other time 

during an expansion, in the period from the first quarter of 1986 through the first quarter of 1987. 

Consumers Continue to Carry the Economy 

Real consumer spending posted a solid increase of 0.3 percent in July amid the biggest gain in real personal income this 

year. Strong auto sales and a robust gain in utility spending from an unusually hot July helped boost overall spending. 

However, auto sales eased in August, dropping 5.0 percent to a 17 million unit annual rate, and the increase in spending 

on utilities should moderate as the weather becomes more typical. Thus, we expect consumer spending to cool this 

quarter to 3.0 percent annualized from a robust pace of 4.4 percent in the prior quarter. 

While personal income growth was revised higher during the second quarter, followed by a strong increase in July, the 

August jobs report points to weakening personal income gains. The report showed that hiring slowed markedly in August 

from the prior two months to 151,000. However, this single data point does not necessarily signal labor market weakness, 

given that only about 100,000 jobs need to be added monthly to hold the unemployment rate constant. The average 

monthly job gain over the last three months rose to 232,000, compared with just 118,000 in the three months ending in 

May. Details of the August report were on the weak side, however. The average workweek declined one-tenth from the

July figure, which was revised lower. Thus, aggregate weekly hours (employment times the average workweek) 

contracted compared with the prior month. In addition, average hourly earnings edged up only 0.1 percent from July and 

rose 2.4 percent from one year ago, the weakest annual increase since March. Together with the slowdown in aggregate 

weekly hours, softer wage gains suggest weaker personal income growth in August. However, a data quirk in the August 

jobs report suggests that the earnings slowdown might be an aberration in the recently improving trend. The monthly gain 

in average hourly earnings tends to be depressed when the 15th day of the month – the date when many workers are 

paid – falls outside the survey reference week, which occurred in August. 

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Corporate Profits with IVA and CCAdj 

(SAAR, $, Year-over-Year % Change)

Corporate Profits Extend Their Streak of Annual Declines
© 2016 Fannie Mae. Trademarks of Fannie Mae. 9.19.2016 2 of 5 

Job losses in the goods-producing sector during August, including a 

decline of 6,000 total construction jobs, were quite discouraging. 

However, residential construction employment grew by 10,800 – the 

biggest monthly gain since March – providing a silver lining for 

residential investment following bearish news on new construction 

spending at the start of the third quarter. 

Nonresidential Investment Should Turn Around 

The construction spending report showed a strong gain for business

investment in structures in July, and large upward revisions in the

prior quarter established a stronger trajectory moving into this

quarter. Thus, we expect real nonresidential investment in structures

to rise for the first time in seven quarters. Recent weakness largely 

reflected slumping investment in oil drilling structures and oilfield 

machinery triggered by the collapse of oil prices in mid-2014. 

However, the drag from the sector has been fading. Recent increases in oil prices, if sustained, should facilitate a 

turnaround in energy-related investment in structures, helping to boost overall structure spending. The WTI crude oil price 

has rebounded to more than $45 per barrel at the time of this writing. Rig counts also rebounded since reaching a trough 

at the end of May. Separate data on industrial production showed mining output rose in July for the second time in three 

months, supporting an improving picture for the energy sector. There is no end in sight to the decline in mining 

employment, however. The sector has lost jobs every month since October 2014, though losses have been moderating 

lately, with August posting the smallest decline since last October. 

In contrast, data related to equipment spending continue to be weak. The factory orders report showed a third consecutive 

drop in core durable goods shipments (excluding defense and aircraft orders), a component used to estimate business 

investment in equipment. Core capital goods orders, a forward-looking indicator, showed some improvement, posting the 

first back-to-back gains this year. The turnaround in business investment in equipment will be gradual, given the erosion 

in corporate profits. The trend in productivity, which fell in the second 

quarter for the third consecutive quarter and posted the first annual 

decline in three years, has negative implications for the profit 

outlook, as low productivity tends to boost unit labor costs. Thus, 

businesses are in a bit of a catch-22: Weak business investment 

contributes to low productivity and weak corporate earnings, but at 

the same time, declining profits make it harder for firms to increase 

their capital expenditures. 

More recent news on the factory sector from a survey of purchase 

managers took an unexpected turn for the worse, with the Institute 

for Supply Management (ISM) manufacturing index slipping 3.2 

points to 49.4 in August (any reading greater than 50 indicates an 

expansion). This marks the first time manufacturing slipped into 

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US Oil and Gas Rig Count

After a Precipitous Dropoff, Oil and Gas Rig Counts Turn a Corner

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Mining Employment Losses Have Moderated

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Residential Construction Employment (SA, Month-over-Month Change, Thous.)

Residential Construction Hiring Rebounds, Posting the Biggest Gain Since March

Note: Residential Construction Employment combines 

construction of buildings and specialty trade contractors
© 2016 Fannie Mae. Trademarks of Fannie Mae. 9.19.2016 3 of 5 

contraction territory since February. Weaknesses were broad-based, with two important components – production and 

new orders – falling below the 50 threshold. 

Not only did the manufacturing sector stumble in August, but the service sector also hit a snag as the ISM 

nonmanufacturing index posted its largest monthly decline since 2008, dropping 4.1 points to 51.4 – the lowest level since 

early 2010. Since the inception of the two ISM series, August was the only month during an expansion when both indices 

dropped by more than three points. The other two times occurred at the end of the 2001 recession and in the middle of 

the last recession. A single month of data is not cause for alarm, but we do need to track related data closely in the near 

term for any corroborating signs of deteriorating fundamentals 

A Rate Hike Is Around the Corner — Said the Fed 

Despite recent attempts by Fed officials to convince the market that economic conditions are ripe for a rate hike, we 

believe the August jobs report did not pass the high bar needed for a target rate increase at this month’s Federal Open 

Market Committee (FOMC) meeting. Bearish news on the ISM surveys also dampened the urgency of a rate increase. In 

addition, the underlying trend in the personal consumption expenditures (PCE) deflator, the Fed’s favored measure of 

inflation, continues to run below the Fed’s 2.0 percent target. The overall PCE price index was flat in July, and the core 

index rose just 0.1 percent. The annual increase in the overall index slowed to 0.8 percent, the lowest reading since 

March, while the year-over-year rise in the core PCE price index remained at 1.6 percent for the fifth consecutive month. 

Because the Fed rarely surprises the market with a rate hike, it will likely increase communications signaling that it intends 

to raise the target rate this year, in hopes that the fed funds futures will price in a rate hike. At the time of this writing, the 

fed funds futures’ odds of a September rake hike were 36 percent. Since 1989, the Fed has raised rates only five times 

when the futures market priced less than 40 percent odds of a hike within three weeks of an FOMC meeting, according to 

Gluskin Sheff and Associates. Given current economic conditions and more important data to come between now and the 

December meeting, we continue to hold our call of no rate hike in 2016. 

Housing Roundup 

Housing data for the single-family market were generally weak in 

July. While total housing starts increased, single-family starts were 

little changed, and permits fell to the weakest pace since last 

September. By contrast, multifamily starts (two units or more) rose 

for the third time in four months and permits increased for the fourth 

consecutive month. With recent trends in homebuilding activity 

favoring the rental market, the share of starts in for-rent multifamily 

buildings (five or more unit structures) has trended up after its recent 

trough in February. (For more information on rental market 

conditions, read the September 2016 Multifamily Market 

Commentary).

The construction spending report, which includes the dollar value of 

new single-family and multifamily construction, was much more 

bearish for residential investment than suggested by the number of 

housing units started. Construction spending on new single-family 

structures fell in July for the fifth consecutive month, while that for 

new multifamily structures dropped for the second straight month. 

The reason for the recent decline in construction spending is the 

drop in the average cost per unit of housing starts, especially for the 

single-family segment. Another reason we marked down our forecast 

of real residential investment this quarter to a modest decline from a 

moderate gain in the prior forecast was the large drop in existing 

home sales in July of 3.2 percent. Because residential investment 

includes broker commissions, the decline in July existing home 

sales, which account for the vast majority of home sales, adds 

headwinds for residential investment for this quarter. 

July data showed that existing home sales underperformed 2015 for 

the first time. However, year-to-date sales are still 2.6 percent more than sales during the same period last year. Leading 

indicators don’t suggest a rebound in home sales in the near term. Pending home sales rose just 1.3 percent in July, and 

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Spending on New Housing Construction Bodes Poorly for Residential Investment

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Share of Housing Starts 

by Type of Building (SA, %)

Share of For-Rent Multifamily Starts Has Trended Up

Single-Family Multifamily (5+ Units)
© 2016 Fannie Mae. Trademarks of Fannie Mae. 9.19.2016 4 of 5 

data for June were revised from a slight gain to a modest drop. Meanwhile, average monthly purchase mortgage 

applications fell in August for the second consecutive month to the lowest reading since last November. 

One thing that hasn’t improved for the housing market is the for-sale inventory, which has been tight since 2013. In July, 

the number of existing homes for sale was down 5.8 percent on a year-over-year basis and was at the lowest level for any 

July since 2002. Lean inventory continues to support home price gains, with annual increases for various measures 

coming in between 5.0 percent and 6.0 percent this summer. Rising home prices improve homeowners’ equity positions 

and mortgage performance but impede potential first-time homebuyers, especially because home price appreciation at the 

low-end of the housing market has continued to outpace the average gain. 

One bright spot for the housing market in July was the 12.4 percent jump in new home sales, the largest increase since 

mid-2014, putting sales at an expansion best. New home sales data, which record contract signings, are volatile from 

month to month and are subject to large revisions, and thus we are hesitant to read too much into the data. Nonetheless, 

the new home sales trend has strengthened markedly, significantly outperforming activity in recent years. If the improving 

trend holds up, it should brighten the outlook for single-family homebuilding, especially when the share of new home sales 

that are under construction or not started has climbed to nearly 70 percent. 

Our forecasts for mortgage rates, housing starts, home sales, home price appreciation, and purchase mortgage 

originations are little changed from last month. We revised higher our projected refinance mortgage originations by $50 

billion for the second half of the year due to higher than expected volumes at the start of the third quarter. For all of 2016, 

we expect total mortgage originations to rise 5.4 percent from 2015 to $1.8 trillion, with the refinance share declining 

slightly to 44 percent. 

Economic & Strategic Research (ESR) Group 

September 9, 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: Bureau of Economic Analysis, Bureau of Labor Statistics, Baker Hughes, Institute for Supply Management, National 

Association of REALTORS®, Mortgage Bankers Association, and Census Bureau 

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Existing Home Sales Underperform 2015 for 

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Leading Indicators Suggest Cooling Home Sales

Mortgage Loan Applications for Purchase Index (SA) Pending Home Sales Index (SA, Right Axis)

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New Home Sales Continue to Outperform Their Recent History

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'06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 Share of New Homes Sold Under Construction or Not Started (SA, %)

New Homes Under Construction or Not Started Reach the Highest Share of Total Sales in 2016
© 2016 Fannie Mae. Trademarks of Fannie Mae. 9.19.2016 5 of 5 

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