Economic Developments - May 2016 

© 2016 Fannie Mae. Trademarks of Fannie Mae. 5.16.2016 1 of 5 

Full-Year Growth Downgraded Again

The economy posted the weakest growth rate in two years of 0.5 percent annualized in the first quarter versus our 

expectation of 1.2 percent. This marks the third year in a row that first quarter growth came in below 1.0 percent, although 

part of the weakness might result from measurement errors. In the past two years, economic growth bounced back in the 

second quarter, and we expect that this year will be no different. Financial conditions have improved over the past few 

months, with a weaker dollar, narrowing risk spreads, and rising equities supporting our forecast for a rebound in growth 

this quarter. We continue to expect growth to pick up during the last three quarters of the year, averaging about 2.0 

percent. Full year 2016 growth should come in at 1.7 percent, a downgrade from 1.9 percent in the April forecast and from 

2.2 percent projected at the start of the year. A sharp slowdown in China, dollar appreciation, and an intensified conflict in 

the Middle East are among the downside risks to the forecast. 

The first quarter slowdown in real gross domestic product (GDP) growth was broad-based across components of private 

domestic demand. Real consumer spending grew 1.9 percent annualized, the slowest pace in a year, weighed down by a 

contraction in durable goods consumption, especially in motor vehicles and parts. Business investment in equipment 

showed the largest decline of the current expansion, partly reflecting weak global growth, the strong dollar, and a 

domestic profit squeeze. The drop in investment in structures was the worst since the first quarter of 2011 due to a plunge 

in oil and gas drilling. Net exports and inventories also dragged on growth. One bright spot was residential investment, 

which added 0.5 percentage points to growth, the largest contribution since the fourth quarter of 2012. The recent budget 

deal also provided modest stimulus from the government sector. We expect both the housing and government sectors to 

contribute to growth for all of this year. 

Given the weak economic output, nonfarm labor productivity fell at a 1.0 percent annual rate in the first quarter and has 

grown at just a 0.6 percent rate over the last year. Unit labor costs accelerated during the quarter, and weak productivity 

growth and rising unit labor costs, if sustained, will continue to weigh on profits. 

Labor Market Loses Some Momentum 

April brought a slower pace of job creation, as nonfarm payrolls increased 160,000, compared with the 203,000 average 

over the prior three months. However, the average workweek ticked up, and average hourly earnings increased 0.3 

percent from March and 2.5 percent from April 2015. While the pickup in wage gains is encouraging, the gains remain 

within the narrow range of 2.0 percent to 2.6 percent witnessed over the past year. Both the pickup in hours worked and in 

wage gains suggest an acceleration in labor income in April, which should help support consumer spending. 

The household survey component of the jobs report also disappointed. The labor force participation rate gave back some 

of the increases of the past six months, dipping two-tenths to 62.8 percent. The unemployment rate remained at 5.0 

percent for the fifth time over the past seven months, but a modest decline in part-time workers who want a full-time job 

helped push the broadest measure of the unemployment rate (U-6) to 9.7 percent, tying the expansion low. 

0.2%

-0.3%

-0.3%

0.5%

-0.8%

1.3%

0.5%

-1.5%-1.0%-0.5% 0.0% 0.5% 1.0% 1.5% 2.0%

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 2016 Q1 Real GDP Annualized % Change

Housing Supports Growth

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

'07 '08 '09 '10 '11 '12 '13 '14 '15 '16 Total Nonfarm Productivity (SA, % Change)

Productivity Growth Is Dismal

Quarter-over-Quarter Change (SAAR) Year-over-Year Change
© 2016 Fannie Mae. Trademarks of Fannie Mae. 5.16.2016 2 of 5

Consumers Are Cautious...

Consumers appeared to exercise a great deal of caution at the end of the first quarter. Real consumer spending was flat 

in March despite a 0.3 percent rise in real income, resulting in a three-tenth gain in the saving rate to 5.4 percent, the 

highest level in over a year. Greater consumer caution might be partly due to rising gasoline prices, which have 

rebounded somewhat since crude oil prices bottomed in February. While it is possible that consumers will remain cautious 

and continue to build up savings, especially with gasoline prices rising further in April, we expect a moderate rebound in 

consumer spending growth in the current quarter. April auto sales rose 5.1 percent, largely reversing the drop in March. 

Through the first four months of this year, sales have averaged about 17.3 million vehicles annualized, about 3.2 percent 

above sales during the same period in 2015. Given that full-year 2015 sales totaled 17.4 million units, the best year since 

2000, the trend in auto sales so far this year remains healthy. In addition, revolving consumer credit (largely credit card 

debt) rose at a healthy clip in March, and the Fed’s Senior Loan Officer Opinion Survey for the three months ending in 

April showed that banks reported an increased willingness to lend to consumers amid stronger demand for consumer 

loans.

...And So Are Businesses

Factory goods orders increased in March, but the gain was largely driven by defense orders and price-related increases in 

energy items for nondurables. Core capital goods orders — a leading indicator of business capital investment — were 

upwardly revised to 0.1 percent from unchanged, suggesting continued lackluster capital expenditures. Business capital 

investment declined sharply during the first quarter in response to compressed profit margins. Political uncertainty

stemming from the upcoming presidential election may also be weighing on businesses’ plans to invest in coming months. 

The sharp decline in non-residential investment in structures in the first quarter largely reflected slumping investment in oil 

drilling structures and oilfield machinery stemming from the collapse of oil prices since mid-2014. Outside of drilling, 

growth of business fixed investment has been reasonably healthy. We expect the drag on structures investment from the 

0

50

100

150

200

250

300

350

400

'11 '12 '13 '14 '15 '16

Change in Total Nonfarm Employment (SA, Thousands)

Job Creation Has Slowed

Change in Total Nonfarm Employment

3-Month Moving Average

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

'07 '08 '09 '10 '11 '12 '13 '14 '15 '16 Average Hourly Earnings (SA, Year-over-Year % Change)

Wage Gains Pick Up But Remain Range-Bound

15.0

15.5

16.0

16.5

17.0

17.5

18.0

18.5 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Total Light Vehicle Retail Sales [Imported+Domestic] (SAAR, Mil. Units)

Vehicle Sales Remain at a Healthy Pace

 $25

 $35

 $45

 $55

 $65

 $75

 $85

 $95

 $105

 $115

 $1.50

 $2.00

 $2.50

 $3.00

 $3.50

 $4.00 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 West Texas Intermediate Spot Price: Dollars per Barrel Regular Grade: Dollars per Gallon 

Rising Energy Prices Could Suppress Future Consumer Spending

Retail Gasoline Price

Crude Oil Price (Right Axis)
© 2016 Fannie Mae. Trademarks of Fannie Mae. 5.16.2016 3 of 5

energy sector to dissipate over time because oil prices have rebounded and because the sector has become smaller over 

the past two years. Meanwhile, we expect the inventory correction to continue through 2016 in response to an 

unsustainably high pace of accumulation in the first half of 2015. After 2016, we expect inventory investment to stabilize 

and remain roughly neutral for economic growth.

Net Exports Will Continue to Subtract from Growth

Net exports subtracted 0.3 percentage points from growth in the first quarter, marking the third consecutive quarter that 

the sector has subtracted from growth and the biggest drag in a year. The main driver for this trend is the jump in the 

trade-weighted value of the dollar since summer 2014 in both nominal and real terms. While the dollar has reversed some 

of that gain more recently, it remains well above mid-2014 levels. We expect trade to drag on growth this year and next 

year.

The Fed Will Likely Hold in June

The April Federal Open Market Committee (FOMC) post-meeting statement suggests that the Fed was less worried about 

financial turmoil abroad as it dropped the reference that “global economic and financial developments continue to pose 

risks.” However, it pledged to “closely monitor” those developments as well as inflation indicators. Overall, the statement 

suggests that a June rate hike remains on the table, though the fed funds futures put the odds of a June hike at just 6.0

percent. In the April forecast, we expected only one rate hike in 2016, with the timing likely to be during the second half of 

the year. We remain convinced that the vote on the U.K. referendum to leave the European Union, which will occur only 

about a week after the June 14-15 FOMC meeting, will likely keep the Fed from raising rates in June. In addition, the risk 

of a Greek default and exit from the Eurozone has been forestalled but not eliminated, with the influx of immigrants fleeing 

Syria and Iraq likely to weigh further on the government’s budget. 

Housing Roundup

Home sales moved moderately higher in the first quarter of 2016 from the prior quarter despite lackluster month-to-month 

activity. New home sales fell in March for the third consecutive month, while total existing home sales rebounded in March 

but failed to completely reverse the sharp drop in February. Through the first three months of this year, existing home 

sales and new home sales were 5.6 percent and 1.5 percent higher, respectively, than sales during the same period last 

year. Leading indicators suggest that home sales will pick up going into the spring season. Pending home sales rose in 

March for a second consecutive month, and the average purchase mortgage application index picked up 4.0 percent in 

April for a second straight month, as the average 30-year fixed mortgage rate edged lower in April from March, according 

to Freddie Mac. In addition, the Fed’s Senior Loan Officer Opinion Survey for the three months ending in April showed 

that banks reported having eased lending standards on most types of residential mortgage loans amid firming demand. 

Homebuilding activity disappointed in the first quarter. Both total housing starts and building permits declined from the 

prior quarter, with volatile multifamily (more than one unit structures) starts being the culprit, dropping for the third 

consecutive quarter after a surge in the second quarter of 2015, partly due to the sharp increase in the Northeast before 

construction tax incentives in New York State expired. One of the main headwinds for multifamily construction is excess 

supply of upper-end apartment buildings in the top ten most populous cities. However, affordable rental units have plenty 

of room for growth. (For more information on rental market conditions, read the May 2016 Multifamily Market 

Commentary). The financing environment for new multifamily construction has become more difficult, according to the

-6%

-4%

-2%

0%

2%

4%

6%

8%

10% Q1-'14 Q2-'14 Q3-'14 Q4-'14 Q1-'15 Q2-'15 Q3-'15 Q4-'15 Q1-'16 SAAR, Quarter-over-Quarter % Change

New and Existing Home Sales Post Modest Gains in the First Quarter

Total Existing Home Sales New Single-Family Home Sales

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

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

Net Share of Banks Reporting...

Mortgage Demand Rises as Lending Standards Continue to Ease

Increased Mortgage Demand

Tightening Lending Standards

Tightening Standards/

Stronger Demand

Easing Standards/ Weaker Demand
© 2016 Fannie Mae. Trademarks of Fannie Mae. 5.16.2016 4 of 5

Fed's Senior Loan Officer Opinion Survey, as a net 

percentage of banks reported tightening lending standards 

for multifamily commercial real estate (CRE) loans over the 

past three months, a second consecutive quarter of 

tightening. 

Year-over-year comparisons are positive for the singlefamily segment, with single-family starts about 22 percent 

above the level in 2015, compared with flat multifamily 

starts. Nonetheless, the trend in the single-family segment 

was still lackluster, as the double-digit gain was from stilldepressed levels. 

Meanwhile, the main measures of home prices, including 

the Case-Shiller, the FHFA purchase-only, and the 

CoreLogic indices, showed strong annual appreciation of 

5.3 percent to 6.0 percent during the first two months of 

2016. Lean inventory and declining distressed sales have 

continued to support home price gains.

The homeownership rate has shown tentative signs of 

stabilizing, according to the Census Bureau’s Housing 

Vacancy Survey. The homeownership rate (not seasonally 

adjusted) for the first quarter of 2016 edged down 0.3 

percentage points from the prior quarter and 0.2 

percentage points from one year ago to 63.5 percent, a 

level around which the rate has hovered for the past four 

quarters. One factor helping to support the overall rate is 

that the large Baby Boom generation is still at a point in the 

life cycle with high homeownership rates, which has helped 

offset the low homeownership rates among the even larger 

Millennial generation in young adulthood.

Our forecast for mortgage rates is little changed from the 

prior forecast, with 30-year fixed mortgage rates at 3.7 

percent during the fourth quarter of 2016. We raised our 

total home sales forecast in 2016, as the upward revision in 

existing home sales slightly outpaced the downward revision in new home sales. We revised lower our outlook for singlefamily and multifamily starts this year. 

For mortgage originations, incoming data for 2016 for both purchase and refinance originations have been stronger than 

we expected, leading us to upgrade our estimates for the first quarter and for the rest of 2016. For purchase originations, 

we lowered our assumed share of home sales using cash through the first quarter of 2017. For all of 2016, we expect total 

mortgage originations to decline 3.7 percent from 2015 to $1.65 trillion, as the 18.8 percent drop in refinance originations 

outpaces the 9.4 percent rise in purchase originations. The refinance share should decline to 39 percent in 2016 from 46 

percent in 2015. Total originations should decline further in 2017, as a drop in refinance originations continues to outweigh 

an increase in purchase originations. We project total production volume to be $1.45 trillion in 2017, with the refinance 

share sliding further to 30 percent.

Economic & Strategic Research (ESR) Group

May 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: Bureau of Economic Analysis, Bureau of Labor Statistics, Autodata Corporation, Energy Information Administration, Census 

Bureau, National Association of REALTORS®, Federal Reserve Board

62.5%

63.0%

63.5%

64.0%

64.5%

65.0% Q1-'14 Q2-'14 Q3-'14 Q4-'14 Q1-'15 Q2-'15 Q3-'15 Q4-'15 Q1-'16 Homeownership Rate: United States (NSA, %)

Homeownership Rate Shows Signs of Stabilizing

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35% Q1-'14 Q2-'14 Q3-'14 Q4-'14 Q1-'15 Q2-'15 Q3-'15 Q4-'15 Q1-'16 Housing Starts (SAAR, Quarter-over-Quarter % Change)

Multifamily Starts Continue to Decline

Single-Family

Multifamily
© 2016 Fannie Mae. Trademarks of Fannie Mae. 5.16.2016 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

Orawin T. Velz, Director Frank Shaw, Analyst 

Hamilton Fout, Director