Economic Developments – July 2018

© 2018 Fannie Mae. Trademarks of Fannie Mae. 7.10.2018 1 of 5

Second Quarter Growth Likely to be the High Point for the 

Rest of the Expansion

It appears that the expansion celebrated its ninth anniversary with a bang, as economic growth likely approached the 

expansion high seen nearly three years ago. We estimate that real gross domestic product (GDP) growth picked up 

during the second quarter to 4.2 percent annualized from 2.0 percent during the first quarter. Accelerating consumer and 

government spending growth, inventory investment, as well as more favorable trade for the first time in three quarters,

likely drove a strong rebound despite an anticipated slowdown in business fixed investment growth from the double-digit 

pace in the first quarter. In addition, residential investment should turn from a drag in the first quarter to a modest positive 

contributor in the second quarter. However, we do not expect the robust growth to be sustainable, and our forecast points 

to a slowdown in the second half of the year. We project that full-year 

2018 growth will reach 2.8 percent, one-tenth higher than in our 

prior forecast, before slowing to 2.2 percent in 2019 as fiscal 

impacts fade. 

While fiscal stimulus will likely continue to support consumer, 

business, and government spending during the second half of 

this year, we expect trade to return to being a drag on growth, in 

part due to continued strength in the dollar, which has 

appreciated about 5 percent since the end of February. With 

stronger growth in the U.S. than in the Eurozone and other 

major trading partners and U.S. monetary policy continuing to 

tighten, we expect the dollar to rise further in the near term.

We see the upside risks from fiscal stimulus counteracting the downside risks from trade. Trade tensions have ratcheted 

up this month, as Canada implemented 25 percent tariffs on $12.5 billion in imported U.S. goods. Meanwhile, the U.S. 

also imposed new 25 percent tariffs on $34 billion of imports from China, prompting China to impose 25 percent tariffs on 

$34 billion of imports from the U.S. The Administration also released a list of $200 billion in additional imports from China 

on which it proposes an additional 10 percent tariff to take effect in September at the earliest. While the direct impacts of 

already imposed tariffs on the overall economy may be small, potential retaliation from China could be devastating for

some local economies. For example, as China accounts for about half of U.S. soybean exports, Chinese businesses 

could cancel significant amounts of U.S. soybean shipments during the third quarter, potentially reversing the recent surge 

in U.S. soybean exports, which jumped $2 billion to $4.1 billion in May. If the U.S. imposes a wider range of tariffs on 

Chinese imports, restricts investment from China, or implements new 

tariffs on auto imports worldwide, we could see meaningfully negative 

impacts on the U.S. and global growth.

While trade rhetoric has become more heated, actual trade data 

have continued to improve. The nominal trade deficit narrowed 

in May for the third straight month to the lowest level since 

October 2016. Exports rose 1.9 percent to a record high, driven 

by a surge in food and beverages, which likely reflected the 

efforts of firms abroad to pull forward their imports from the U.S.

ahead of announced tariffs. At the same time, U.S. imports 

increased just 0.4 percent, weighed down by a drop in auto and 

consumer goods. The inflation-adjusted goods deficit, used to 

calculate net exports in the GDP estimate, narrowed to the 

smallest level since March 2017, suggesting that net exports 

likely contributed meaningfully to second quarter GDP growth.

The Institute for Supply Management (ISM) manufacturing index also indicated little evidence of negative impacts of tariffs 

announced or imposed so far on the manufacturing sector in June. The index rose to 60.2, matching the second highest 

level of the expansion and implying the fastest pace of expansion in the sector since February. (A reading of more than 50 

indicates an expansion in activity). Notably, the supplier delivery index jumped to the highest reading since 2004, 

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'07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 Nominal Broad Trade-Weighted Exchange Value of the US$ 

The Dollar Has Strengthened This Year

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'00 '02 '04 '06 '08 '10 '12 '14 '16 '18 Trade Balance: Goods and Services (BOP Basis, SA, Bil.$)

Trade Deficit Narrows to Lowest Level in 19 Months
© 2018 Fannie Mae. Trademarks of Fannie Mae. 7.10.2018 2 of 5

indicating a marked increase in product delivery delays, partly because of a shortage of truck drivers. Anecdotally, firms 

continued to report supply chain bottlenecks that could limit production 

and put upward pressure on prices. Several industries reported that 

the steel tariffs have already pushed prices significantly higher,

while respondents in other industries noted that further tariffs 

could lead firms to reduce their investment.

Overall, we expect uncertainty from trade policy to weigh on 

businesses, and thus we lowered modestly our projection for 

business investment for the second half of the year. Along with 

concerns over tariffs from the ISM survey, the minutes from the 

June Federal Open Market Committee (FOMC) revealed that 

most participants said that “uncertainty and risks associated with 

trade policy had intensified,” and members were concerned

about the possible negative effects of rising trade tensions on 

business sentiment and investment spending. According to some 

of the Fed's regional contacts, the uncertainty over trade policy

has resulted in scaled back or postponed plans for capital spending.

Consumer Spending Growth Likely Tripled in the Second Quarter

Real consumer spending disappointed in May as a decline in real service spending offset increases in durable and 

nondurable goods spending. A large drop in spending on household utilities such as natural gas and electricity amid 

cooler than normal temperatures drove the decline, which is poised to reverse in June. However, spending on 

discretionary service categories, including recreational services, also fell in May. Flat real consumer spending in May 

followed a 0.3 percent rise in April, a downgrade from an initially reported 0.4 percent gain.

Spending growth likely picked up in June, partially supported by 

a 3.3 percent rise in unit vehicle sales, the strongest gain in nine 

months, to 17.5 million annualized units. Light truck sales, which 

exceeded 12 million units for only the second time since record 

keeping began in 1990, drove the increase as auto sales were 

little changed. With auto sales trending down over the past year, 

light truck sales as a share of total sales rose to a record high of 

69 percent in June. While gasoline prices were little changed in 

June, they have risen about 17 percent this year, which is taking

a bite out of the increased disposable personal income from the 

tax cuts. Given an expected rebound in consumer spending 

growth in June, we estimate that real consumer spending growth 

accelerated to 2.7 percent annualized last quarter from 0.9 

percent in the first quarter.

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ISM Manufacturing Index 

Manufacturing Activity Expands Faster, but Bottlenecks Present Headwind

Supplier Deliveries (SA, 50+ = Slower)

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2.0% May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18Real Personal Consumption Expenditure (SAAR, Bil. Chn 2009$, M-o-M % Change)

Service Spending Weighs on Overall Consumer Spending

Services Goods Total

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Light Vehicle Retail Sales [Imported+Domestic] (SAAR, Mil. Units)

Record-High Light Truck Sales Drive Vehicle Sales

Car Sales Light Truck Sales

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'07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 West Texas Intermediate Spot Price: Dollars per Barrel Regular Grade: Dollars per Gallon 

Rising Gasoline Prices Have Partially Offset Tax Cut Benefits

Retail Gasoline Price

Crude Oil Price (Right Axis)
© 2018 Fannie Mae. Trademarks of Fannie Mae. 7.10.2018 3 of 5

The Labor Market Continued to Improve

Solid improvement in the labor market will continue to support 

consumers. Nonfarm payrolls increased 213,000 in June, and 

upward revisions to the prior two months pushed the 3-month 

average job growth to 211,000. Meanwhile, average hourly 

earnings rose 0.2 percent from May and 2.7 percent from last 

June, leaving the annual gain unchanged from the prior month

and staying within the tight range of 2.6 percent to 2.8 percent 

seen since December. The average workweek remained 

unchanged at 34.5 hours for the fifth consecutive month.

While the unemployment rate moved up for the first time since 

August to 4.0 percent, the increase was accompanied by the 

first rise in the labor force participation rate in four months to 

62.9 percent from 62.7 percent in May. The participation rate 

has moved within a tight range of 62.7 percent to 63.0 percent 

over the past two years. Continued increase in the supply of labor would support the view that more labor market slack 

exists than previously believed and that solid hiring can continue without overheating the market. Over the past year, the 

labor force has grown by an average of 160,000 per month, running below the average monthly gain in household 

employment. We expect the trend to continue, and project a decline in the unemployment rate to 3.6 percent during the 

second half of the year before reaching a trough of 3.5 percent in mid-2019. 

The Job Openings and Labor Turnover Survey (JOLTS), which is released with a one-month lag to the employment 

report, showed continued tight labor market conditions. The hires rate (hiring as a share of total employment) jumped in 

May to an expansion high, while the job openings rate edged down one tick to 4.3 percent from a record high. Jobs 

openings continued to exceed unemployed workers for the third consecutive month. In addition, after hovering between 

2.2 percent and 2.3 percent for a year, the quits rate, which is a gauge for workers’ confidence in the job market, edged 

up to 2.4 percent, an expansion best. Results from the National Federation of Independent Business (NFIB) Survey 

underscore the difficulties small businesses are facing in filling open positions. The share of firms reporting few or no 

qualified applicants in filling open positions surged 7.0 percentage points in June to 55 percent, a record high.

 

Fed Poised to Raise Rates in September

While the June jobs report indicated that wage pressures remain contained, inflation has moved up. The personal 

consumption expenditures (PCE) deflator, the Fed’s preferred measure, rose 0.2 percent in May for the second 

consecutive month, pushing the annual growth rate to 2.3 percent, above the Fed’s two-percent target for the first time 

since February 2017. The core deflator, excluding food and energy prices, also accelerated year over year to hit the target 

for the first time since April 2012. Incoming data led us to revise higher our projected PCE inflation in the fourth quarter of 

2018 to 2.3 percent from 2.1 percent in the prior forecast. Consumers’ inflation expectations also firmed in June, 

according to the University of Michigan survey of consumer sentiment, with one-year inflation expectations rising twotenths to 3.0 percent and 5-year inflation expectations edging up one tick to 2.6 percent. 

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'00 '02 '04 '06 '08 '10 '12 '14 '16 '18 JOLTS Rate (Level as a %of Total Employment)

Hires and Quits Rates Rise to Expansion Bests

Job Openings Hires Quits

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NFIB Small Business Survey (SA, %)

Share of Firms with Few or No Qualified Applicants Rises to a Record High

Businesses with Few or No Qualified Applicants for Job Openings

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'14 '15 '16 '17 '18 SA, Thousands, Month-over-Month

Three-Month Average Job Gain Rises Above 200,000 for Fourth Time in 2018

Change in Total Nonfarm Employment

3-Month Moving Average
© 2018 Fannie Mae. Trademarks of Fannie Mae. 7.10.2018 4 of 5

The Fed has described its inflation objective as “symmetric,” 

suggesting it will tolerate inflation overshooting the target in the 

medium term. The June FOMC meeting minutes noted that 

some participants were concerned that the flattening of the yield 

curve could signal a coming economic slowdown. However, 

others pointed to the large Fed balance sheet as a factor 

keeping long-term rates low and suggested that an inverted 

yield curve may not be a reliable signal of a recession, as 

implied by their historical relationship. The spread between 2-

year and 10-year yields has fallen to about 30 basis points as of 

this writing. Despite the flattening yield curve, we expect the Fed 

to continue its monetary policy normalization. Given the strong 

labor market, our higher inflation forecast, and signals from the 

Fed of its willingness to tolerate an inverted yield curve, we 

changed our Fed rate hike call to two increases in the second 

half of this year, in September and December, compared with 

just one hike in our June forecast.

Housing Roundup

Housing activity was mixed in May. Single-family starts rose for 

the fourth time in five months but remained below the expansion 

best reached last November. Multifamily starts rebounded, 

reversing about half of the prior month’s drop. However, permits 

dropped for both segments. New home sales rose in May, 

driven solely by sales in the South, which rose to the highest 

level in more than a decade. By stage of production, sales of 

new homes not yet started drove the gain in overall sales, rising 

for the third time in four months to a six-month high, suggesting 

building activity has not kept pace with demand as builders 

continued to face challenges from labor shortages of labor and 

rising building material costs.

In contrast to the improvement in new home sales, existing home sales fell in May for the second straight month and 

declined on an annual basis for the fourth time in five months. The for-sale inventory has remained below year-ago levels 

for three years. Inventory shortages are impeding sales and supporting strong home price appreciation. According to the 

National Association of REALTORS®, properties typically stayed on the market in both April and May for only 26 days, the 

shortest duration since the series began in 2011. The near-term outlook remains bearish as pending home sales, a 

forward-looking indicator of existing home sales, dropped in May for the second consecutive month.

 

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Existing Home Sales Market Trends Sideways

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Pending Home Sales (Right Axis)

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Existing Homes Available for Sale (NSA, Year-over-Year % Change)

For-Sale Inventory Has Declined Annually for Three Years

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1.4% Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Spread between 10- and 2-Year Treasury Yields

The 10-Year to 2-Year Treasury Spread Continues to Fall

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'06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 SAAR, Thous

New Single-Family Starts and Home Sales Rise

Single-Family Starts

New Single-Family Home Sales
© 2018 Fannie Mae. Trademarks of Fannie Mae. 7.10.2018 5 of 5

Mortgage demand continued to be bearish during June despite 

the slight drop in the average 30-year fixed mortgage rate to 

4.57 percent from 4.59 percent in May, marking the first monthly 

decline since last September. Monthly average purchase 

mortgage applications were virtually flat after declining in May 

for the first time in three months. Refinance applications 

declined for the fifth straight month and the eighth time in nine 

months, sending the monthly level of applications to the lowest 

level since December 2000.

Disappointing existing and pending home sales prompted us to 

lower our forecast of 2018 existing home sales to a slight drop 

from a slight rise in the June forecast and downgrade purchase 

mortgage originations by $20 billion. We left our forecast of 

refinance originations unchanged from the prior forecast, 

showing a drop of about 26 percent this year from last year, which drove an 8 percent decrease in total mortgage

originations to $1.69 trillion in 2018. We expect the refinance share to fall 8 percentage points from 2017 to 28 percent.

Economic & Strategic Research (ESR) Group

July 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:, Federal Reserve Board, Census Bureau, Institute for Supply Management, Bureau of Economic Analysis, Autodata, Energy 

Information Administration, Bureau of Labor Statistics, National Federation of Independent Business, National Association of REALTORS®, Freddie 

Mac, and Mortgage Bankers Association

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 Hamilton Fout, Director

Rebecca Meeker, Business Analyst

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'06 '08 '10 '12 '14 '16 '18 Index (SA, March 16,1990 = 100)

Refinance Applications Fall to Lowest Level Since 2000

Refinance Applications

Freddie Mac 30-Year Fixed-Rate Mortgage (Right Axis)