Economic Developments – August 2017

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Still on Pace for a Two-Percent Economy

The economy grew 1.9 percent on an annualized basis during the first 

half of the year, compared with our expectation of 2.1 percent in the 

prior forecast. Our forecast for the second half of the year is slightly 

stronger, keeping our outlook for full-year 2017 growth at 2.0 percent. 

Risks to our forecast are roughly balanced. On the upside, consumer 

spending growth may not moderate as much as we expect. In 

addition, the sharp decline in the dollar during the first seven months 

of the year could boost exports more than we anticipate, although the 

outlook for the trade sector is clouded by uncertainty surrounding 

trade policy. Downside risks include a technical default due to a 

failure to raise the debt ceiling and a partial U.S. government 

shutdown if Congress cannot pass a spending bill before September 

30. In addition, geopolitical tension has also increased.

Growth Picks Up in Second Quarter as Expected

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

growth came in at 2.6 percent annualized, a touch lower than our 

expectation of 2.7 percent in the July forecast. The acceleration in 

growth was largely attributable to inventory investment, which pulled 

back substantially and subtracted 1.5 percentage points from growth in 

the first quarter but stabilized and was neutral to growth in the second 

quarter. A strong increase in consumer spending and a healthy rise in 

nonresidential investment also helped boost growth. Encouragingly, 

business equipment investment posted the strongest gain since the 

third quarter of 2015. However, residential investment fell sharply, 

subtracting 0.3 percentage points from growth, a payback from the 

weather-induced surge in the first quarter. The second quarter GDP 

report included annual revision back to 2014. The revision did not 

substantially change the economy’s trajectory. Real GDP growth was 

revised higher in 2014 and 2015, but lower in 2016. Growth for the first 

quarter of 2017 was revised two-tenths lower to 1.2 percent.

Consumers Save Less Than Initially Believed

While real consumer spending growth was solid in the second quarter, monthly data revealed weakening momentum 

heading into this quarter. Both real consumer spending and personal income were unchanged in June. The annual 

revision to GDP showed a marked downgrade of the personal saving rate, largely the result of downward revisions to 

personal income. The saving rate for the first quarter of this year was revised lower to 3.9 percent from an originally 

reported 5.1 percent, and it edged down further to 3.8 percent in the second quarter. The marked downward revision in 

the saving rate suggests consumers have less of a financial cushion than previously estimated.
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Growth of both revolving (largely credit card) and nonrevolving (largely auto and student loans) consumer credit slowed in 

June, partly due to banks tightening their lending standards. Weakness in vehicle sales contributed to the slowdown in 

nonrevolving credit growth. In July, auto and truck sales edged up 0.4 percent, but they have been below year-ago levels

every month this year. While auto sales have posted annual declines since October 2015, truck sales fell year-over-year

for the first time since 2010. Moderating auto sales and credit growth support our forecast of a slowdown in consumer 

spending growth in the second half of this year.

On a supportive note for consumers, labor market conditions are

positive. The Job Openings and Labor Turnover Survey showed that 

the job openings as a share of total employment rose in June to 

match the expansion high of 4.0 percent. Furthermore, details from 

the National Federation of Independent Business survey, which 

showed that small business optimism improved in July for the first 

time in six months, also suggest a shortage of qualified workers. The 

share of firms reporting unfilled job openings rose to an expansion 

high of 35 percent, while the share with few or no qualified job 

applicants jumped six percentage points to 52 percent, matching an 

expansion high. The survey also points to improving hiring outlook as 

the proportion of firms with plans to hire rose to 19 percent, the 

highest level since the end of 2006. 

The July jobs report showed that payroll gains were solid and broadbased, and a slight upward revision put average monthly hiring over 

the past three months at 195,000, the strongest pace since February. 

The unemployment rate ticked down one-tenth to 4.3 percent, while 

the labor force participation rate ticked up by the same amount to 

62.9 percent. 
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Despite strong hiring trends, wage pressure remains muted. Average hourly earnings rose a strong 0.3 percent from 

June, but the annual wage increase remained unchanged at 2.5 percent, staying within the narrow range of 2.5 percent to 

2.8 percent witnessed so far this year.

Consistently subdued wage growth seems justified given labor productivity trends. Nonfarm business sector productivity 

firmed modestly in the second quarter, increasing 0.9 percent annualized. Because compensation rose moderately, unit 

labor costs – a measure of how fast compensation is growing relative to output – increased only 0.6 percent annualized 

during the quarter. On a year-over-year basis, productivity was up 1.2 percent, the same as the prior quarter but still low 

by historical standards, while unit labor costs fell 0.2 percent, the second annual decline in three quarters. 

Another measure of labor compensation, the Employment Cost Index (ECI), underscored the lack of wage pressure, as 

both wages and benefits posted only modest increases of 0.5 percent (not annualized) and 0.6 percent, respectively, in 

the second quarter. From a year ago, the ECI rose 2.4 percent, unchanged from the prior quarter. Weak labor cost growth 

takes pressure off businesses to pass higher input costs on to consumers, which should keep inflation contained.

We expect real GDP growth to moderate to 2.3 percent annualized in the third quarter, as consumer spending growth is 

projected to slow to 2.5 percent from 2.8 percent in the second quarter. Outside of consumer spending, an inventory build 

should be a positive for growth this quarter. We expect real residential investment to turn from a sharp drop to a modest 

gain, as homebuilding and home sales should gradually improve in the second half of the year, with the latter boosting

brokers’ commissions. As oil prices stabilize, nonresidential investment in structures should improve further. Lastly, the 

decline in the dollar and a pickup in global growth should support manufacturing and exports, providing a tailwind for the 

second half of the year. However, uncertain tax policy could delay businesses’ investment plans.

No Sense of Urgency for the Fed to Raise Rates

The Federal Reserve held the fed funds rate steady at the July 

Federal Open Market Committee meeting and stated that it expected

to begin implementing its balance sheet normalization program 

“relatively soon.” It also acknowledged that annual inflation has 

declined recently and is running below its two-percent target. The 

Fed’s favored measure of inflation – the Personal Consumption 

Expenditures Deflator – was flat in June, and the annual increase 

slowed to 1.4 percent from 1.5 percent in the prior month and as high 

as 2.2 percent in February. Given muted wage and inflation pressure, 

we continue to expect balance-sheet tapering to begin in September 

and a December rate hike.

Housing Roundup

Real residential investment fell 6.8 percent annualized in the second quarter and subtracted the most from growth since 

the third quarter of 2010. As we mentioned earlier, we expect a moderate rebound this quarter. One piece of good news 

for owner-occupied housing came from the second quarter Housing Vacancy Survey, which supported our view that the 
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homeownership rate has stabilized after an extended downturn. The homeownership rate (not seasonally adjusted) came 

in at 63.7 percent, 0.8 percentage points higher than the level a year ago. This marks the second consecutive quarter that 

the rate posted an annual gain. A 1.2 percentage point year-over-year increase for households under age 35 helped 

stabilize the overall homeownership rate, supporting our view that Millennials have begun to mount a homeownership 

recovery and close the homeownership attainment gap with their predecessors. (Read “Millennials Have Begun to Play 

Homeownership Catch-Up,” Fannie Mae Housing Insights, August 10, 2016). Meanwhile, the rental vacancy rate rose for 

the fourth consecutive quarter to 7.3 percent, the highest reading since the third quarter of 2015, amid a drop in the 

homeowner vacancy rate to 1.5 percent, the lowest level since the first quarter of 2001.

Housing activity was mixed at the end of the second quarter. Both 

single-family and multifamily starts rose in June, while existing home 

sales fell during the month and new home sales registered a slight 

increase. Activity through the first half of the year came in as 

expected, and thus our forecast for all of 2017 is largely the same as 

in the prior forecast.

The for-sale inventory of existing homes has been declining on an 

annual basis for more than two years. In turn, tight inventory has 

constrained sales and boosted home prices. The Fannie Mae Home 

Purchase Sentiment Index® (HPSI) decreased 1.5 percentage points 

in July from a survey high in June. Selling sentiment deteriorated 

sharply, weighed down by economic conditions. Among consumers 

who believe now is a bad time to sell a home, the share citing 

economic conditions as a primary reason posted a sharp rise. At the 

same time, high home prices helped send buying sentiment to a 

record low since the survey’s inception in 2010, with the share saying now is a good time to buy dropping to a survey low 

and the share responding that now is a bad time to buy rising to a survey high. Nearly half of consumers who say now is 

a bad time to buy cited rising prices as a primary concern – a survey high.
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The near-term outlook for home sales is mixed. Pending home sales rose in June, ending a streak of three monthly drops 

and posting an annual increase for the first time since March. The rise echoed an increase in average purchase mortgage 

applications during the month. However, average purchase applications fell in July, more than offsetting June’s gain.

Mortgage rates should continue to support home sales, as we expect them to remain near current levels, averaging 4.0 

percent in the fourth quarter. Our mortgage originations forecast is largely the same as in the prior forecast. We revised 

higher our forecast of refinance originations for this year and next year in response to stronger year-to-date data than 

anticipated. Total single-family mortgage originations are expected to drop about 19 percent this year to $1.67 trillion. The

refinance share is forecasted to decline from 48 percent in 2016 to 35 percent in 2017. We project a further drop in overall 

originations of about six percent to $1.57 trillion in 2018 as a decline in refinance originations outweighs an increase in 

purchase originations, with the refinance share decreasing to 26 percent.

For information on multifamily market conditions, read the August 2017 Multifamily Market Commentary.

Economic & Strategic Research (ESR) Group

August 10, 2017

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, Bureau of Economic Analysis, Autodata, National Federation of Independent Business, Bureau of 

Labor Statistics, Census Bureau, National Association of REALTORS®, Fannie Mae.

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 Michael T. Vangeloff, Strategic Planning Analyst III