Economic Developments – June 2019

© 2019 Fannie Mae. Trademarks of Fannie Mae. 6.11.2019 1 of 5

Waning Momentum Reinforces Forecast of Growth 

Slowdown

The first quarter’s robust economic growth of 3.1 percent annualized is likely to be the fastest quarterly growth this year. 

Incoming data are consistent with a marked slowdown to 1.7 percent in the second quarter, the same pace projected in our May 

forecast. While we maintained our expectation that relative strength in consumer spending and labor productivity will support 

growth, we now expect weakness in fixed investment to weigh more heavily on macro conditions during the latter part of 2019 

and through 2020. Thus, we have revised downward our full-year gross domestic product (GDP) forecasts from 2.3 percent to 2.1 

percent in 2019 and from 1.8 percent to 1.5 percent in 2020.

Sluggish manufacturing activity, slowing global growth, an escalation of U.S.-China trade tensions, and the possibility of a 

resurgence of U.S.-Mexico trade tensions all reinforce downside risks to our forecast. Additionally, equity valuations fell in May for 

the first time this year, increasing the risks associated with company-level borrowing and threatening to deplete the stimulus 

provided by the Tax Cuts and Jobs Act of 2017. The yield curve inverted at the end of May and has remained inverted as of the 

time of this writing, suggesting that market participants believe monetary stimulus will be necessary to forestall a recession. In 

response to these signs of actual or potential downside, we are now forecasting that the Federal Open Market Committee (FOMC) 

will cut the federal funds rate by 25 basis points at its September meeting. 

Both existing and pending home sales disappointed slightly in April; moreover, upward revisions to new home sales in the first 

quarter imply that the inventory of new homes available for sale is smaller than we previously thought. However, we expect the 

remainder of the second quarter to make up for April’s softness as mortgage rates stabilize at new lows for the year and home 

price appreciation continues to moderate. We maintain our forecast of a modest 1.0 percent gain in home sales during 2019, but 

the slow early pace implies more of that growth will occur during the latter half of the year. Conversely, our forecast of housing 

starts relative to last month is stronger during the second quarter 

but slightly weaker during the rest of 2019 and 2020, reflecting our 

expectation of a gradual weakening in macroeconomic conditions.

 

Yield Curve Inversion Spurs Rate Cut Predictions

In late May the spread between the yields on 10-year and 3-month 

Treasuries inverted, with 3-month yields eventually exceeding 10-

year yields by as much as 28 basis points in early June. The 10-year 

yield plummeted 45 basis points between the beginning of May and 

the beginning of June to the lowest level since September 2017,

while the 3-month yield declined a modest 8 basis points. An 

inversion is regarded by many as a sign of overly tight U.S. monetary 

policy and harbinger of recession, but it may also reflect global 

capital flows into the country driven by the fact that U.S. yields 

remain attractive relative to those elsewhere. With the long end of 

the curve falling below the short end, the futures market turned 

bearish and, as of this writing, are implying a cut in the fed funds 

rate by July’s FOMC meeting and a second cut by December.

Several FOMC members have expressed a more dovish position on 

rate movements recently. In early June, Federal Reserve Board

Chairman Powell gave a speech in Chicago in which he emphasized 

that the central bank is closely monitoring the recent escalation in 

trade tensions and “will act as appropriate to sustain the 

expansion.” The market posted an immediate positive reaction to 

the comments, with both the S&P 500 Stock Index and the Dow 

Jones Industrial Average ending the day up more than 2 percent.

Market participants seem to have interpreted Chairman Powell’s 

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The 10-Year/3-Month Treasury Spread Inverts 

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Stock Market Reacts Positively to Reports that are 

Supportive of a Rate Cut

Powell's Chicago 

Speech

May jobs report shows only 75,000 jobs added 
© 2019 Fannie Mae. Trademarks of Fannie Mae. 6.11.2019 2 of 5

remarks as confirmation that the Fed would provide an implicit backstop to declines in equities, and since then have reacted 

counterintuitively to new indicators of macroeconomic conditions on the theory that negative data increases the chance of a Fed 

rate cut, which would be a positive for “risk-on” assets. This was demonstrated most clearly after the unexpectedly weak May jobs

report triggered a 1.4 percent gain in the S&P 500 during the hours after the release.

Inflation has continued to drift below the Fed’s 2.0 percent target, 

increasing concerns that inflation expectations may adjust to a 

lower level that would make it difficult to achieve the Fed’s goal of 

promoting “maximum sustainable employment” along with stable 

prices, defined by the Fed as an annual inflation rate of 2.0 percent.

The Fed attributed muted inflationary pressures during the first 

quarter to “transitory factors,” but in more recent comments several 

FOMC members have expressed greater concern, with New York Fed 

Chairman Williams noting that “inflation that’s too low is now a 

more pressing problem.” In response to the persistence of inflation 

on the lower side of the Fed’s target, along with downside risks 

including trade tensions and slowing global growth, we are now 

forecasting that the FOMC will reduce its target for the federal funds 

rate by 25 basis points at its September meeting.

International Trade Tensions Exacerbate Global Manufacturing Weakness

In response to reported Chinese backtracking on concessions in ongoing trade negotiations in early May, the U.S. unexpectedly 

hiked tariffs on Chinese goods. International trade tensions have since escalated, with tit-for-tat retaliations in the U.S.-China 

relationship along with a recent U.S. threat to impose new tariffs on Mexico until the flow of illegal migrants to the U.S. 

moderated. While participants on both sides of the U.S.-Mexico border worked to head off that threat, hopes of a U.S.-China 

breakthrough during or leading up to the G20 meeting at the end of June are looking less realistic. We expect further tariffs to be 

implemented before a trade deal is reached, which will likely result in higher prices for consumer products and production inputs, 

and we have adjusted upward our forecast for inflation in 2019. Moreover, the uncertainty regarding future trade policy is likely to 

reduce confidence among businesses and consumers, causing them to scale back on investments and major purchases.

International trade tensions have ratcheted up along with increased signals of slowing global growth. The World Bank revised 

downward its 2019 global macroeconomic growth forecast from 2.9 percent in January to 2.6 percent in June, citing trade 

barriers and lackluster investment flows as the main drags. Slower growth in China, the U.S., and the Euro Area present major 

obstacles for growth in emerging economies. Mirroring data from the U.S., global manufacturing has been particularly weak with 

more countries showing contractions in manufacturing activity (as measured by Purchasing Managers’ Indices) than at any time 

since April 2015. Global manufacturing activity is at its lowest level since October 2012 and is almost 2 points below its long-term 

average.

Confident Consumers Are Reluctant to Spend

Growth in personal consumption expenditures (PCE) was revised up 

one-tenth in the second estimate of first quarter real GDP to 1.3 

percent, the second largest contributor to GDP growth behind net 

exports. This upward revision was largely due to the March increase 

in real consumer spending being revised higher by two-tenths to the 

largest monthly increase since 2009, indicating an improved starting 

point for the second quarter. However, this source of support took a 

breather in April as real consumer spending was flat due to 

weakness in durable goods purchases and, to a lesser extent, 

spending on services.

The loss of momentum on consumer spending during April seemed at odds with two surveys showing continued consumer 

optimism in May. The Conference Board’s measure of consumer confidence rose, moving close to the expansion highs reached 

late last year, driven primarily by strength in the present situation component, which rose to the highest level in more than 18 

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After Posting the Largest Gain Since 2009 in March, 

Consumer Spending Takes a Breather

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The Fed Funds Futures Market Expects Two Rate 

Cuts by the End of this Year

6/10/2019
© 2019 Fannie Mae. Trademarks of Fannie Mae. 6.11.2019 3 of 5

years. The University of Michigan Consumer Sentiment Index likewise improved to just shy of expansion highs, but its increase 

was driven entirely by a jump in the consumer expectations component to the highest level since January 2004, while the current 

economic conditions component continued to trend down from a peak in March 2018. 

The earliest read on consumer spending in May came from sales of light vehicles, which showed the strongest gain since 

September 2017 at 6.2 percent, the second surprisingly strong sales figure in the past three months. With auto sales trending

down since the end of 2017, light truck sales (which includes SUVs) as a share of total sales rose to a record high of 71 percent in 

May. Drivers have been helped by a sharp drop in crude oil prices since their most recent peak of $63 per barrel at the end of April; 

this should also boost real disposable income as the decline in oil prices translates to lower prices at gas stations. 

We continue to regard consumer fundamentals as an important source of stability in what is otherwise an uncertain 

macroeconomic environment. However, in light of the April pause in retail sales and consumption expenditures, we revised down 

our forecast for second quarter growth in consumer spending. We consider it likely that the recent increases in trade tensions and 

equity market volatility will prompt consumers to adopt a more guarded outlook and revise downward their still-strong 

expressions of optimism.

Businesses Also Confident, But Investment Likely to Remain Weak Amid Increased Uncertainty 

Nonresidential fixed investment now seems unlikely to pick up in the 

second quarter, as we had predicted a month ago, and we revised 

downward our forecast for that component of GDP growth from 3.4 

percent annualized to 2.0 percent, with similar reductions in 2020. 

Businesses had a slow start to the year as corporate profits not only 

fell during the first quarter—the second straight quarter of decline—

but posted the largest drop since the end of 2015. Similarly, annual 

growth in after-tax profits decelerated to 1.9 percent, the slowest 

pace since the third quarter of 2016. The decline in business profits, 

coupled with the increased uncertainty surrounding trade and 

economic conditions abroad, are likely to cool business sentiment

even though the National Federation of Independent Business 

reported historically high levels of small business optimism in May.

Uncertainty over the expiration of the debt ceiling also poses risks to 

business investment this year. When the debt ceiling was reinstated at the beginning of March, the U.S. Treasury began employing 

“extraordinary measures” to avoid defaulting on the government’s obligations. These measures, however, will be exhausted 

sometime in the third quarter and another increase in the federal debt ceiling will be required. While we assume that the federal 

government debt ceiling will be raised in a manner that does not permanently erode economic activity, the potential for a lengthy 

Congressional debate may push businesses to delay investment until the issue has been resolved. 

Government outlays during the early part of this year were boosted 

by a large increase in state and local spending on highways and 

other infrastructure, and we believe some of that spending will flow 

into the second quarter. We increased our government consumption 

and investment forecast this quarter by 1.7 percentage points, in 

large part making up for the decline in business fixed investment. 

Employers Hesitant to Hire

The heightened uncertainty that seems to be inhibiting business 

fixed investment may be causing a similar loss of momentum in the 

job market, which we had hitherto seen as a source of stability and 

optimism. Nonfarm payrolls increased by only 75,000 in May, and 

downward revisions totaling the same number to March and April

data implied that May’s weak gain represented zero net additional job growth. Accordingly, we have revised downward our 

forecast for growth in total employment through 2020. The unemployment rate held steady at a historically low level, but we 

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© 2019 Fannie Mae. Trademarks of Fannie Mae. 6.11.2019 4 of 5

expect to see it start to increase later this year as anticipated growth in employment falls short of moderate growth in the labor 

force participation rate.

Despite continued tightness in the labor market, we have yet to see evidence of wage pressure that would contribute to an 

increase in inflation, as annual growth in hourly earnings declined to an eight-month low of 3.1 percent. On a more positive note, 

productivity increased 3.4 percent annualized during the first quarter, boosting the productivity growth rate to an average of 1.7 

percent over the past two years. Moreover, even though business fixed investment has disappointed, investment in research and 

development and software has been very strong over the past year, averaging between 6 and 16 percent annualized for the past 

five quarters. These investments should help spur productivity and minimize increases in unit labor costs, and we continue to 

believe they will come in strong for the remainder of the year.

Housing Is Expected to Support Growth

Housing activity was mixed in April, with single-family starts moving higher along with solid new home sales, while existing sales

fell modestly and came in weaker than we had expected on the basis of the previous month’s jump in pending sales and 

mortgage applications. However, it is likely that some of March’s increase in pending sales will contribute to stronger May sales as 

it can take six weeks for a signed contract to result in a closed sale. While we revised our second quarter existing sales forecast

modestly downward, our overall view of an improving second quarter pace of sales remains intact and we expect an increase of

2.2 percent from the first quarter on a seasonally-adjusted basis. Going forward, stabilizing mortgage rates and a modest rise in 

the inventory of homes available for sale should help support growth in sales of existing homes in the latter half of the year. 

Revisions to February and March new home sales data showed a considerably stronger winter sales pace than previously 

reported, with March sales hitting a new cyclical high at a seasonally-adjusted annualized pace of 723,000 units. This implies that

the inventory of previously started homes for sale accumulated by homebuilders at the end of the last year was sold off at a 

considerably faster pace than we previously thought, leaving fewer new homes available for sale as of the end of April. Thus, 

despite momentum in April new sales, we have revised our forecast for second quarter new home sales modestly downward 

while also bumping up starts to reflect the diminished inventory of new homes available for sale.

 

Single-family permits declined by 3.7 percent in April, tempering optimism for a robust near-term jump in starts. However, 

continued demand for new homes driven by sustained consumer confidence and low unemployment, coupled with the limited 

inventory of new homes available for sale, is expected to lead to an upward trend in permits in coming months. Supporting this 

view is a continued improvement in May of the Home Builders Housing Market Index, a measure of homebuilder expectations. 

Currently more than 640,000 multifamily rental units are under construction with more than 400,000 expected to deliver this year.

Since only 85,000 units were completed from January through May of this year, an acceleration in completions is expected to

occur over the rest of the year. Also consistent with this view, new permits for multifamily construction rose in May to the second 

highest level in the past two years. While a sizeable portion of this supply is located in the nation’s top metro areas, there is 

continued demand for multifamily units across the country. 

For more information on multifamily market conditions, please see the June 2019 Multifamily Market Commentary. 

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© 2019 Fannie Mae. Trademarks of Fannie Mae. 6.11.2019 5 of 5

The CoreLogic National House Price Index accelerated on an annual basis in April for the first time in 13 months but remained 

near the slowest pace in 7 years reached in March. Also supporting affordability, mortgage rates, sitting at 3.82 percent in the first 

week of June as reported by Freddie Mac, have declined over a full percentage point from last fall’s highs and are helping to 

bolster homebuyer purchasing power. The headline value for Fannie Mae’s Home Purchase Sentiment Index rose solidly in May to 

levels last seen in the spring of 2018, even though the share of respondents reporting income growth over the past year 

moderated. Similarly, Fannie Mae’s Mortgage Lender Sentiment Survey for the second quarter showed a large increase in the 

share of lenders reporting expectations of growing purchase mortgage demand over the next three months. While tight home 

inventories and a legacy of sustained home price appreciation will limit the robustness of the total sales pace recovery, we expect 

moderate growth in home purchases through the remainder of the year.

In response to the decline in mortgage rates, we increased our forecast for mortgage originations over the remainder of the year,

with total originations now expected to rise 2.6 percent from 2018 to $1.68 trillion. We expect the refinance share of total 

mortgage originations to be unchanged from 2018 at 29 percent, but the decline in rates has increased the upside risk to that 

forecast as the refinance option is in the money for an increasing share of recent-vintage mortgages. Single-family (1-4 unit 

properties) mortgage debt outstanding rose to the highest level since the end of 2009 during the first quarter of 2019, increasing 

0.2 percent from the prior quarter to $10.9 trillion. However, this was the smallest pace of growth since the start of 2016 and was

consistent with decelerating home price appreciation over the quarter.

Economic & Strategic Research (ESR) Group

June 11, 2019

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, Standard & Poor’s, Bloomberg, Bureau of Economic Analysis, Bureau of Labor Statistics, National Association of REALTORS®, 

Census Bureau, Fannie Mae ESR Group. 

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 

Brad Case, Director Hamilton Fout, Director

Rebecca Meeker, Business Analyst Eric Brescia, Economist

Richard Goyette, Business Analyst