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Less Upbeat Growth Outlook for the Second Half

The first print of second quarter economic growth came in weaker than we expected in the July forecast. Furthermore, the 

composition of last quarter’s growth was unfavorable to the outlook for the second half of the year. The strength in 

inventory buildup points to a larger payback for the current quarter than we anticipated, suggesting that our forecast for 

the current quarter was too optimistic. While the government revised higher economic growth for the first quarter, the 

disappointing performance of second quarter growth and less optimistic prospects for the current quarter put our full-year 

2015 growth outlook at 2.1 percent—the same as in our prior forecast. Drivers of growth this year will likely be consumer 

spending, housing, and government spending. As the dollar has appreciated further recently, it will continue to weigh on 

manufacturing and trade. While declines in business investment related to oil and gas exploration and production appear 

to be abating, we expect renewed drops in crude oil prices to continue to create a headwind for the sector. As we are 

approaching the September Federal Open Market Committee (FOMC) meeting, we expect interest rate volatility to pick up 

in response to surprises in incoming data and Fed communications.

In the prior forecast, we mentioned that increased international uncertainties, including Greece’s potential default and 

China’s stock market plunge, were among downside risks to our forecast. While these concerns have receded somewhat, 

fundamental problems still remain. Chinese stock market volatility eased by late July, but real activity deteriorated as a 

private gauge of manufacturing, the July Caixin purchasing managers index, dipped further into contraction territory and

reached the lowest reading in 15 months. Though Greece has accepted the latest austerity plan, implementation will be 

painful for the economy. Fortunately, the economy in the rest of Europe has improved, and recent spreads between 

peripheral debt and the German bund did not widen much at all, a stark contrast to the spike in the spreads seen in 2012, 

indicating limited contagion into global markets from the threat of the potential Greek exit.

The First Half Was Not So Bad After All

The first estimate of second quarter gross domestic product 

(GDP) showed a 2.3 percent annualized growth rate. However, 

as a result of annual benchmark revisions to GDP back to 2012, 

the figure for the first quarter was revised up to a 0.6 percent

annualized increase from a 0.2 percent drop. Despite the 

weaker-than-expected second quarter growth, the revision in the 

first quarter growth put the average growth for the first half 

slightly stronger than we anticipated. The revisions attempted to 

reduce residual seasonality that tended to cause weak reads on 

economic growth in the first quarters of past years. While the 

revisions moderated the weakness witnessed in the first quarters 

of 2014 and 2015, overall growth during the 2012-14 period was

revised down an average of 0.3 percentage points to 2.0 

percent, with most of the downward revisions occurring in 

2013. At the same time, underlying inflation, as measured by 

the core personal consumption expenditures (PCE) deflator, was 

revised up to 1.7 percent from 1.5 percent.

Details of the second quarter showed that consumer spending

was the biggest driver, contributing two percentage points to 

growth. Other main drivers included housing, which contributed 

to economic growth for the fifth consecutive quarter, and the 

government sector, which added to growth for the first time in 

three quarters solely because of the strength in the state and 

local government sector. Net exports, which subtracted 1.9 

percentage points from growth in the first quarter, added

modestly to growth in the second quarter.

Drags on growth included nonresidential investment, as the 

weakness in business investment in structures and equipment 

more than offset the gain in investment in intellectual property 

products.
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Inventory investment also subtracted from growth in the second 

quarter as it slowed slightly from the robust pace in the first quarter,

but remained at an elevated pace. We see the second quarter pace 

of real inventory buildup of $110 billion as a negative for growth in 

the second half of this year. Since 1947, real inventory investment 

exceeded $100 billion only eight times, and we believe that the 

unsustainable stockpiles built will come at the expense of growth in 

the current quarter as a potentially significant drawdown will likely

occur. As a result, we trimmed our forecast of growth for the current 

quarter by 0.6 percentage points to 2.5 percent annualized, with 

consumer spending, again, being the biggest driver.

Consumer Spending Expected to Be a Reliable Growth Engine

While real consumer spending picked up to 2.9 percent annualized 

in the second quarter from 1.7 percent in the first quarter, as we had 

anticipated in our July forecast, the monthly trajectory suggests that 

our expectation of further strengthening in the current quarter may 

be too optimistic. While real personal income continued to grow, rising 0.2 percent in June, real consumer spending was unchanged

following a 0.4 percent increase in May.Flat real consumer 

spending at the end of the second quarter set up a soft trajectory for

consumer spending heading into the third quarter. However, auto 

sales were robust in July, rising 3.3 percent to 17.6 million 

annualized units. Sales have been at 17 million units or more in four 

of the past five months, suggesting that consumers remain confident enough to purchase big-ticket items. 

Meanwhile, consumer confidence took a hit to begin the third 

quarter after jumping in June. Both the Conference Board’s

Consumer Confidence Index® and the University of Michigan 

Consumer Sentiment Index pulled back in July, with the former 

dropping 8.9 points to the lowest level since September 2014 and 

the latter falling 3.0 points. While the Conference Board noted that 

uncertainty and volatility in financial markets stemming from the 

situations in Greece and China might have played a role in eroding 

confidence, the University of Michigan concluded that survey results 

showed virtually no impact of such international events on the index. Job Creation Remains Steady

Nonfarm payrolls rose 215,000 in July. The increase was 

comparable to the average monthly gain of 211,000 registered 

during the first half of 2015. The July total employment count was 

2.7 percent above the pre-recession high and, importantly, the 

number of full-time workers is now just 0.2 percent shy of the 

previous peak. Manufacturing employment showed signs of life, as 

factory payrolls rose 15,000, the second biggest gain this year. Mining employment declined for the seventh consecutive month

, but 

at a more moderate pace, suggesting fading negative impact from 

past declines in oil prices. However, a renewed decline in oil prices

raises concerns for employment in the industry, though continued 

losses in the mining sector won’t have a significant impact on overall 

employment.

Wage pressures remain muted, as average hourly earnings for all 

workers rose 0.2 percent from June and 2.1 percent from July 2014. 

Since late 2012, 12-month average hourly earnings growth has

fluctuated within a narrow band of 1.8 percent and 2.3 percent.
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The gain in average hourly earnings recorded in the jobs report is 

consistent with the Employment Cost Index (ECI), a broader measure 

of labor compensation. The ECI for civilian workers rose just 0.2 

percent in the second quarter—the smallest increase in the history of 

this index, which began in 1982. The wage component also rose 0.2 

percent, compared with a 0.1 percent gain for benefits. The 12-month 

changes for the overall compensation component and the wage and 

salaries component eased to 2.0 percent and 2.1 percent, 

respectively, moderating substantially compared with the prior 

quarter, but on par with increases seen in the second half of 2014.

Though average hourly earnings remain soft, the July jobs report

bodes well for personal income in July, as the average workweek for 

private employees ticked up one-tenth of an hour after being stuck at 

34.5 hours for four months. The longer workweek, coupled with the 

rise in employment, caused the index of aggregate hours worked to 

jump 0.5 percent in July. The labor income proxy, the product of 

hourly earnings and hours worked, rose 0.7 percent, matching its 

best showing this year.

The unemployment rate remained steady at 5.3 percent amid little 

change in the number of employed persons or the size of the labor 

force, with the labor force participation rate remaining near a fourdecade low of 62.6 percent. The broadest measure of labor 

utilization, the U-6, which takes into account discouraged workers 

and part-time persons who want full-time jobs, fell by one-tenth to 

10.4 percent. While the U-6 rate reached the lowest level since June 

2008 and has fallen substantially below the recession peak of 17.1 

percent, it remains well above the pre-recession low of 7.9 percent. 

The Fed Inches Toward a September Rate Hike

More than nine years have passed since the Fed last raised the fed funds rate. The statement following the Federal Open 

Market Committee (FOMC) July meeting noted that the committee is looking for “some further improvement” in the labor 

market before raising the target rate. We believe that the July jobs report offered sufficient evidence of labor market 

improvement for the Fed to move. The pace of the rate hike is expected to be very gradual, with only one 25-basis point 

increase this year. While the lack of wage pressure may cause some committee members to question the amount of slack 

in the labor market, Fed officials have said that an acceleration in wages is not a requirement for the rate hike. Meanwhile, 

underlying inflation, while remaining substantially below the Fed’s target, has firmed from the soft readings earlier in the 

year. In June, the core PCE deflator rose at a 1.6 percent annualized rate over the last six months, compared with 0.8 

percent at the start of the year.

The Dollar’s Strength Remains a Headwind

The manufacturing sector will likely continue to struggle amid a

strong dollar and subdued global demand. The Institute for Supply 

Management (ISM) manufacturing index declined in July, sending 

the index to the lowest level since April. The ISM provided positive 

news on the service sector, however, as its nonmanufacturing index 

surged in July to nearly a 10-year high, suggesting that the vast 

majority of economic activity continued to improve. 

Business investment in equipment subtracted from growth in the 

second quarter, but conditions appear to be improving. While the 

June factory orders report marked down core capital goods 

orders—a leading indicator of business investment in equipment—

from the advance report, the increase in core orders is the first gain 

since March, which is encouraging for capital expenditures for the 

third quarter.
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The strength in the dollar, which has appreciated more than 20 percent against a basket of trading partners’ currencies 

since last June, has boosted spending power on U.S. imports, while at the same time making U.S. exports less attractive 

overseas. The trade deficit widened in June as nominal imports rose while exports shrunk, primarily due to a reduction in

capital goods shipments oversees. The June trade deficit continued the recent trend in which real exports have struggled 

while imports have continued to climb higher. In June, real exports were about unchanged from the level a year ago, while 

real imports rose 5.5 percent. We expect this trend will continue through the rest of the year, and net exports will likely 

subtract from growth for the second consecutive year. 

Crude Prices Have Dropped Again

Global oil prices have been dropping as the non-OPEC supply has not fallen meaningfully amid OPEC’s increased 

production. The Iranian nuclear deal will not affect oil prices this year because Iran’s oil sanctions will not be lifted until the 

end of the year, at the earliest. Given weakening global growth, concerns about demand are weighing on prices. West 

Texas Intermediate oil prices have fallen from $60 per barrel toward the end of June to around $44 per barrel at the time 

of this writing, but remain within the range witnessed this year. So 

far, retail gasoline prices haven’t responded to the recent drop in 

crude prices.

Declining oil prices took a toll on spending on private fixed 

structures in mining, exploration, and wells, which accounts for 

about 30 percent of overall nonresidential structures investment. 

Real spending on private fixed structures in mining, exploration,

and wells subtracted 0.4 percentage points and 0.6 percentage 

points from growth in the first and second quarters, respectively. 

The industry has been adjusting to the decline in crude prices 

during the past year. Rig counts, an input used to estimate 

nonresidential investment in structures in the sector, has stabilized 

since July. Barring further substantial declines in oil prices, the 

drag on energy-related production and overall business 

investment in equipment should subside toward the end of this 

year.

Housing Likely to Be a Bigger Contributor to Growth in 2015 

Housing activity was mixed in June, but all main indicators rose

through the first six months of the year compared to the same 

period last year, supporting our expectation of a broad-based 

improvement in the housing market. Existing home sales for June 

jumped to the strongest pace since February 2007. Inventory 

remains tight. The National Association of REALTORS® (NAR) 

noted that properties stayed on the market for an average of 34 

days in June, the shortest duration since tracking began in May 

2011, with 47 percent of homes sold in June staying on the market 

for less than a month.

As distressed sales shares typically decrease month over month in 

May due to seasonal factors, NAR reported that distressed sales 

dropped to new lows in June, accounting for only 8 percent of the 

market, the lowest share since record-keeping began in late 2008. 

CoreLogic data showed a similar trend, reporting that distressed 

sales declined to 9.9 percent of total home sales in May, the lowest 

for the month of May since 2007.

In contrast to the strength in existing home sales, new home sales 

dropped sharply in June, and sales in the prior three months were 

revised down significantly. Leading indicators suggest some 

weakness for near-term home sales. The NAR pending home sales 

index fell in June for the first time this year. While the purchase 

mortgage application index rose during the last week of July, it 

remains below recent highs reached in June and early July. The 
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home sales outlook remains healthy compared to last year, 

however, as pending home sales remain above year-ago levels 

for the tenth consecutive month, and by a healthy margin, while 

average purchase applications for July were nearly 18 percent 

higher than in July 2014.

Solid total home sales and lean inventories have supported

strong home price appreciation. The CoreLogic national home 

price index (not seasonally adjusted)—the measure used by the 

Fed to estimate the value of owner-occupied real estate—rose 

1.7 percent in June, marking six consecutive monthly gains. On 

a year-over-year basis, prices increased 6.5 percent, the largest 

gain since June 2014. Still, prices are 7.4 percent below the 

series peak reached in April 2006.

Improving consumer fundamentals, especially steady job growth 

and rising household net worth, have helped boost household 

formation. According to the Census Bureau’s Housing Vacancy 

Survey, the number of households increased by 1.6 million in the 

second quarter from a year ago, marking the third consecutive 

quarter of robust year-over-year household growth. However, all 

of the net gain in household formation over the past year was 

due to rental households. As a result, the rental vacancy rate has 

been declining, reaching 6.8 percent—the lowest rate since 

1985. The decline in rental vacancies to historically low levels is

putting upward pressure on rents and providing a tailwind to new 

multifamily construction and residential investment. (For more 

information on multifamily market conditions, read the August 

2015 Multifamily Market Commentary.) Meanwhile, the 

homeownership rate continued to trend down, falling 0.3 

percentage points in the second quarter to 63.4 percent—the 

lowest level since 1967.

Despite downbeat news on the homeownership rate, there has 

been some positive news for the owner-occupied market. Fixed 

mortgage rates declined during the last week of July for the third 

consecutive week to 3.91 percent, marking the lowest level since 

early June, according to Freddie Mac. We expect mortgage rates 

to be little changed during the rest of 2015, given ongoing 

international uncertainties, continued monetary easing around 

the globe, and expected slow pace of monetary tightening by the 

Fed. Mortgage rates are likely to trend up gradually next year, 

averaging 4.3 percent during the final quarter of 2016.

Meanwhile, the Fed’s Senior Loan Officer Opinion Survey for the 

three months ending in July showed strengthening demand for 

mortgages, especially for GSE and government loans. And, for 

the fifth quarter in a row, banks reported easing mortgage credit. 

We expect low mortgage rates and gradually loosening credit to 

help support the housing market recovery even as the Fed 

begins to hike rates.

Given that incoming data for existing home sales have been stronger than we expected and single-family housing starts 

and new home sales have been disappointing, we upgraded our forecast of existing home sales and downgraded 

projected single-family starts and new home sales. We expect total housing starts to increase about 10 percent and total 

home sales to rise nearly 8.0 percent in 2015. We also marked down our projected purchase and refinance originations. 

For all of 2015, we expect total mortgage originations to increase approximately 20 percent to $1.42 trillion, compared 

with a 24 percent gain in the prior forecast, with the refinance share remaining at 47 percent.
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August 10, 2015

Economic & Strategic Research (ESR) Group

For a snapshot of macroeconomic and housing data between the monthly forecasts, please read ESR’s Economic and Housing Weekly 

Notes.

Sources for chart data: Bureau of Economic Analysis, the Conference Board, The University of Michigan, Bureau of Labor Statistics, Census Bureau, 

Bloomberg, The National Association of REALTORS®, The National Association of Home Builders, The Federal Reserve Board

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, Business Analyst

Richard Koss, Director Hamilton Fout, Director