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Weathering the Headwinds

Economic growth in the first half of 2015 turned out to be decent 

despite a very slow start, thanks to a large upward revision that put

second quarter growth at nearly 4.0 percent. However, the outlook 

for the second half is less upbeat than a month ago. While consumer 

spending appears to be holding up reasonably well, the economy is 

increasingly feeling the impact of the appreciating dollar and slowing 

global growth, especially in emerging markets. As a result, net 

exports will likely act as a significant drag on growth in the second 

half of the year, and declining demand abroad should continue to 

weigh on manufacturing. We now expect third quarter real gross 

domestic product (GDP) growth to come in at 1.7 percent 

annualized, a sizable downgrade from 2.5 percent in the prior 

forecast. While the inventory drawdown and deteriorating trade 

deficit are drags on growth as we anticipated, their impacts appear

to be more substantial than we had projected. Growth should still 

pick up in the fourth quarter, as domestic demand should remain 

supportive amid a fading inventory drag. We expect the economy to 

grow 2.2 percent this year before strengthening slightly to 2.4 

percent in 2016, as the negative impact from the strong dollar 

dissipates. Consumer spending should be the biggest driver of 

growth again in 2016, while net exports should be a smaller drag. 

The expected downshift in growth in the third quarter is not

because of more cautious consumers. Real consumer spending 

increased 0.4 percent in August following a 0.3 percent rise in July, 

and auto sales jumped in September to over 18 million annualized 

units—the highest in more than a decade. For the third quarter, real 

consumer spending growth likely came in at a similar pace to the 

second quarter’s 3.6 percent annualized. The renewed decline in 

gasoline prices will help boost purchasing power as it weighs on 

headline inflation. The personal consumption expenditures (PCE)

deflator was flat in August, held down by declining energy prices, 

marking the first time it failed to increase in seven months. The 

underlying inflation trend has been steady, but remains well below 

the Fed’s 2-percent target, as core prices (excluding food and 

energy items) rose 0.1 percent from July and 1.3 percent from 

August 2014, posting the same year-over-year gain recorded for six 

of the last seven months. 

The strength in consumer spending was in contrast to the downbeat 

September 2015 jobs report. Job gains for September came in at 

142,000, well below expectations. In addition, August and July job 

gains were revised substantially lower, contrary to a widely

anticipated sizable upgrade for August. As a result, the average 

monthly gain for the three months ending in September moderated 

to 167,000, the weakest since February 2014. For private-sector 

payrolls, the average monthly gain during the period was 

considerably weaker at 138,000, the worst showing since August 2012. Weakness was broad-based, affecting the 

manufacturing and energy sectors as expected, but also extending into the service industry. The average workweek 

ticked down to 34.5 hours, while average hourly earnings came in flat, leaving the year-ago increase unchanged at an 

uninspiring 2.2 percent. 

The household survey wasn’t much better: The unemployment rate held steady at 5.1 percent amid a 0.2 percentage 

point decline in the labor force participation rate to a 38-year low of 62.4 percent. One improving aspect in the household 
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survey was a 0.3 percentage point drop in the broadest measure of unemployment (U-6) to 10.0 percent, as the number 

of part-time workers who want full-time jobs fell sharply during the month. Year to date, the U-6 has declined 1.3 

percentage points, more than double the drop in the headline unemployment rate.

The weakness in the jobs report was at odds with other employment-related data, including initial jobless claims. The fourweek moving average in claims fell in early October for the fourth consecutive week, keeping claims near their expansion 

lows. However, if the employment trend fails to show some improvement in the near term, it will add downside risks to our 

forecast of a pick-up in economic growth in the fourth quarter of this year. 

We believe that the bearish jobs report and steady (albeit well below target) inflation make it unlikely that the Fed will raise

rates this year, despite the fact that Fed Chair Yellen indicated in her September 24 speech that a hike before year’s end 

was the most likely outcome. The minutes to the September 16-17 Federal Open Market Committee (FOMC) meeting showed 

that Fed officials focused on the risks around low inflation. Several voters cited the risk that deflationary pressures from lower oil

prices or a stronger dollar “could persist and, as a result, delay or diminish the expected upturn in inflation.” In the end, Fed 

officials decided that “it was prudent to wait for additional information,” including data that would “bolster members’ 

confidence” that inflation will move higher, before hiking rates. To the extent that “global developments” can put downward 

pressure on inflation (e.g., through declining import prices), it will likely take a long time to build confidence that inflation 

will move toward the Fed’s target in the medium term. We now expect the liftoff in March 2016, as do market forward 

expectations, but would not be surprised if it happens this December or next June.

The impact of the appreciating dollar is evident in September import prices. Non-petroleum import prices fell for the ninth 

consecutive month and will likely continue to weigh on consumer goods inflation for the rest of the year. At the same time, 

the strong dollar and weak global growth are hurting the U.S. trade deficit. The August trade gap widened significantly and 

was the largest in five months, as exports fell for the third time in four months and imports rose for the second time in 

three months. After adding slightly to GDP in the second quarter, net exports should resume dragging on growth during 

the rest of the year.

Slow global demand has hurt the manufacturing sector. The Institute for Supply Management (ISM) showed that the 

manufacturing index fell in September for the third consecutive month, sending the index to the lowest level since May 

2013, where it now stands just slightly above the 50-mark threshold, indicating expansion in the sector. The expansion in 

the service industry also slowed during the month, with the ISM 

nonmanufacturing index falling for the second consecutive month. 

However, unlike the manufacturing index, the nonmanufacturing index

remains well in expansion territory.

Housing Roundup

Housing indicators were mixed in August. On the negative side, 

single-family and multifamily starts and existing home sales dropped 

during the month. The inventory of existing homes for sale (not 

seasonally adjusted) remains tight, however, posting a year-over-year 

drop for the third month in a row. Pending home sales, a forwardlooking indicator of existing home sales, fell for the second time over 

the last three months, suggesting existing home sales could remain 

soft in the near term. Purchase mortgage applications also trended 

lower in August, but picked up in September and surged in early 

October as lenders rushed to file applications before the new TILARESPA Integrated Disclosure (TRID) rule took effect on October 3. 

In contrast to the sharp drop in existing home sales, new home sales 

jumped in August after a surge in July, rising to a fresh expansion 

high. Inventories of homes for sale also remain near historic lows, 

which bodes well for housing starts going forward if supply constraints 

from the shortage of skilled labor are alleviated. The upward trend in 

new home sales is consistent with home builders’ rising confidence, 

which moved up in September for the third time over the last four 

months to the highest reading of the expansion.

Supported by lean inventories, home prices showed healthy gains this 

summer, with the main home price measures showing annual gains of 

approximately 5.0 percent in July. In addition to the tight inventories,
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distressed sales have trended down. Distressed sales as a share of total existing home sales fell to 9.4 percent in July, 

the lowest share since prior to the recession, according to data from CoreLogic. The most bullish measure of home prices, 

the CoreLogic Home Price Index, which is used by the Federal Reserve to estimate the value of owner-occupied real 

estate, jumped in August, posting the biggest year-over-year gain since last June. Strong home price gains helped drive 

the increase in second quarter household net worth to a record high, and likely did so again in the third quarter. The gains 

in housing wealth were badly needed at a time when the equity market became very volatile amid global financial turmoil.

While strong home price appreciation helps boost household net worth and lift negative equity mortgages into positive 

positions, home price gains that are faster than income growth erode affordability unless mortgage rates drop sufficiently. 

Over the longer term, demographics should turn more favorable for the housing market, with more Millennials forming 

households amid continued improving labor market conditions, creating increased demand for both rental and owneroccupied properties. With home building activity and home sales expected to increase in 2016, residential investment 

should continue to add to economic growth next year.

Jitters over global economic growth and the financial market’s adjustment to the delay in the Fed’s expected lift-off have 

caused long-term interest rates to move lower over the past month. Freddie Mac’s weekly survey showed that the 

average yield on 30-year fixed-rate mortgages declined to 3.76 percent for the week ending October 8, the lowest level 

since the end of April. Given the risk-off environment, we expect mortgage rates to remain below 4.0 percent this year 

before rising only gradually to 4.1 percent by the end of next year, if the Fed begins normalizing monetary policy as we 

expect. Our forecast of housing activity is little changed over the past month, with total home sales projected to rise about 

8.0 percent in 2015 before advancing another 4.0 percent in 2016. 

However, we updated our estimate of single-family (1-4 unit 

properties) mortgage originations for 2014, as a result of our annual 

benchmark to the newly released Home Mortgage Disclosure Act 

(HMDA) data. We revised higher our estimated purchase and 

refinance originations by $107 billion and $10 billion, respectively, 

putting 2014 mortgage originations at $1.30 trillion, with a refinance 

share of 40 percent. We upgraded our projected mortgage 

originations for 2015 to $1.70 trillion, an increase of about 31 percent

from 2014, compared with a 25 percent rise in the prior forecast. The

projected refinance share of 46 percent in 2015 is the same as we 

projected in the prior forecast. For 2016, we expect total single-family 

mortgage originations to decline from 2015 originations by

approximately 17 percent to $1.41 trillion, with a refinance share of 32 

percent.

For information on multifamily market conditions, read the October 2015 Multifamily Market Commentary.

October 12, 2015

Economic & Strategic Research (ESR) Group

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

Housing Weekly Notes.
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Sources for chart data: Bureau of Economic Analysis, Energy Information Administration, Bureau of Labor Statistics, CoreLogic, the National 

Association of REALTORS®, the National Association of Home Builders, Census Bureau, the Federal Reserve Board, Fannie Mae ESR Group Forecast

as of October 12, 2015

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