Economic Developments – July 2017

© 2017 Fannie Mae. Trademarks of Fannie Mae. 7.10.2017 1 of 5

Moderating Growth Expected in the Second Half; Housing 

Supply Still Lagging

Incoming data continue to suggest a rebound in economic growth in the second quarter from first quarter growth, but 

somewhat weaker than we anticipated in the prior forecast. We expect growth to slow to an average of 1.9 percent for the 

second half of the year, compared with an estimate of 2.1 percent for the first half. Overall, our projected full-year growth 

remains at 2.0 percent, the same view we have held since February. We expect housing won’t be a drag this year but 

won’t make a huge contribution either as supply remains a problem.

The global economic growth outlook has improved, as reflected in communications from several major central banks. Late 

last month, European Central Bank (ECB) President Draghi delivered 

a bullish assessment of the growth and inflation outlook in the Euro 

area. The financial markets viewed this as groundwork for the ECB to 

taper quantitative easing later this year. Bank of England Governor 

Carney stated that monetary stimulus could be removed if business 

investment and net exports strengthen enough to offset weakness in 

consumer spending and if wage growth picks up.

These bullish outlooks moved Treasury yields higher, with the 10-year 

Treasury rising about 25 basis points over the past two weeks to 2.39 

percent at the time of this writing. Improving growth abroad, combined 

with a decline in the dollar of about 4 percent so far this year, should 

help improve U.S. manufacturing and exports, which deteriorated 

substantially after the dollar started to strengthen in 2014.

Growth in the Rearview Mirror Improves

First quarter economic growth was revised higher to 1.4 percent annualized in the third estimate of gross domestic 

product (GDP). The latest upgrade reflected stronger consumer and government spending and more favorable net 

exports than initially reported, which offset downward revisions in 

residential and nonresidential investment and inventories. Corporate 

profits, which fell for the first time in three quarters, were revised lower 

to show a bigger drop. The quarter-to-quarter decline was broadbased. Profits in the domestic financial sector posted a drop for the 

first time in five quarters, while those in the nonfinancial sector fell for 

the second consecutive quarter. Overseas profits were revised from 

an increase in the initial estimate to a decline, the first drop in four 

quarters. While year-over-year changes in overall corporate profits 

remained positive for the third consecutive quarter following five 

straight quarters of declining annual profits, the rate of increase has 

slowed markedly to 3.3 percent. Declining profits or modest growth

are generally seen late in the business cycle. 

We expect second quarter economic growth to rebound to 2.7 percent

annualized, supported by a pickup in consumer spending growth to 2.9 percent, a slight downgrade from the previous 

forecast. While real consumer spending picked up strongly in March following back-to-back drops, building momentum 

into the second quarter, it grew only modestly in April and May. May real consumer spending edged up just 0.1 percent 

despite a 0.5 percent jump in real personal income. As a result, the personal saving rate rose four-tenths to 5.5 percent. 

Between December and May, the saving rate rose a full percentage point, suggesting increasing caution among 

consumers. In addition, vehicle sales declined in June for the fifth time this year to the slowest sales pace since February

2015, despite lower gasoline prices and sizeable dealer incentives. However, lending standards for auto loans have 

tightened in recent quarters in response to deteriorating loan performance. We expect that vehicle sales and production 

will be a drag on the economy this year after sales peaked in 2016.

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'13 '14 '15 '16 '17 Nominal Broad Trade-Weighted Exchange Value of the US$ 

The Dollar Has Trended Down This Year

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Corporate Profits with IVA and CCAdj 

(SAAR, $, Year-over-Year % Change)

Corporate Profit Growth Has Slowed 
© 2017 Fannie Mae. Trademarks of Fannie Mae.

7.10.20172 of 5

 

Meanwhile, the Fed’s favored measure of inflation, which is tied to 

consumer spending, has moved further below the two-percent target. 

The Personal Consumption Expenditures (PCE) deflator fell 0.1

percent in May, the second decline in the past three months, pushing 

annual inflation lower to 1.4 percent. Excluding food and energy, the 

core PCE deflator increased 0.1 percent from April and 1.4 percent 

from last May. Declining inflation in healthcare expenditures, which 

account for nearly one-fourth of core PCE, has partly restrained core 

inflation. So far, Fed officials have attributed the recent weakness in 

inflation to transitory factors. The minutes to the June Federal Open 

Market Committee (FOMC) meeting note that, “most participants” felt 

that softness in inflation was driven by “idiosyncratic factors, including 

sharp declines in prices of wireless telephone services and 

prescription drugs.” 

Sluggish consumer spending growth has occurred amid historically 

high consumer confidence, but even that has pulled back somewhat 

from the recent peaks witnessed after the Presidential election. 

Declining gasoline prices and rising stock prices have likely helped

support confidence.

Positive labor market conditions have also supported the consumer. 

According to the most recent jobs report, nonfarm payrolls increased 

222,000 in June and gains in the prior two months were revised 

higher by 47,000. The monthly job gain during the first half of this 

year averaged 180,000, the same as registered during the first six 

months of 2016. The average workweek edged up one-tenth in June 

to 34.5 hours.

Despite solid job growth, accelerating wage gains remain elusive. 

Average hourly earnings rose 0.2 percent from May and 2.5 percent 

from a year ago, where it has hovered for most of the year. Earnings 

growth can be volatile from month to month. On a quarterly basis, 

annual growth for the second quarter moderated to the slowest pace 

since the first quarter of 2016.

Other news from the June jobs report was mixed. While the 

unemployment rate edged up one-tenth to 4.4 percent, it was due to 

labor force growth outpacing employment gains and pushing the labor 

force participation rate up one tick to 62.8 percent. On a disappointing 

note, the broadest measure of labor underutilization (the U-6 rate), 

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0.8% May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 SAAR, Chn.2009$, M-o-M % Change

Consumers Are Cautious

Personal Consumption Expenditures Personal Income

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The Saving Rate Has Climbed This Year

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'12 '13 '14 '15 '16 '17 Personal Consumption Expenditures: Chain Price Index

Fed’s Favored Inflation Measure Falls Further Below the Two-Percent Target

Year-over-Year Change Month-over-Month Change

Federal Reserve Target: 2% Year-over-Year

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'07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17

Consumers Remain Optimistic

Conference Board (SA, 1985=100) University of Michigan (NSA, Q1-66=100) 0

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Hiring Trend Remains Healthy

Change in Total Nonfarm Employment 6-Month Moving Average
© 2017 Fannie Mae. Trademarks of Fannie Mae. 7.10.2017 3 of 5

which includes discouraged workers and part-time workers who prefer full-time jobs, rose two-tenths to 8.6 percent after 

declining for four consecutive months. 

 

The Fed Stays the Course

The June jobs report should create no sense of urgency and allow the Fed to stay the course of gradual monetary policy 

normalization. The minutes of the June FOMC meeting showed no consensus on when the Fed should begin to wind 

down its $4.5 trillion balance sheet. “Several” participants preferred to announce the policy change “within a couple of 

months.” Others wanted to defer until later in the year to allow the Fed more time to assess the economic and inflation 

outlook. We now expect the Fed to announce its policy to taper the balance sheet in September and hike the fed funds 

rate once more this year in December.

Housing Roundup

Recent housing data, especially those related to homebuilding, have come in soft. Single-family starts fell in May for the 

second time in three months and permits dropped for the third consecutive month. Similarly, multifamily starts decreased 

for the fifth straight month to the slowest pace since last September and permits also fell. The declining trend in 

multifamily construction reflects the mature state of the sector’s expansion. Recent declines in the single-family sector 

might reflect payback from the boost caused by unseasonably warm weather earlier in the year. In addition, a shortage of 

workers likely remains a constraint on construction activity because new homes have been selling well and the number of 

single-family homes authorized but not started has climbed significantly this year from a year ago.

Through the first five months of this year, single-family starts were about 7 percent higher than the same period last year, 

compared with a decline of about 5 percent for multifamily starts. Because of the unexpected weakness in single-family 

construction, we revised lower our full-year projection of single-family starts to a gain of about 6 percent, versus 

approximately 9 percent growth in the May forecast. We expect multifamily starts to decline slightly this year from last 

year, the same view expressed in the prior forecast.

Private residential construction spending also fell in May for the first time in more than a year, reflecting a pullback in both 

units built and average construction cost per unit. After rising at a double-digit annualized pace in the first quarter, real 

residential investment likely fell modestly in the second quarter, dragging on GDP for the first time in three quarters. 

Home sales have been more encouraging than housing starts. New home sales rose in May on the heels of sizable 

upward revisions. Existing home sales also rose during the month, reversing some of the decline in April. Year-to-date 

through May, total home sales increased 3.9 percent from the same period a year ago, roughly tracking with our forecast 

for a 3.3 percent rise for all of 2017.

The lack of inventory continues to constrain sales. For-sale inventory of existing homes fell 8.4 percent from last May’s 

level and has been posting year-over-year declines since June 2015. The months’ supply declined to 4.2 months from 4.7 

months last May. The average time on the market fell to a fresh record low of 27 days, down from 29 days in April and 32 

days a year earlier.

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'07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 Average Hourly Earnings (SA, Y-o-Y % Change, Quarterly)

Wage Growth Decelerates Markedly Last Quarter

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U-6: Unemployed and Marginally Attached as a % of Labor Force

Broadest Measure of Labor Underutilization Rises for the First Time This Year
© 2017 Fannie Mae. Trademarks of Fannie Mae. 7.10.2017 4 of 5

Recent trends in leading indicators of home sales are mixed. On a positive note, average purchase mortgage applications 

rose in June for the fourth consecutive month amid a decline in average fixed mortgage rates to the lowest level since 

November. By contrast, pending home sales fell in May for the third consecutive month. 

 

An extremely tight inventory of homes for sale continues to support home prices, with main measures of home prices 

posting an annual gain of between 5.5 percent (S&P Case-Shiller) and 6.9 percent (Federal Housing Finance Agency) in 

April. In May, the CoreLogic Home Price Index rose 6.6 percent from a year ago, with lower-priced homes experiencing 

significantly stronger appreciation. For example, prices in the lowest tier (75 percent or less of the median) rose 9.4 

percent from a year ago, while prices for the low-to-middle tier (between 100 and 125 percent of the median) posted an 

8.1 percent year-over-year gain. With the continued robust pace of home price appreciation, we revised higher our 

projected home price forecast for the rest of this year.

Consumers are also more optimistic regarding the home price outlook, 

according to the Fannie Mae National Housing Survey. The June 

survey showed that the net share of consumers expecting home 

prices to go up over the next year jumped 6 percentage points to 46 

percent, the highest reading since September 2013. The survey also 

showed that more consumers believe it is easy to get a mortgage and 

fewer think it is difficult to obtain one. The gap between the share of 

consumers saying it is easy to get a mortgage and the share believing 

it is difficult widened to 22 percentage points, the biggest difference 

since the survey’s inception in 2010.

Consumers’ view of mortgage credit accessibility is consistent with 

results from surveys of lenders, including the Federal Reserve Board 

Senior Loan Officer Opinion Survey in Bank Lending Practices and 

Fannie Mae’s Mortgage Lender Sentiment Survey, both of which 

showed that lenders continued to ease lending standards during the 

second quarter. The latter survey indicated that lenders also expected

credit standards to ease further in the current quarter. By easing credit 

standards lenders attempt to increase access to homeownership; 

however, given the extremely lean supply, they may also put 

additional upward pressure on home prices and reduce home 

purchase affordability. Resulting affordability challenges might be 

especially pressing for potential first-time home buyers who, unlike 

trade-up buyers, are unable to reap the benefit of rapid home price 

appreciation in their existing properties.

Mortgage rates have supported housing demand and should continue 

to do so through the rest of the year. We expect 30-year fixed 

mortgage rates to average 4.1 percent in the fourth quarter, compared 

with 4.0 percent last quarter. Given our lower projected single-family 

starts but higher projected home price trends, we revised slightly higher our purchase mortgage originations forecast for 

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'99 '01 '03 '05 '07 '09 '11 '13 '15 '17 Millions Existing Homes Available for Sale (NSA)

Inventory of Existing Homes for Sale Deteriorates Further

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Leading Indicators for Home Sales Send Mixed Signals Mortgage Applications for Purchase Index Pending Home Sales Index (Right Axis)

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HPSI: Net Share of Respondents Who Say Home Prices Will Go Up in the Next 12 Months 

More Consumers Expect Home Price Appreciation Over the Next Year

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'10 '11 '12 '13 '14 '15 '16 '17 HPSI: Respondents Who Think It Would be Easy/Difficult to Get a Mortgage 

Consumers Believe It's Easier to Get a Mortgage Now

Difficult Easy
© 2017 Fannie Mae. Trademarks of Fannie Mae. 7.10.2017 5 of 5

this year. For refinance originations, our forecast for the first half of the year was little changed, but we increased 

moderately our projection for the current quarter. As a result, we expect total single-family mortgage originations to drop 

about 20 percent in 2017 to $1.65 trillion, with a large decline in the refinance share from 48 percent in 2016 to 34 percent 

in 2017.

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

Economic & Strategic Research (ESR) Group

July 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, Conference Board, University of Michigan, Bureau of Labor Statistics,

National Association of REALTORS®, Mortgage Bankers Association, 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