Economic Developments – October 2017

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Hurricanes Temporarily Distort Economic Activity, 

But Their Effects May Linger in the Housing Sector

In September, we revised higher our forecast for full-year 2017 

gross domestic product (GDP) growth by two-tenths to 2.2 

percent. Because Hurricane Irma had just made landfall when we 

completed the forecast, we didn’t incorporate its impact, but noted 

a downside risk to our third quarter GDP growth projection and an 

upside risk to our fourth quarter outlook. So far, the recent 

hurricanes have had varying impacts on incoming economic data, 

making it difficult to separate the underlying trend from temporary,

weather-induced noise. After considering the hurricanes’ likely 

overall impacts, we lowered our third quarter GDP growth 

projection in the prior forecast by two-tenths to 2.4 percent 

annualized. The hurricanes appear to have slowed consumer 

spending growth and dragged modestly on consumer and 

business confidence. In addition, they disrupted home sales, 

which were already weighed down by tight inventory.

While consumer spending growth and residential investment likely weakened during the third quarter, we expect that 

business equipment investment, inventory investment, and trade helped to offset those weaknesses. The decline in the 

dollar and stronger global growth have been tailwinds for manufacturing and exports. Although we lowered our 

expectations for third quarter GDP growth, we slightly raised our growth forecasts for the fourth quarter of this year and 

the first quarter of next year to reflect rebounds in activity as hurricane disruptions dissipate and rebuilding efforts begin. 

As a result, our GDP growth forecast for all of 2017 remains at 2.2 percent, as the hurricanes have not altered our view of 

full-year economic performance.

For 2018, we expect economic growth to moderate to 1.8 percent, despite the expected hurricane rebuilding boost early in 

the year. We see a modest upside risk to growth from possible tax cuts, but downside risks from restrictive trade policies 

and geopolitical concerns. Monetary policy also poses downside risk. Last month’s well-telegraphed announcement from 

the Fed to taper the balance sheet has had little immediate impact on interest rates or mortgage spreads. However, the 

effect of reducing the balance sheet amid continued increases in the fed funds rate is uncertain in the long term, which

could lead to increased rate volatility. 

Third Quarter Activity Reflects Disruptions from the Hurricanes

Consumer spending is one important piece of economic data that appears to have been affected by Hurricane Harvey. 

Real consumer spending fell 0.1 percent in August, the month of landfall, marking the first drop since January. Power 

outages following the storm likely contributed to the decline in real spending on housing utilities. Furthermore, Harvey

appears to have driven a plunge in auto sales in August to a multi-year low of 16.1 million units annualized, which led to a 

sharp drop in durable goods spending during the month. However, auto sales surged 15.0 percent in September to an 

expansion high of 18.6 million units annualized as Harvey may have pushed some auto purchases from August into 

September. In addition, September sales likely received a strong boost as consumers replaced vehicles damaged or 

destroyed by Harvey and Irma.

While we also expect that Irma disrupted consumer spending in early September, spending likely rebounded later in the 

month. Over the three months through August, real consumer spending rose just 1.0 percent annualized, a significant loss 

of momentum from 2.4 percent annualized over the three months ending in July. Thus, even with an expected rebound in 

September, we anticipate that real consumer spending growth moderated to 1.9 percent annualized for the third quarter, 

down from the 3.3 percent pace recorded in the second quarter.

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

Hurricanes Weigh on Consumer and Business Confidence

Conference Board Consumer Confidence University of Michigan Consumer Sentiment NFIB Small Business Optimism Index
© 2017 Fannie Mae. Trademarks of Fannie Mae. 10.10.2017 2 of 6

 

The September employment report also clearly showed the impacts of the hurricanes. Nonfarm payrolls dropped 33,000

during the month, which was not surprising given the timing of Hurricane Irma’s landfall. In an indication of potential 

distortions from the storm, the Bureau of Labor Statistics noted that the number of workers who had a job but were not at 

work due to bad weather jumped during the survey period to the second highest level in the four-decade history of the 

series. While the hurricanes likely weighed on the September data, the payroll trend had already weakened before the 

hurricanes, as data in the prior two months were revised lower by a total of 38,000.

Leisure and hospitality payrolls, which are highly sensitive to weather, fell 111,000 between August and September, the 

largest drop on record. Payrolls in food services and drinking places accounted for 105,000 of this decline. In the 

establishment survey, individuals are employed if they are paid for any work in the pay period that contains the 12th of the 

month. About six million people were evacuated in Florida ahead of Irma’s September 10th landfall, which may have 

prevented many from working during the payroll reference week. In lower-paid industries such as leisure and hospitality, 

workers are more likely to be unpaid when they are absent from work. 

 

September’s establishment survey showed that average hourly earnings, which are not adjusted for the composition of 

employment, jumped 0.5 percent from August and 2.9 percent from last September, the biggest annual increase this year. 

Part of the pickup was likely induced by the hurricanes, due to stronger demand for relatively high-paid utilities workers 

amid the plunge in lower-paid workers in the leisure and hospitality sector. However, upward revisions boosted the yearover-year rate of growth in average hourly earnings in both August and July, pointing to a firmer wage growth trend before 

the hurricanes. 

Looking past the weather-related noise, there were many positives in the September household survey, which is less 

likely to be affected by the hurricanes. (In the household survey, people are still counted as employed even if they 

temporarily can’t get to their jobs due to bad weather). The unemployment rate declined two-tenths to 4.2 percent, a 16-

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'90 '93 '96 '99 '02 '05 '08 '11 '14 '17

Total Light Vehicle Retail Sales [Imported+Domestic] (SAAR, Mil. Units)

Auto Sales Jump As Vehicles Damaged by Hurricanes Are Replaced

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Personal Consumption Expenditures 

(SAAR, Chn.2009$, 3-M Avg Change)

Consumer Spending Loses Momentum

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350 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Change in Nonfarm Employment (SAAR, Thous., Month-over-Month )

Nonfarm Payrolls Decline on the Heels of Hefty Downward Revisions to July Data

Initial Estimate Revised Estimate

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'39 '44 '49 '54 '59 '64 '69 '74 '79 '84 '89 '94 '99 '04 '09 '14 Nonfarm Payroll: Leisure & Hospitality (SA, Thous., Month-over-Month Change)

Leisure and Hospitality Payrolls Post the Largest Monthly Drop on Record
© 2017 Fannie Mae. Trademarks of Fannie Mae. 10.10.2017 3 of 6

year low, and the broadest measure of labor force underutilization (the U-6 rate) fell three-tenths to 8.3 percent, an 

expansion low.

 

The decline in the unemployment rate was accompanied by a rise in the labor force participation rate, which increased 0.2 

percentage points to 63.1 percent, the highest level since March 2014. The labor force participation rate for prime-aged 

(25-54 year old) workers rose in September to match the highest rate since the end of 2010. With improving employment 

and labor force participation, the employment-to-population ratio increased to its recovery best. 

 

Hurricane impacts will dissipate over time, as has occurred in the aftermaths of previous major storms. In fact, the decline 

in payrolls recorded in September’s preliminary estimate could ultimately show a gain after revisions, which happened 

following both Hurricanes Andrew and Katrina. We expect payrolls to get a boost in coming months as those who were 

kept from work by the hurricanes return to their jobs. However, over time, we expect job gains to moderate as the labor 

market approaches full employment. Meanwhile, our forecast calls for a decline in the unemployment rate to 4.0 percent 

during the fourth quarter of 2018, as we anticipate that the economy only needs to create about 80,000 jobs per month by

then to keep up with growth in the working-age population. 

Despite the expected slowdowns in consumer spending growth and residential investment last quarter, other components 

of GDP appear to have held up well. The factory goods orders reports showed strengthening core capital goods 

shipments, a direct input to estimates of business investment in equipment, suggesting that business capital expenditures 

are poised to be a solid contributor to third quarter GDP growth for the second consecutive quarter. The leading indicator

for business capital expenditures—core capital goods orders—has also firmed, which bodes well for business equipment 

investment for the fourth quarter. On the trade front, the real goods trade deficit narrowed in August, suggesting that net 

exports likely contributed to third quarter growth for the third straight quarter. Lastly, total factory inventories posted a solid 

gain in August, suggesting more inventory build this quarter, which will also help to support growth.

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Unemployment Rates Fall to Expansion Lows

Civilian Unemployment Rate: 16 yr +

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

1.5%

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

Wage Growth Picks Up to the Fastest Pace This Year

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Participation Rate for Prime Working Age Adults Has Improved Over the Past Two Years

16 Years and Older

25-54 Year Olds

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Civilian Employment-to-Population Ratio (SA, %)

Employment-to-Population Ratio Rises to a Fresh Expansion High
© 2017 Fannie Mae. Trademarks of Fannie Mae. 10.10.2017 4 of 6

The Fed Stays the Course Amid Muddy Waters

We expect the Fed to brush off the temporary distortions in the September payrolls data, and see the pickup in wage 

growth and the drop in the unemployment rate as supporting evidence for a rate hike in December despite muted inflation. 

The Fed’s favored measure of inflation tied to consumer spending—the Personal Consumption Expenditures (PCE) 

Deflator—ticked up 0.2 percent in August, keeping the annual increase at 1.4 percent for the third consecutive month, well 

below the Fed’s two-percent target. The core PCE deflator, excluding food and energy prices, rose 0.1 percent, but the 

year-over-year growth rate decelerated from 1.4 percent to 1.3 percent, the weakest increase this year. In her speech at 

the National Association of Business Economists conference late last month, Fed Chair Janet Yellen pointed to significant 

uncertainties surrounding the inflation outlook but reiterated the necessity of continuing to remove policy accommodation, 

noting that the Fed should be "wary of moving too gradually." 

Housing Roundup

While economic data prior to the hurricanes showed increased momentum, housing data were losing steam as lean forsale inventory and strong home price appreciation, especially in 

the lower-end of the price range, restrained sales and home 

purchase affordability. Hurricane Harvey exacerbated the 

slowdown in sales in August, and Irma will likely lead to additional

pullback in September. 

Existing home sales fell in August for the third consecutive month 

to reach a 12-month low, with sales dropping sharply in the South 

but also in the West. The number of homes for sale posted the 

27th consecutive year-over-year drop, falling 6.5 percent. Housing 

supply appears to be a problem rather than housing demand, as 

homes are selling fast, with existing homes staying on the market 

for 30 days or less for the fourth consecutive month. New home 

sales also dipped to a new 2017 low in August. While Hurricane 

Harvey likely drove the decline in sales in the South, sales also 

fell in the Northeast and the West. 

Leading indicators point to further drops in home sales. Pending home sales, which record contract signings of existing 

homes and usually lead closings by one to two months, fell in August for the fifth time in six months to hit a 20-month low. 

On a year-over-year basis, pending home sales posted the fourth drop in five months. While pending sales decreased in 

the South, sales posted the sharpest decline in the Northeast, suggesting that Harvey was not the only factor restraining 

activity. 

Another leading indicator, purchase mortgage applications, fell in August for the second month in a row despite declining 

mortgage rates. However, purchase demand rebounded slightly in September. Refinance applications have fared better 

than the purchase segment, rising in September for the second consecutive month and the fourth time in five months.

 

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Pending Home Sales Index (SA)

Pending Home Sales Fall Year-over-Year For 

the Fourth Time in the Past Five Months

Year-over-Year % Change

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Purchase Applications End Recent Slide, as Refinance Applications Hit 10-Month High

Purchase

Refinance (Right Axis)

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'06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 SAAR, Millions of UnitsSAAR, Millions of Units

New and Existing Home Sales Drop to the Lowest Levels of 2017

Existing Home Sales

New Home Sales (Right Axis)
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Harvey did not have a meaningful impact on homebuilding 

activity in August. Multifamily starts dropped, but single-family 

starts posted a modest rise, boosted by gains in the West and 

the South. The hurricanes should have a greater impact on the 

September construction data, however. The Census Bureau 

noted that the Federal Emergency Management Agency 

(FEMA) Individual Assistance counties in Texas and Florida 

together accounted for about 13 percent of single-family 

permits in the United States and 26 percent of permits in the 

South in 2016. It is unusual for homes to be rebuilt from the 

ground up following a hurricane, and thus the housing starts 

data are unlikely to see a major boost in coming months from 

the hurricane recovery efforts. Furthermore, structural repairs in 

the hurricane disaster areas will likely face significant delays,

given ongoing shortages of skilled labor and material such as 

lumber, whose prices have risen sharply this year. Repairs of 

existing structures are not counted as housing starts, but will be included in the home improvement component of

residential investment.

Extremely lean inventory continues to fuel home price appreciation, which has been outpacing income growth. Main 

measures of home prices, including the Case-Shiller, the Federal Housing Finance Agency Purchase-Only, and the 

CoreLogic indices, showed annual gains of between 5.9 percent and 6.3 percent in July.

Our mortgage rate forecast hasn’t changed over the past month, with the yield on 30-year fixed-rate mortgages expected 

to average 3.9 percent in the fourth quarter. However, largely as a result of the hurricanes, we have downgraded our 

home sales forecast for the year. We now expect total home sales to be flat in 2017 versus a 3.3 percent rise in the prior 

forecast. For 2018, we expect total home sales to rebound by about three percent, a slight upgrade from the September 

forecast.

As in October of each year, we have updated our estimate of 

single-family (1-4 unit properties) mortgage originations for the 

prior year based on our annual benchmarking to the newly 

released Home Mortgage Disclosure Act (HMDA) data. We 

revised lower our estimated purchase originations by $9 billion and 

revised higher our estimate of refinance originations by the same 

amount, thus keeping our 2016 total mortgage originations 

estimate unchanged at $2.05 trillion. As a result of the 

benchmarking, the 2016 refinance share edged up one percentage 

point from the prior estimate to 49 percent. We also upgraded our 

projected mortgage originations for 2017 by $109 billion, with 

refinance originations accounting for the majority of the increase, 

as we adjusted various assumptions in our purchase and refinance 

mortgage originations models during the annual benchmarking

process. For all of 2017, total mortgage originations are expected 

to decline approximately 13 percent from 2016 to $1.79 trillion, with a 12 percentage point drop in the refinance share to 

37 percent. Mortgage originations are projected to fall further by about four percent to $1.72 trillion in 2018, as a decline in 

refinance originations outweighs an increase in purchase originations, leading to an expected further drop in refinance 

share to 31 percent. 

Economic & Strategic Research (ESR) Group

October 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: The Conference board, The University of Michigan, National Federal of Independent Business, Autodata, Bureau of Economic

Analysis, Bureau of Labor Statistics, Census Bureau, National Association of REALTORS®, Mortgage Bankers Association, S&P Case-Shiller, 

CoreLogic, Federal Housing Finance Agency, Fannie Mae.

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'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 House Price Indices (Year-over-Year Growth, %)

Home Price Appreciation Remains Robust

FHFA House Price

Index: Purchase Only CoreLogic: US National

S&P/Case-Shiller: US National 0

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Pre-Revision Post-Revision

'16 '17 '18

Single-Family Mortgage Originations (NSA, $Billions, 1-4 Units)

2016 HDMA Release Leads to Negligible Revisions to Originations Estimates

Purchase Refinance
© 2017 Fannie Mae. Trademarks of Fannie Mae. 10.10.2017 6 of 6

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