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Building Momentum into the Second Half

We believe that second quarter economic growth likely came in slightly stronger than we expected in the prior forecast,

boosted by strengthening consumer spending and residential and nonresidential investment. Meanwhile, net exports, 

which were the largest drag on first quarter gross domestic product (GDP) since 1985, likely were close to neutral in the 

second quarter. We now estimate that economic growth picked up to 2.8 percent annualized in the second quarter, 0.4 

percentage points stronger than in the June forecast, and expect that it will accelerate further in the second half of the 

year to an average of approximately 3.0 percent. Our forecast for the second half is little changed; however, because of 

the government’s upward revision to GDP in the first quarter as well as our more optimistic view for the second quarter, 

we upgraded our full-year 2015 economic growth outlook to 2.1 percent from 1.9 percent in the June forecast. Consumer 

spending is expected to be the biggest driver of growth, with housing and government spending also contributing. Due to 

the strong dollar and weak economies abroad, we expect net exports to be a drag on growth this year. The decline in oil 

prices over the past year will likely continue to hurt nonresidential investment in structures, while business investment in 

equipment and inventory should be neutral to growth. 

While incoming domestic data over the past month largely 

beat our expectations, conditions abroad have deteriorated, 

posing downside risks to our forecast. The debt crisis in 

Greece is now front and center as the country is facing a 

choice between implementing harsh austerity and exiting the 

Eurozone, going into unchartered territory. So far, the Greek 

crisis has not ignited a run on sovereign debt of other weaker 

European economies, such as Italy, Portugal, and Spain. 

Bond yields in these countries have remained low. Investors 

may be expecting Greece to strike a deal with its creditors to 

avoid default, or they might have confidence that the 

European Central Bank (ECB) will intervene with several 

initiatives, including accelerating its Quantitative Easing (QE)

program, to avoid contagion across the rest of Europe. 

Depending on how events unfold over the next month, the 

Greek debt crisis and the potential Greek exit could have 

significant implications for the future of the Eurozone.

Trouble is also brewing in China. The Chinese government announced several measures to stem the spectacular dive in 

its stock market, including suspending trading of one-third of the companies listed on the Shanghai and Shenzhen 

exchanges and ramping up state investments in stocks. Despite these efforts, China’s major indices remain a third off 

their highs as this article goes to print. Meanwhile, China’s auto sales fell in June for the first time in two years, triggering 

concerns of a further downshift in its economic activity. Downside risks to our forecast include challenges associated with

the debt crisis in Greece, the economic slowdown and stock market swoon in China, the deepening recessions in some 

emerging markets, and renewed appreciation in the dollar.

Consumers Poised to Bounce Back...

The third print of first quarter GDP showed that the economy 

contracted by 0.2 percent annualized, compared with a 

decline of 0.7 percent in the second estimate. Following the 

poorest showing in a year during the first quarter, consumer 

spending showed signs of a turnaround amid rising consumer 

confidence, expanding household net worth, healthy job 

gains, and improved income growth prospects. We estimate 

that real consumer spending growth accelerated to 2.9 

percent annualized in the second quarter from 2.1 percent in 

the first quarter, and expect some additional acceleration in 

the second half of the year. 

Monthly data showed that, after no change in April, real 

consumer spending was upbeat in May, jumping 0.6 percent.

The increase for the prior three months ending in May 
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accelerated to 4.2 percent annualized, compared with a paltry 

gain of 0.8 percent in the three months ending in February.

Meanwhile, real personal income rose 0.2 percent during May

following a 0.4 percent gain in April. With annual growth in real 

income accelerating one-tenth of a percentage point to 4.2 

percent, it is the strongest year-over-year gain since February. 

While auto sales declined in June, the drop was from a neardecade-high pace in May. For the second quarter, auto sales 

averaged 17.1 million units annualized, the strongest pace 

since the third quarter of 2005.

...Amid Improving Consumer Confidence...

Consumer moods improved substantially in June. The 

Conference Board’s Consumer Confidence Index® jumped 6.8 

points from May, tying the March level at the second highest 

reading in the expansion. Both current assessments and 

expectations regarding the labor market improved in June. 

Income expectations, as measured by the share of households 

expecting their income to rise over the next six month minus 

the share expecting it to fall, ticked up in June for a second 

consecutive month after reaching an expansion-best in March.

The University of Michigan’s consumer sentiment index also 

jumped in June, rising 5.4 points to the highest reading since 

the expansion-best reached in January. Consistent with the 

Conference Board results, consumers’ view of the labor market 

improved and expectations for income growth firmed.

...Rising Net Worth...

Household net worth—assets minus liabilities—set a fresh 

record high in the first quarter amid rising home values and 

equity prices. The ratio of household net worth to personal 

disposable income increased to 639 percent for the quarter, the 

best showing since the third quarter of 2007, right before the 

economy slipped into recession. Households continued to be 

reluctant to incur more debt, however, as overall borrowing 

grew only 2.2 percent annualized in the first quarter—the 

slowest pace since the fourth quarter of 2013. The ratio of 

household debt to personal disposable income fell to 106.5

percent in the first quarter, the lowest level in more than a 

decade. The resulting decline in debt burden is a positive for 

consumers in the longer term, as it creates a support for future 

borrowing and spending.

...And Solid Job Growth

The June jobs report showed healthy hiring, with total nonfarm 

employment rising 223,000. Given downward revisions for 

April and May, the average monthly job gain through the first 

six months was 208,000, implying 2.5 million jobs for the 

year—not as great as last year but still a solid number. Details 

were soft, however, as both average hourly earnings and the length of the average workweek were unchanged. For the 

second quarter, average hourly earnings increased 2.2 percent annualized, moderating from 2.7 percent in the first 

quarter but somewhat better than the trend over the prior few years.
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Employment growth by industry varied substantially. Healthcare 

and social assistance continues to be the bright spot, with a 

53,000 job gain over the month and a record 539,000 increase 

over the past year. Manufacturing jobs were up a modest 4,000. 

Mining employment, which includes oil and gas extraction, 

dropped for the sixth consecutive month, though job losses

moderated to 3,600 from 17,000 in May. Total construction 

employment was unchanged, weighed down by the largest drop 

in residential construction employment in nearly five years.

Month-to-month changes could be volatile, and, as housing 

demand is heating up amid lean inventories, we expect home 

building activity and residential construction employment to pick 

up. One concern is that builders may find it increasingly difficult 

to hire skilled workers without substantially raising wages. 

Construction wage gains have accelerated this year after 

slowing sharply in 2014, in contrast to the overall wage growth, 

which has been moving sideways at approximately 2.0 percent 

over the past three years.

A survey of single-family builders conducted by the National 

Association of Home Builders (NAHB) in June 2015 showed

that labor shortages have become even more widespread 

during the past year, especially for workers with basic skills. For 

example, 69 percent of builders reported a shortage of workers 

to do rough carpentry and 67 percent reported difficulties finding

framing crews. The NAHB noted that the shortage of workers 

this year is substantially more severe than at the peak of the 

housing boom and rivals the widespread shortage just before 

the start of the expansion in 2001.

The employment report’s household survey showed a 0.2 

percentage point decline in the unemployment rate to a sevenyear low of 5.3 percent. However, this positive headline masked 

the bleak news that the labor force participation rate fell three-tenths to 62.6 percent, the lowest reading since October 

1977. The broadest measure of underemployment (U6), which includes those who are not in the labor force but want jobs 

as well part-time workers who prefer full-time jobs, fell 0.3 percentage points to 10.5 percent and is down 1.5 percentage 

points over the past year. Another gauge of labor market slack is the ratio of unemployed persons to job openings. The 

Job Openings and Labor Market Turnover Survey (JOLTS), which is released with a one-month lag to the jobs report, 

showed that job openings edged up to a fresh record high of 5.36 million in May. The ratio of unemployed persons to job 

openings remains at 1.6, well below its average of 2.1 during the 2001-07 expansion. Even if we add marginally

unemployed persons—those who are not in the labor force but want a job—the ratio remains below the prior expansion 

average of 3.3. Overall, these indicators suggest that labor market slack has diminished meaningfully over the past year. 
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International Developments May Push Rate Lift-off Past September

The Federal Open Market Committee (FOMC) has emphasized that the timing of the lift-off in the target fed funds rate will 

be data-dependent, with the Committee continually assessing incoming information on both the labor and inflation fronts. 

The minutes of the June FOMC meeting released on July 8th showed that the Committee discussed the risks associated 

with waiting too long to begin normalizing interest rates. The Committee also discussed uncertainty about Greece as one 

of "a number of reasons to be cautious."

We believe our call for the first rate hike to occur in September remains viable given incoming data. On the labor market 

front, the June unemployment rate falls within the middle of the Committee's central tendency forecast (which excludes 

the three highest and three lowest projections) for the fourth quarter of this year. Other broader indicators of labor market 

slack have also shown improvements in recent months. On the inflation front, the minutes showed some members noted 

that recent underlying inflation has firmed and that stabilization in the dollar and oil prices supports the Fed’s inflation 

outlook. However, the Fed could err on the side of caution and delay the liftoff to later this year, or even in early 2016. At 

the time of this writing, the market is pricing the start of the rate hike close to March 2016.

Manufacturing Is Still In a Rut Despite More Optimistic Purchasing Managers

The industrial production report showed that the mining sector continues to drag on the economy, with mining output 

falling in May for the fifth consecutive month and the seventh time over the last eight months. The continued drop in 

mining output was expected; the decline in manufacturing output was the downside surprise in the industrial production 

report, given that the May Institute for Supply Management (ISM) manufacturing index rose for the first time in seven 

months. 

The factory orders report reinforced the view that the recovery in the sector will be very slow, as orders fell in May for the 

second consecutive month and for the ninth time over the last 10 months. Details were disappointing as core capital 

goods shipments—an input used to estimate business equipment spending—were revised lower. In addition, core capital 

goods orders, a leading indicator for shipments, were downgraded from a 0.4 percent gain to a 0.4 percent loss, marking 

the fourth drop in the last five months. Overall, data on core shipments and core orders suggest weak business equipment 

spending in the second quarter as well as in coming quarters.

The Institute of Supply Management (ISM) manufacturing index improved further in June to the highest reading since 

January. Despite improvement in the ISM manufacturing index at the end of the quarter, the average for the second 

quarter was unchanged from the first quarter. A turnaround in manufacturing will likely be gradual given the soft demand 

abroad and strength of the U.S. dollar.

Housing Expected to Provide a Tailwind to Growth

Home sales were notably stronger in May and are poised to post a sizable increase in the second quarter. Existing home

sales rebounded 5.1 percent to the strongest pace since November 2009, when sales spiked ahead of the expiry of the 

first-time home buyers tax credit. New home sales increased 2.2 percent following an 8.1 percent rebound in April. 

Combined, total annualized home sales of 5.9 million units in May mark the strongest pace since June 2007.
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Leading indicators point to continued improvement going into 

the summer months. Pending home sales rose for the fifth 

consecutive month to a nine-year high, and purchase 

mortgage applications rose in early July to the second highest 

level since June 2013. Meanwhile, mortgage lending 

standards are easing on the margin, although they remain 

tight by historical standards. According to Fannie Mae’s 

second quarter 2015 Mortgage Lender Sentiment SurveyTM

,

more lenders have continued to report credit loosening rather 

than tightening.

The back-to-back increase in new home sales brought the 

months’ supply (seasonally-adjusted) down to 4.5 months 

from 5.1 months a year ago and from an average of 5.5 

months for all of 2014. With improving sales, homebuilders’ 

confidence jumped five points in June to its highest level 

since last September. We expect the combination of strong 

sales, lean inventories, and rising confidence to lead to 

increased home building activity this year.

Following a surge in April to the strongest pace since July 

2007, both single-family and multifamily housing starts fell 

sharply in May. Meanwhile, building permits, a leading 

indicator of starts, surged to the highest level since 

September 2007. We expect housing starts to average 1.12 

million units in 2015, a slight upgrade from the June 

forecast solely from the multifamily segment. As we 

mentioned earlier, shortages of labor likely will play a role in

restricting construction activity this year. (For more 

information on multifamily market conditions, read the July 

2015 Multifamily Market Commentary.) Rising home sales amid tight inventories are putting upward 

pressure on home prices. The CoreLogic HomePrice Index, 

the measure used by the Fed to estimate real estate value 

in the Financial Accounts of the U.S., posted a robust 6.3 

percent year-over-year gain in May, the strongest pace 

since last July. While other home price measures such as 

the Case-Shiller and the FHFA house price indices also 

showed healthy home price gains this year, the CoreLogic 

index has been relatively more bullish than other 

measures. While strong home price appreciation has helped boost 

household net worth and reduced the number of 

underwater properties, it presents a challenge to potential 

first-time buyers.With strong home price gains amid 

continued strong job and income growth, consumers are 

looking more favorably on the current selling climate. 

Fannie Mae’s June 2015 National Housing SurveyTM 

(NHS) showed that the share of consumers who believe 

now is a good time to sell a home reached a new survey high, 

increasing three percentage points to 52 percent and crossing

the 50-percent threshold for the first time in the survey’s

five-year history. 
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The tight housing market also is putting upward pressure on rents, thanks to the jump in the number of renter households. 

After increasing just 0.5 percent on average during the first five years of the expansion, annual growth in household 

formation has surged since late 2014. Following a 1.4 percent rise in the fourth quarter of 2014, year-over-year growth in 

household formation slowed slightly to 1.3 percent in the first quarter of this year. Because the newly created households 

were renter households, increased rental demand has pushed the rental vacancy rate lower and driven rents higher. 

Details in the Consumer Price Index (CPI) showed that both tenant rent and owners’ equivalent rent (a measure of the 

change in the shelter cost homeowners receive from their primary residences) have accelerated sizably over the past two 

years. In May, the CPI for tenant rent was up 3.5 percent from a year ago, compared with 2.8 percent for owners’ 

equivalent rent. Rapidly rising rents have boosted consumer expectation for rent increases. The Fannie Mae NHS also

showed that the share of consumers expecting rents to go up in the next 12 months rose four percentage points to 59 

percent in June, an all-time survey high. These results from the Fannie Mae survey suggest that the home purchase 

market may improve in the near term, with more renters likely to find owning to be more cost-effective than renting and 

more sellers likely to put their homes on the market.

After reaching their recent trough in February, fixed mortgage rates have trended up, cooling refinance demand. During 

the last week of June, refinance mortgage applications fell to the lowest level this year, though they rebounded modestly 

in early July. Economic turmoil in Greece and China has renewed a flight to safety, which should help keep long-term 

interest rates low, supporting home sales in the crucial summer selling season. Given our expectation of stronger 

economic growth, mortgage rates should trend up going forward, though we expect a gradual rise from about 4.0 percent 

currently, according to Freddie Mac, to about 4.5 percent by the end of 2016. We modestly upgraded our projected home 

sales for 2015, with existing and new home sales rising by approximately 5 percent and 25 percent, respectively. Our 

forecast of mortgage originations is little changed, as an upward revision in projected purchase originations slightly 

outweighs a downward revision in projected refinance originations. For all of 2015, we expect total mortgage originations 

to rise approximately 24 percent to $1.46 trillion, with a refinance share of 47 percent.

July 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: Bloomberg, Bureau of Economic Analysis, Autodata, the Conference Board, Federal Reserve Board, Census Bureau, Bureau 

of Labor Statistics, Fannie Mae National Housing Survey

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; Orawin T. Velz, Director; Brian Hughes-Cromwick, Economist; Mark Palim, VP;

Frank Shaw, Business Analyst; Richard Koss, Director; Hamilton Fout, Director