Economic Developments – April 2017

© 2017 Fannie Mae. Trademarks of Fannie Mae. 4.10.2017 1 of 5

“Will Policy Changes...”

Our theme for 2017, launched in January, is “Will policy changes extend the expansion?” Policy has, by and large, not yet 

changed and neither has our forecast. Our forecast for full-year 2017 economic growth remains at 2.0 percent. We remain 

unconvinced that a meaningful positive impact from stimulative fiscal policy will occur this year. While it appears that we 

missed the mark on our forecast of real gross domestic product (GDP) growth last quarter, we believe special factors that

depressed growth in the first quarter will partially unwind in the second quarter. Meanwhile, there are a number of 

indicators in what is typically a late-cycle position, such as the decline in bank lending, the level of nonfinancial corporate 

debt, and the level of household indebtedness.

Near-term risks to the economy include a potential government 

shutdown on April 29 and policy uncertainty delaying investment 

decisions. Congressional appropriations will expire on April 28, and, if 

Congress does not pass an extension, the federal government will 

partially shut down. The economic consequences of a short shutdown 

would likely be minor, since lost federal pay is usually made up 

retroactively; however, any shutdown may weigh on consumer and 

business confidence in the ability of the government to bring about 

expected positive policy changes. Even without the government 

shutdown there is anecdotal evidence of business investment delays.

Long-term Treasury yields have trended sideways this year as a result. 

Rates dipped to the lower-end of a narrow range at the time of this 

writing, amid weak economic reports as well as increased geopolitical 

risks. The Freddie Mac survey showed that the average 30-year fixed rate mortgage fell in the first week of April for the 

third consecutive week to 4.10 percent, just one tick off its 2017 weekly low.

Our expectation for first quarter real economic growth has slipped to just 1.1 percent annualized, half a percentage point 

below what we had anticipated in the prior forecast. If our forecast is realized, this would mark the fourth consecutive year 

that growth has decelerated to start the new year. First quarter economic growth is likely to be understated due to 

lingering issues with seasonal adjustment known as residual seasonality—a pattern that remains in seasonally-adjusted 

data. We expect activity to rebound somewhat in the second quarter following the weak first quarter, as has occurred 

each of the last three years.

Measured Economic Activity Is At Odds with Current Sentiment Survey Results

Recent reports underscore the ongoing disparity between subdued 

hard data on economic activity and upbeat soft data on consumer and 

business sentiment. Under the hard data category, economic reports

related to consumer spending for the first quarter were bearish. Real 

consumer spending edged down 0.1 percent in February following a 

0.2 percent decline in January—the first back-to-back drops since 

March and April 2009. 

The second warmest February on record depressed utilities 

consumption for the second consecutive month. Given more normal

March weather, we should see a rebound in utility spending to close 

out the first quarter. In addition, delayed tax refunds may have 

contributed to soft consumer spending, suggesting an increase in the 

pace of spending in coming months. 

1.0%

1.5%

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2.5%

3.0%

3.5%

4.0%

4.5% Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17

Mortgage Rates and 10-Year Treasury Yields Trend Sideways 

10-Year Treasury Note Yield

30-Year Fixed Mortgage Rate

-0.40%

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0.80% Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 SAAR, Chn.2009$, M-o-M % Change

Consumer Spending Declines Again Despite Rebound in Disposable Personal Income

Personal Consumption Expenditures Disposable Personal Income
© 2017 Fannie Mae. Trademarks of Fannie Mae. 4.10.2017 2 of 5

However, March auto sales fell 5.4 percent, the biggest monthly 

decline in a year. Thus, even if spending in some areas such as 

utilities picked up in March, we still expect overall real consumer 

spending to slow sharply to 1.1 percent annualized for the first quarter 

from a robust 3.5 percent pace in the fourth quarter.

Data on labor market conditions were mixed in March, with the 

monthly jobs report revealing a tale of two surveys. On the 

disappointing side, the establishment survey showed headline job 

gains of just 98,000, the weakest monthly gain since last May. 

Downward revisions of 38,000 jobs for the prior two months pulled the 

three-month average gain down to 178,000 from 197,000 in the three 

months ending in February. The continued struggles of the retail 

sector were evident in the decline of 30,000 jobs in March following 

February’s decline of 31,000. Stormy March weather following an

unseasonably warm January and February was partially responsible for the overall weakness. One supporting piece of 

evidence of a seasonal payback was construction payrolls, whose gains moderated to 6,000 in March following the 

increase of 59,000 jobs in February and 34,000 in January. Meanwhile, the annual rise in average hourly earnings 

moderated one-tenth to 2.7 percent.

On the brighter side, the household survey was upbeat, suggesting that the establishment survey likely overstated

worsening labor market conditions. Both the official unemployment rate and the broadest measure of labor market slack, 

the U-6 rate, slipped to fresh expansion lows of 4.5 percent and 8.9 percent, respectively. While the labor force 

participation rate was flat at 63 percent, the employment-to-population ratio increased for the third consecutive month to 

60.1 percent, a new expansion best.

 

Despite some signs of weakening economic activity in the spending 

and jobs data, consumers were more upbeat in March. The 

Conference Board Consumer Confidence Index jumped to the highest 

level in more than 16 years, and the University of Michigan Consumer 

Sentiment Index improved from February, remaining just below the 

13-year high reached in January. Small business owners remained 

optimistic. While the National Federation of Independent Business 

Optimism Index edged down in February for the first time in five 

months, it remains near its record high.

Incoming data on trade and investment showed some improvement 

during the first quarter. The trade deficit narrowed in February, partly 

because of weak consumer demand that caused a pullback in imports 

of autos and other goods amid a small increase in exports. Factory 

orders rose in February for the third consecutive month, indicating continued improvement in the manufacturing sector as 

the headwinds from the strong dollar and declining energy prices faded. While core orders (nondefense capital goods 

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'06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17

Unemployment Rates Dip to Expansion Lows

Civilian Unemployment Rate: 16 yr +

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

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

Employment-to-Population Ratio Edges Up to a Fresh Expansion High

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

Vehicle Sales Fall to the Slowest Pace in Over Two Years

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Consumer and Business Confidence Measures Remain Elevated

Conference Board Consumer Confidence University of Michigan Consumer Sentiment NFIB Small Business Optimism Index (Right Axis)
© 2017 Fannie Mae. Trademarks of Fannie Mae. 4.10.2017 3 of 5

orders excluding aircraft), a leading indicator of business investment in equipment, dipped slightly during the month, it was 

the first drop in five months. 

Despite recent improvements in indicators of manufacturing activity, 

including manufacturing payrolls, they continue to lag behind results 

from surveys of purchasing managers. For example, the Institute for 

Supply Management (ISM) Manufacturing Index rose in February for 

the sixth consecutive month, showing the fastest expansion in the 

sector since August 2014. The index edged down only slightly in 

March, remaining at an elevated level. 

Fed Comments Become More Hawkish

The Fed’s favored measure of inflation, the personal consumption 

expenditures (PCE) deflator, edged up 0.1 percent in February. From 

a year ago, prices rose 2.1 percent, achieving a pace above the Fed’s 

2.0 percent target for the first time in nearly five years. Retail gasoline 

prices, which have risen from the seven-year low reached last 

February, helped boost the headline PCE deflator over the past year. 

Excluding energy and food prices, the annual increase in core prices 

has been more stable, hovering between 1.7 percent and 1.8 percent 

for the past seven months. Combined with the decline in the 

unemployment rate to 4.5 percent, we expect firming inflation will prod 

the Fed to raise the fed funds rate in June and September, compared 

with September and December in the prior forecast. 

The minutes from the March Federal Open Market Committee (FOMC) 

meeting suggested that the Committee is laying the groundwork to 

begin shrinking the Fed’s balance sheet. The minutes noted that, if the 

economy performs as expected, “most participants” viewed that “a 

change to the committee’s reinvestment policy would likely be 

appropriate later this year.” Our view is that an explicit portfolio policy statement is likely to be included in the December 

meeting statement. Of course, all of this is “data dependent,” to use the Fed’s own words.

Late Cycle Housing Dynamics

Through February, news from the housing sector was more upbeat than 

reports from other areas of the economy, partly because of the unusually 

warm winter weather. Single-family starts jumped in February, as permits 

rose to an expansion high. By contrast, multifamily starts fell for the 

second consecutive month, while permits fell for the third time in four 

months. The National Association of Home Builders’ Housing Market 

Index (HMI), a gauge of home builders’ confidence in the single-family 

market, jumped six points in March to 71, an expansion best. (A reading 

of more than 50 indicates more builders view the market as good rather 

than poor.)

Heading into the spring home selling season, the housing market should 

benefit from a seasonal increase in listings. However, extremely low for-sale inventory remains the primary headwind. 

While construction activity has picked up, single-family building still significantly lags the demographic driven level of 

demand. Declines in household mobility are suppressing existing home supply.

Home sales were mixed in February. Existing home sales posted the largest monthly drop in a year, falling from the 

expansion best reached in January. New home sales, on the other hand, rose to the second highest level of the 

expansion. Even so, in yet another indication of how hard data on economic activity is trailing softer measures of 

sentiment, gains in new single-family home sales are lagging far behind improvements in builder sentiment reflected in the 

HMI.

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

ISM Manufacturing Index (SA, +50 = Expansion)

Manufacturing Sector Activity Slows Slightly In March From a Two-and-a-Half Year High

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'12 '13 '14 '15 '16 '17 Personal Consumption Expenditures: Chain Price Index (Y-o-Y % Change)

Fed’s Favored Inflation Measure Climbs Above 

the Target for the First Time Since April 2012

PCE: Price Index

PCE: Less Food and Energy

Federal Reserve Target

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Home Builders' Sentiment Climbs Higher as New Home Sales Improve Again

Home Builders: Housing Market Index New Single-Family Home Sales (Right Axis)
© 2017 Fannie Mae. Trademarks of Fannie Mae. 4.10.2017 4 of 5

Forward-looking indicators of home sales have been positive. Pending home sales, which record contract signings for

existing homes, jumped in February to the second-highest level in over a decade, suggesting improvements in closed

sales in coming months. Another leading indicator of home sales, purchase mortgage applications, rebounded in March, 

regaining the levels seen before the post-election mortgage rate spike. 

 

A potentially faster pace of Fed rate hikes poses a downside risk to the home sales market. In March, the Fannie Mae 

Home Purchase Sentiment Index (HPSI) gave back some of the gains accumulated over the prior two months that sent 

the index to its survey high in February. One of the HPSI components, the net share of consumers who expect mortgage 

rates to rise over the next year, increased during the month, exceeding that reported during the 2013 taper tantrum.

However, in the absence of stimulative policy actions, we anticipate the Fed actions will lead to a flatter yield curve and 

minimal upward pressure to longer term rates, in which case those consumer rate concerns would not be realized.

The aforementioned extremely lean inventory continued to boost home price appreciation, with the CoreLogic National 

House Price Index rising 7.0 percent in February from a year ago, the fastest pace of gain since May 2014. The 

CoreLogic measure tends to show stronger appreciation than other price measures and is prone to downward revisions. 

However, other measures also showed healthy annual home price appreciation at the start of this year.

The strength in recent home price appreciation has turned into a double-edged sword for two components of the March 

HPSI. High home prices were the most important factor behind both the bad time to buy and good time to sell indicators, 

cited by 39 percent of consumers who say it is a bad time to buy (a survey high) and 24 percent of those who say it is a 

good time to sell. The net share of consumers saying it’s a good time to sell jumped to a record high, surpassing the 

plunging good time to buy indicator for the first time in the six-year history of the survey.

 

In addition to the potential seasonal rise in for-sale inventory, perhaps boosted by some sellers seeking to lock in profits 

from recent rapid home price gains, the home sales market could also get a boost from homebuyers who decide to jump 

into the market before rates rise further. We expect about a 3.0 percent increase in home sales for 2017, a slight 

improvement from the previous forecast. Our outlook for mortgage rates is little changed from the prior forecast, with 30-

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'06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 SA, Index SAAR, Thousands of Units

Spike in Pending Home Sales Bodes Well for Near-Term Existing Home Sales 

Existing Home Sales (Left Axis) Pending Home Sales (2-Month Lead, Right Axis) 1000

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'13 '14 '15 '16 '17 Mortgage Loan Applications (SA, Mar-16-90=100, Monthly Average)

Purchase Mortgage Demand Recovers

Purchase Refinance (Right Axis)

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'04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 Year-over-Year Growth CoreLogic National House Price Index (NSA, Jan-00=100)

Annual Home Price Growth Climbs to Seven Percent for the First Time Since May 2014

House Price Level Annual Appreciation (Right Axis)

Record - April '06

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'11 '12 '13 '14 '15 '16 '17 Fannie Mae HPSI (NSA, Mar-11=60) % of Respondents Who Say It Is a...

Consumers Think It Is a Sellers' Market in Housing for the First Time

Good Time to Buy Good Time to Sell
© 2017 Fannie Mae. Trademarks of Fannie Mae. 4.10.2017 5 of 5

year fixed mortgage rates averaging 4.3 percent in the fourth quarter of 2017. We expect total mortgage originations to 

drop about 20 percent this year to $1.58 trillion. We also expect purchase originations to rise moderately amid a sharp 

drop in refinance originations, pushing the refinance share lower 16 percentage points from 2016 to 32 percent in 2017.

Economic & Strategic Research (ESR) Group

April 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 Federal Reserve Board, Freddie Mac, Bureau of Economic Analysis, Autodata Corporation, Bureau of Labor Statistics,

The Conference Board, The University of Michigan, The National Federal of Independent Business, The Institute for Supply Management, Census 

Bureau, The National Association of Home Builders, The National Association of REALTORS®, Mortgage Bankers Association, CoreLogic, and 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