Economic Developments – September 2019

© 2019 Fannie Mae. Trademarks of Fannie Mae. 9.10.2019 1 of 5

Consumer Spending Continues to Drive the Economic 

Outlook

Consumer spending remains the most important force driving the continued expansion of the U.S. economy. Increases in auto 

and retail sales, real disposable personal income, and real personal consumption expenditures (PCE), along with an upward 

revision to previously reported PCE, are evidence of current consumer strength. Also encouraging, a recovery in new single-family 

construction spending suggests that residential fixed investment may be slightly stronger this quarter than we previously 

expected. As a result of these two factors, we increased our forecast for growth in real gross domestic product (GDP) by one-tenth

of a percent in the third quarter, even though we revised downward our already below-consensus view of nonresidential fixed 

investment to a negative number. We maintained our top-line forecast for GDP growth in 2019 of 2.2 percent and revised 

downward our full-year 2020 forecast by one-tenth to 1.6 percent. 

Risks to our forecast remain biased to the downside. Businesses enjoyed at least a temporary respite from further escalation of 

U.S.-China and other trade disputes, but the month brought both confusion in the U.K. regarding the government’s Brexit plan 

and renewed evidence that the U.S. manufacturing sector is not immune to the global manufacturing slowdown. Perhaps more 

ominous, the month also brought signs that the resilience of consumer spending may be starting to wear thin, with weak growth 

in employment and a sharp turn downward in consumer sentiment. The minutes of the July meeting of the Federal Open Market 

Committee (FOMC) confirmed that members were sensitive to downside risks — as well as the possibility of a stock market 

downturn — and were supportive of our forecast for two more quarter-point rate cuts in September and December. 

We made no change to our forecast for total housing starts in the third quarter, with a slight increase in expected single-family 

starts offsetting a slightly less sanguine view of multifamily starts. Our forecast of third quarter home sales was revised downward

after the National Association of REALTORS® recorded a steep drop in pending sales of existing homes. Moreover, annual home 

price appreciation accelerated in July, with prices increasing most in the lowest price tiers. We have incorporated slight 

downward revisions to our forecasts for full-year home sales in both 2019 and 2020, as well as a slight downward revision to our 

full-year 2020 forecast of housing starts.

Consumption and Wage Gains Remain Strong

Real personal consumption expenditures (PCE) grew 0.4 percent during July, a solid performance to start the third quarter as the

already strong increase reported for the second quarter was revised upward from 4.3 percent to 4.7 percent annualized. Strength 

in PCE came from all components, with spending on durable goods, nondurable goods, and services all increasing in July. Data on 

retail sales reinforced the message of strength, rising in July for the fifth straight month with growth distributed broadly among

department stores, electronics and appliance stores, clothing and accessory stores, and non-store retailers.

A measure of consumer sentiment raised concern as to whether the robust consumer spending may be in danger of losing 

momentum. The University of Michigan Consumer Sentiment Index plunged in August by 8.6 points, the largest monthly drop 

since 2012, to the lowest index level since October 2016; moreover, the final reading was 2.3 points lower than the mid-month 

preliminary reading, suggesting that consumer confidence deteriorated 

in the second half of August. For several months we have regarded a 

stall in consumer spending as among the most significant downside 

risk to our forecast, but we do not yet regard the University of 

Michigan data as reliable evidence of such a stall. Indeed, the first 

available data on consumer spending in August continued the streak 

of strong readings, with sales of light vehicles increasing by 1.1 

percent — firmly contradicting the message of the Consumer 

Sentiment Index, as spending on big-ticket items such as cars and 

trucks is particularly sensitive to consumer outlooks. A marginal 

decline of 0.7 points in the Conference Board Consumer Confidence 

Index for August was of no concern, particularly coming on the heels 

of an 11.5-point jump in the same index in July.

15

16

17

18

19

20

75

90

105

120

135

150

'17 '18 '19

While One Measure of Sentiment Shows a Steep Decline, Auto Sales Tell a Different Story

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

Total Light Vehicle Sales (Right Axis, SAAR, Mil. Units)
© 2019 Fannie Mae. Trademarks of Fannie Mae. 9.10.2019 2 of 5

The Employment Situation report released by the Bureau of Labor 

Statistics (BLS) was similarly ambiguous, with weak job growth 

making the case that consumer spending may start to erode but an 

increase in average hourly earnings suggesting continued support.

Nonfarm payroll employment increased by just 130,000 in August, 

below our expectations — and even that number was boosted by the 

hiring of 25,000 temporary workers for the upcoming U.S. Census. 

Moreover, previously reported payroll employment gains for June 

and July were revised downward by a combined 20,000. Downward 

revisions in prior month employment growth figures have 

historically confirmed the trend in employment slowdown, and 

every month’s initial job estimate has been revised downward

beginning with the March report. Furthermore, revised data from the 

BLS’s Productivity & Costs report confirmed the preliminary 

indication that total hours worked during the second quarter had 

suffered the largest decline since the third quarter of 2009.

In response to these signs of weakness, we revised downward our forecast of employment growth for the rest of 2019 and the first 

quarter of 2020. On the other hand, the August employment report showed a meaningful increase in average hourly earnings, up

3.2 percent on an annual basis, along with a slight increase in the average workweek. These data provide no evidence of the kind 

of deterioration in wages and salaries that would lead to a reduction in consumer spending. Moreover, the labor force increased 

by more than a half-million, the largest increase this year, with the participation rate increasing from 63.0 percent to 63.2 percent

as potential workers continued to return from the sidelines.

A relatively weak gain in manufacturing employment provided 

further evidence that the global manufacturing slowdown has 

impacted the U.S., and the Institute for Supply Management (ISM) 

followed suit with their Manufacturing Index dropping 2.1 points in 

August to 49.1, reaching “contraction” territory for the first time 

since August 2016. Although factory orders increased in July, 

manufacturers’ shipments declined—continuing a trend that has 

seen shipments fall at an annualized rate averaging 1.2 percent since 

last October. In response to softening demand for manufactured 

goods we trimmed slightly our expectations for third quarter growth 

in business inventories.

Inflation Remains Below the Fed’s Target and Business Investment Heads Lower

The minutes of the July FOMC meeting offered four reasons for the Committee’s decision to reduce the federal funds rate by 25 

basis points: the first was to “better position the overall stance of policy” so that the Fed would be able to respond effectively to 

any deterioration in macroeconomic conditions; the second was to insure against further downside risks; the third was to boost 

inflation toward the Fed’s symmetric 2.0-percent target, thereby guarding against a decline in inflation expectations; and the 

fourth—stated implicitly—was to protect against a sharp decline in equity markets. Developments since that meeting have 

essentially maintained the status quo with negatives roughly balanced against positives. We have already noted continued 

strength in consumer spending balanced by signs of deteriorating consumer confidence, as well as slowing in labor market hiring

balanced by signs of increasing hourly earnings; similarly, a renewed escalation in U.S.-China trade tensions immediately after 

the FOMC meeting was followed shortly afterward by an announcement that more than half of the threatened new tariffs would 

be delayed until December. Equity markets have accommodated these developments with what might be termed a tentative 

equilibrium.

Inflation data has been similarly ambiguous, with several price indices rising closer to the Fed’s target but not enough to allay the 

Fed’s concerns. The PCE price index increased annually by 1.4 percent in July, according to the Bureau of Economic Analysis, and 

the core PCE price index (excluding food and energy) gained just 1.6 percent. The consumer price index (CPI) reported by the 

Bureau of Labor Statistics was up 1.8 percent in July from a year earlier, though the core CPI was the only measure to rise above 

34

38

42

46

50

54

58

62

340

380

420

460

500

540

580

620

'07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19

Manufacturing Activity Contracts for the 

First Time Since 2016

Manufacturers' Shipments (SA, Bil.$) Manufacturing PMI (Right Axis, SA, 50+ = Econ Expand)

-50

0

50

100

150

200

250

300

350 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Change in Nonfarm Employment (SA, Thous., Month-over-Month )

Beginning with the March Report, Job Growth Revisions Have Been Consistently Negative 

Revised Estimate Initial Estimate
© 2019 Fannie Mae. Trademarks of Fannie Mae. 9.10.2019 3 of 5

the Fed’s target. We continue to question whether reducing the 

federal funds rate can be depended upon to boost inflation as it 

might in a more normal economic environment. Given this 

uncertainty and the balance between upside and downside 

surprises, we are maintaining our forecast that the FOMC will 

implement two more cuts to the federal funds rate, by 25 basis 

points each in September and December. 

The weakest segment of the U.S. macroeconomy is business fixed 

investment, and a succession of three reports from the Census 

Bureau supports our expectation of continued weakness. Imports of

non-vehicle capital goods declined by 2.6 percent in July, while 

capital goods exports increased by 1.8 percent, suggesting a decline 

in equipment investment in the U.S. economy. The value of private 

nonresidential structures put in place declined by 0.8 percent in 

July. Shipments of durable goods contracted by 1.1 percent in July, with machinery and transportation equipment leading the 

decline at 1.9 percent and 2.0 percent, respectively. Contractions in the equipment and structures components of business fixed 

investment, coupled with the continued grounding of Boeing’s 737 MAX aircraft, a 14 percent decline in rotary rig counts yearover-year responding to persistently low oil prices, and no improvement in the environment of global macroeconomic and 

political uncertainties, led us to reduce our already low third quarter growth forecast from positive 0.6 percent to negative 0.6 

percent. Over the next three quarters, however, we expect a moderate recovery in business fixed investment driven by sustained 

domestic consumer demand and continued tightness in labor markets.

Sliver of Hope for Residential Investment?

Housing activity started off strong in the third quarter, in line with 

our expectations. Existing home sales rose 2.5 percent in July to 5.42

million annualized units, the second highest sales pace since April 

2018, while new single-family and multifamily residential 

construction spending rose 0.9 percent, the largest gain since May

2018. Additionally, retail sales at home improvement stores, a proxy 

for home remodeling spending, ticked up in July. Together, these 

positive developments suggest a modest rebound in residential 

fixed investment in the third quarter, which would end six 

consecutive quarters of declines.

Demand factors for home sales remain on solid footing. While 

uncertainty over U.S.-China trade tensions and financial market volatility may dampen sentiment, continued employment growth 

and solid wage gains combined with low mortgage rates should be supportive going forward. The Fannie Mae Home Purchase 

Sentiment Index (HPSI) inched up in August to 93.8, a new survey high, suggesting continued buying interest on the part of 

consumers. 

As of this writing, the 30-year fixed mortgage rates sits at 3.49 

percent, the lowest weekly level since October 2016 and only 18

basis points above the lowest level of the expansion (seen in 

November 2012). With rates declining almost an entire percent and a 

half from the peak last November, fewer homeowners have 

mortgages at rates lower than current market levels, meaning 

homeowners are less likely to feel “locked in” to their current 

mortgage. In the coming months more owners may be enticed to list 

their homes for sale, helping to support existing home sales. 

However, our attitudinal survey work does not suggest enough of a 

shift in the existing home supply to alleviate overall supply 

constraints.

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

'12 '13 '14 '15 '16 '17 '18 '19

Inflation Measures Still Well Below 

Fed's 2.0 Percent Target Rate

CPI (NSA, 1982-84=100, Y/Y %Change)

PCE (SA, 2012=100, Y/Y %Change)

150

180

210

240

270

300

95

99

103

107

111

115

Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19

Drops in Pending Home Sales and Purchase 

Applications Suggest Slower Pace of Home Sales 

Pending Home Sales Index (SA) Mortgage Purchase Applications (Right Axis, SA, Mar-16-90=100)

240

260

280

300

320

340

360

'15 '16 '17 '18 '19 Private Construction Spending on New Housing Units (SAAR, Bil.$)

Construction Spending Posts Second 

Largest Gain Since Early 2018
© 2019 Fannie Mae. Trademarks of Fannie Mae. 9.10.2019 4 of 5

Inventories of existing homes for sale, after ten months of year-over-year gains, fell in July for the second straight month, down 

1.6 percent from a year prior to reach the lowest July reading since the series began. We believe a pullback in existing home sales 

is likely, particularly since a July decline in pending sales almost completely erased June’s gain. We expect declines in August and 

September to dampen third quarter sales as pending sales tend to lead existing sales by about 45 days. Furthermore, in August 

the average number of purchase mortgage applications posted the largest decline since February, suggesting a weakening sales 

pace in September and early October. The paucity of listings has prevented home sales from responding to lower interest rates as 

strongly as they have in the past. Given the weak response to lower rates to date, we revised slightly downward our existing sales 

forecast over the coming quarters, and we now we expect 2019 existing sales to fall a modest 0.3 percent from 2018 levels.

The lack of existing home inventory is supportive of new construction. We continue to expect single-family housing starts to move 

modestly upward through the remainder of the year, even as builders continue to face labor and land constraints. New sales will 

also trend upward, but at a slower pace than starts, as year-to-date sales have been bolstered by home builders drawing down 

excess inventory of previously started homes that had built up at the end of last year. In coming months homebuilders will have 

to rely more heavily on starts to fulfill sales demand, and sales will be increasingly limited by the pace of construction. 

Refreshingly, homebuilders seem to be increasingly focused on 

entry-level products, the segment of the housing market most 

undersupplied given the strength of entry-level demand. The 

median square footage of new single-family construction fell 4.3

percent in the second quarter to the lowest level since 2011. This 

trend will help affordability, especially for first-time homebuyers. 

Building smaller homes does have the downside of being more labor 

intensive per dollar of construction; this, combined with the ongoing 

scarcity of construction labor, has been a factor in keeping 

residential fixed investment from boosting the overall economy in 

recent quarters. Given the supply and demand fundamentals, the 

decline in mortgage rates has been a price accelerator exacerbating 

the affordability challenge for entry-level buyers. 

Multifamily housing data were mixed in July with the volatile starts measure plummeting to the lowest level in nearly two years,

while permits rebounded from a sharp decline in June. Low rental vacancy rates and the recent acceleration of renter household 

annual growth in the second quarter will be supportive of multifamily building going forward. Combined with low construction 

loan rates, we expect healthy multifamily construction in the coming quarters even if somewhat less than the strong pace seen at 

the beginning of this year. For more information on multifamily market conditions, read the September 2019 Multifamily Market 

Commentary.

We have updated our estimate of single-family (1- to 4-unit properties) mortgage originations for the prior two years based on our 

annual benchmarking to the newly released Home Mortgage Disclosure Act (HMDA) data. We revised higher our estimated 

purchase originations in 2017 and 2018, resulting in an upwardly revised path for purchase originations in 2019 and 2020 as well. 

The benchmarking also resulted in higher refinance originations in 2017 and 2018, with the refinance share of total originations 

unchanged at 36 percent in 2017 and revised upward by 1 percentage point in 2018 to 30 percent. 

The decline in our mortgage rate forecast since last month led us to revise upward our forecasts of refinance originations in both 

2019 and 2020. Given our improved view of purchase originations from HMDA revisions and rate-driven refinance originations, we 

now expect total originations to rise by 11.6 percent from 2018 to $1.97 trillion in 2019, with a refinance share of 35 percent. 

Looking ahead to 2020, we expect total originations to decline by 6.8 percent from this year to $1.84 trillion as projected declines 

in refinance activity outpace essentially flat purchase activity, with the refinance share dropping to 31 percent.

Economic & Strategic Research (ESR) Group

September 10, 2019

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

Weekly Notes.

2,000

2,100

2,200

2,300

2,400

2,500

2,600

'99 '01 '03 '05 '07 '09 '11 '13 '15 '17 '19 Housing Starts 1-Unit Structures: Median Floor Area (NSA, Square Feet)

Typical Single-Family Housing Start 

Size Continues to Shrink
© 2019 Fannie Mae. Trademarks of Fannie Mae. 9.10.2019 5 of 5

Data source for charts: Conference Board, University of Michigan, Autodata, Bureau of Labor Statistics, Census Bureau, Institute for Supply Management, Bureau of 

Economic Analysis, National Association of REALTORS®, Mortgage Bankers Association, Fannie Mae ESR Group. 

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 

Brad Case, Director Rebecca Meeker, Financial Economist 

Eric Brescia, Economist Richard Goyette, Business Analyst