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Second Half Growth Likely to Creep Higher

Despite Turmoil Abroad

Our forecast for U.S. growth for the remainder of the year is largely 

unchanged despite heightened market volatility in recent weeks as 

investors adjusted their expectations for growth in China and the 

potential of monetary policy tightening. Wall Street's favorite gauge 

of market volatility and anxiety level—the Chicago Board Options 

Exchange VIX index—spiked to the highest level in more than three 

years. Nonetheless, we expect real GDP growth to come in at 2.5 

percent annualized in the third quarter and accelerate in the final 

quarter of the year as positive domestic fundamentals more than 

offset weaker export outlook. This would result in second half 

growth averaging modestly higher than the first half growth of 2.2 

percent. For all of 2015, we expect the economy to grow 2.4 

percent, compared with 2.1 percent in the prior forecast. This rate of 

growth along with the dual dynamic of a stronger dollar and lower oil 

prices should result in inflation remaining subdued.

We expect consumer spending to again be the biggest driver of growth for the current quarter. Real consumer spending 

rebounded in July, rising 0.2 percent after June’s flat reading. Meanwhile, core personal consumption expenditures rose 

just 1.2 percent from a year ago, the weakest gain in more than four years. Combined with a 1.5 percent rise in August 

auto sales to the strongest pace in more than a decade, the moderate increase in real consumer spending at the start of 

the third quarter suggests that our prior forecast of real consumer spending of 2.9 percent annualized for the third quarter 

remains valid. 

While August nonfarm payroll gains came in weaker than expected 

at 173,000, the overall jobs report was a solid one, with an upward 

revision of 44,000 to prior months’ increases, a 0.3 percent rise in 

average hourly earnings, and an uptick in the average workweek to 

tie the expansion-high of 34.6 hours. The soft headline job growth 

may not even be an issue next month, as August payroll gains 

typically get meaningful upward revisions, partly due to the low 

response rate during the first estimate. Between 2010 and 2014, 

August nonfarm payrolls were revised up by an average of 80,000

jobs from the first to third estimates. The August jobs report points to 

a strong gain in August personal income, as the product of the 

average workweek and average hourly earnings—a payroll proxy for 

labor income—posted the biggest gain since January. 

The household survey marked a milestone in August, as full-time 

employment surpassed its pre-recession peak. The unemployment 

rate fell two-tenths of a percentage point to 5.1 percent, one full 

percentage point lower than a year ago and the lowest rate since 

March 2008. The drop in the unemployment rate was for good 

reasons, as the labor force participation rate held steady, albeit at a 

historically low rate of 62.6 percent. However, the employment-topopulation ratio ticked up to 59.4 percent, tying the expansion’s best.

The August unemployment rate was half a percentage point lower 

than the rate at the time the Fed started to hike the fed funds rate in 

June 2004. In the context of the current Fed, the 5.1 percent rate is

below the bottom of the central tendency (excludes the three highest 

and three lowest projections) of the Fed’s year-end forecast for 2015, 

and now sits within the central tendency of its forecasts for 2016 and 

2017. 
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The Fed also considers other measures of labor underutilization besides the headline unemployment rate. The U-6 

measure—the broadest measure of the unemployment rate that includes discouraged workers and part-time workers who 

prefer full-time jobs—fell one tick to 10.3 percent, 1.7 percentage points below the rate a year ago and equal to the longterm average. While the Fed could find reasons to delay raising rates beyond the September FOMC meeting, including 

increased downside risk for inflation and financial instability, we believe that it will not find one in the August jobs report. 

Other data released over the past month generally showed improving economic activity. The July factory goods orders 

report confirmed the advanced estimate of the biggest gain in core capital goods orders in more than a year, pointing to 

renewed life in business equipment spending after a slight drop in the second quarter. Nonresidential investment in 

structures was revised higher to show a gain in the second print of GDP from a decline in the first print, and the July

construction spending report points to continued improvement in the third quarter. However, renewed declines in oil prices 

pose downside risk to the nonresidential investment outlook. 

Recent financial turmoil is due in part to deteriorating global economic growth prospects, with China’s August Purchasing 

Managers’ Index (PMI) declining to contractionary territory for manufacturing activity—the worst performance in three 

years. Real GDP in Canada, our biggest trading partner, contracted again in the second quarter of this year, as its 

economy has been hurt by weak commodity demand. Combined with the strong dollar, weak global growth resulted in 

anemic U.S. real export growth in July. However, U.S. real imports declined during the month, partly because of the drop 

in the value of petroleum imports, causing the real goods deficit to narrow. Overall for 2015, we expect inventory 

investment and net exports will be drags on growth while consumer spending, nonresidential investment, government 

spending, and residential investment will contribute to growth.

Housing Roundup

Housing activity was largely positive in July, especially for the single-family segment. Existing home sales advanced 2.0 

percent during the month, marking the third consecutive monthly gain and reaching the fastest sales pace since February 

2007. 

Meanwhile, new home sales rebounded 5.4 percent, recouping some 

of the 7.7 percent drop in June. While other housing indicators

including home builders’ confidence, existing home sales, and singlefamily and multifamily starts have reached levels witnessed prior to the 

recession or at the onset of the recession, new home sales have not 

yet reached their pre-recession levels. Combining new and existing 

home sales, July total home sales surpassed six million annualized

units for the first time since the onset of the recession. 

Leading indicators of home sales softened, however. Pending home 

sales, which lead existing home sales by one to two months, 

rebounded in July but recouped less than half of the drop in the prior 

month. Meanwhile, average purchase mortgage applications dropped 

in August for the second consecutive month and applications during 

the first week of September fell after two consecutive weekly gains.

Most home price measures continued to improve but at a more modest 

pace than last year. The CoreLogic home price index was an 

exception, posting the strongest year-over-year gain in July in more 

than a year.

Mirroring a jump in July single-family starts and a pullback in 

multifamily starts, new construction spending for single-family homes 

rose to a fresh expansion high, while multifamily construction spending 

took a breather for the first time in four months, dropping slightly from 

June’s expansion best. (For more on multifamily market conditions, 

read the September 2015 Multifamily Market Commentary.) Despite 

reaching the highest level in the expansion, single-family construction 

spending remains well below the level witnessed prior to the recession. 
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By contrast, multifamily construction spending is only about 7.0 

percent below its record high reached in January 2007 (not adjusted 

for inflation).

After edging up above 4.0 percent in early June, the average yield on 

30-year fixed-rate mortgages has dropped below 4.0 percent again

since the last week of July, according to Freddie Mac. We expect that 

a fed funds rate hike of 25 basis points by the Fed this year will flatten

the yield curve, as the rising short-term rates in the U.S. will likely 

activate a carry trade by institutions in countries whose central banks 

are easing, creating flows into U.S. capital markets and holding down 

long-term rates. As we expect a gradual pace of Fed tightening amid 

continued monetary easing from central banks abroad, slow global 

growth, and anchored inflation expectations, mortgage rates should 

rise only gradually, averaging 4.2 percent in the final quarter of 2016, 

10 basis points below the path in our prior forecast.

Our forecast for existing home sales for the rest of this year and next year is largely the same as in the prior forecast. 

However, we revised our purchase mortgage originations forecast modestly higher due to an expected decline in the 

share of homes sold for cash. CoreLogic data show that the share of cash sales has been trending down from its record 

high in 2011, and the share in recent months has been lower than we assumed in our forecast. We also revised higher 

our forecast of refinance originations in the second half of this year due to slightly lower mortgage rates than we expected.

One disappointing aspect of the housing market this year is sub-par single-family new home construction. The National 

Federation of Independent Business (NFIB) and the National Association of Home Builders (NAHB) surveys provided

some evidence of supply constraints, due in part to a lack of skilled labor. The NAHB also cited tight standards for 

acquisition, development, and construction (AD&C) lending as one factor suppressing home building activity in recent 

years. However, the outlook for lending standards is mixed. The Federal Reserve Senior Loan Officer Opinion Survey 

showed tighter lending standards for AD&C loans (including both residential and commercial real estate loans) for the 

three months ending in July for the first time since 2010. However, the second quarter NAHB AD&C financing survey 

indicated that lending standards for AD&C loans continued to ease. On the demand side, while household formation has 

picked up since late 2014, all of the net gain in households over the past year was due to renters. We believe that, as a 

result of both supply and demand constraints, improvement in single-family starts has been muted this year. While we 

expect these constraints to improve somewhat next year, we revised lower our projected single-family starts in 2016. On 

net, the combination of lower cash shares and reduced single-family starts leads to a higher projected purchase 

originations for next year. For all of 2015, total mortgage originations should increase approximately 25 percent to $1.48 

trillion, with a refinance share of 46 percent. We project the total production volume to decline about 18 percent to $1.22 

trillion in 2016 and the refinance share to drop about 15 percentage points.

September 10, 2015

Economic & Strategic Research (ESR) Group

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

Note.

Sources for chart data: Bloomberg, Bureau of Labor Statistics, Census Bureau, The National Association of REALTORS®, CoreLogic

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

Orawin T. Velz, Director Frank Shaw, Business Analyst

Richard Koss, Director Hamilton Fout, Director