Economic Developments – July 2019

© 2019 Fannie Mae. Trademarks of Fannie Mae. 7.10.2019 1 of 5

Will Consumers Be Enough to Sustain the Expansion?

The expansion celebrated its tenth anniversary this month, though we expect growth in real gross domestic product (GDP) likely 

slowed sharply from the first quarter’s impressive pace of 3.1 percent. We upgraded our estimate for second quarter growth by

one-tenth from last month, but we are still predicting a slowdown to an annualized rate of 1.8 percent for the quarter. Personal 

consumption expenditures were likely stronger than our previous forecast suggested, but business fixed investment is likely to

have decelerated from its first quarter pace. For the full year we maintained our 2019 GDP forecast of 2.1 percent, but we believe 

growth will slow in 2020 to 1.6 percent due to waning fiscal stimulus, continued uncertainty weighing on consumer and business 

confidence, and eventually a slowdown in consumer spending. 

Since our last forecast there have been several key developments in the macroeconomy. While trade tensions between the U.S.

and China remain, negotiations between the two countries resumed after the G-20 summit at the end of June, at the very least 

delaying the implementation of further tariffs. Jobs rebounded in June after a weak May report, dispelling fears of a significant 

slowdown in employment this past quarter, and both personal income and consumer spending remained solid. However, we do 

not believe these positive developments will prevent the Federal Reserve from cutting the federal funds rate, and we are now 

predicting quarter-point rate cuts in both July and December, replacing our earlier prediction of a single rate cut in September.

Our overall view of the housing market is one of moderate strength through the end of the year. The continued decline in 

mortgage rates during the second quarter and sustained strength in the labor market should support demand for home sales and 

construction. While recent housing data have been mixed, it is in part due to the lingering effects of last year’s slowdown,

including continued slow growth in new home building. Tempering the pace of the recovery, limited housing supply remains a 

chronic obstacle. 

 

Consumer Spending Should Propel Growth 

The final estimate of first quarter growth in real personal 

consumption expenditures (PCE) was revised downward four-tenths 

to 0.9 percent annualized, the weakest pace in a year, but consumer 

spending likely accelerated strongly and should be the bright spot of 

second quarter GDP growth. After two consecutive months of solid

real consumer spending gains in April and May, we revised upward

our second quarter forecast substantially from 2.4 percent to 3.3

percent. Our first look at June consumer spending was slightly less 

encouraging as light vehicle sales edged down modestly; however, 

the decline failed to reverse May’s impressive gain, and average 

monthly vehicle sales for the second quarter increased modestly 

from the prior quarter, a positive sign for accelerating growth in 

consumer spending. June was a strong month for equity prices, a 

further support to consumption activity. The S&P 500 rose 1.2 

percent over the month and continued to climb in early July when it 

reached a fresh expansion best. For all of 2019 we boosted our 

forecast of consumer spending growth by four-tenths as continued 

strength in the labor and equity markets, along with strong 

household balance sheets, should be supportive. 

June’s robust jobs report showed payrolls increased by 224,000, 

outweighing small downward revisions to the prior two months and 

indicating that the labor market remains a strength of the economy. 

While the unemployment rate edged up slightly in June, the increase 

was driven by greater participation as the civilian labor force posted 

the largest increase of the year. The labor force participation rate 

ticked up slightly in June and has remained within the narrow range 

of 62.4 percent to 63.2 percent for nearly six years, reinforcing the 

-0.8%

-0.6%

-0.4%

-0.2%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0% Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19 SAAR, Chn.2012$, M-o-M % Change

Consumer Spending Likely Picked Up Strongly 

in the Second Quarter

Personal Consumption Expenditures

Disposable Personal Income

147101316192225283134374043464952555861646770737679828588919497100 103 10 6 10 9 11 2 11 5 11 8 12 1 12 4 12 7 13 0 13 3 13 6 13 9 14 2 14 5 14 8 15 1 15 4 15 7 16 0 16 3 16 6 16 9 17 2 17 5 17 8 18 1 18 4 18 7 19 0 19 3 19 6 19 9 20 2 20 5 20 8 21 1 21 4 21 7 22 0 22 3 22 6 22 9 23 2 23 5 23 8 24 1 24 4 24 7 25 0 25 3 25 6 25 9 26 2 26 5 26 8 27 1 27 4 27 7 28 0 28 3 28 6 28 9 29 2 29 5 29 8 30 1 30 4 30 7 31 0 313 316 319 322 325 328 331 334 337 340 34 3 34 6 34 9 35 2 35 5 35 8 36 1 36 4 36 7 37 0 37 3 37 6 37 9 38 2 38 5 38 8 39 1 39 4 39 7 40 0 40 3 40 6 40 9 41 2

0

50

10 0

15 0

20 0

25 0

30 0

35 0

40 0

450

50 0

-4

-3

-2

-1

0

1

2

'85 '88 '91 '94 '97 '00 '03 '06 '09 '12 '15 '18 Change in Total Nonfarm Employment In First 6 Months of Year (NSA, Millions)

While More Than a Million Jobs Were Added In the 

First Half of 2019, Pace Slowed Sharply from 2018

Pre-Crisis Average: 953,000
© 2019 Fannie Mae. Trademarks of Fannie Mae. 7.10.2019 2 of 5

impression that participation has stabilized after trending downward for several years after the recession. The number of workers

employed part-time for economic reasons declined again to just shy of the expansion low, confirming a tight labor market. 

However, the details of the employment report showed some signs of weakness and softening labor demand. While more than

one million jobs were added in the first half of 2019, the gain was well below 2018’s robust 1.4 million jobs and the slowest pace of 

job growth in the first half of a year since 2010. The average workweek remained steady at 34.4 hours for the third straight month, 

but the annual growth in total weekly hours has fallen from 2.4 percent in January to 1.5 percent in June, the slowest pace since 

September 2017. Annual wage growth stalled at the slowest pace since last September, somewhat surprising given the extremely 

low unemployment rate. Additionally, job openings have slowed in recent months, trending downward since reaching an 

expansion high last November. 

While consumers have been resilient to increased trade tensions and slowing global growth so far, there were some signs of 

weakness in consumer confidence as two measures of sentiment declined in June. The Conference Board’s Consumer Confidence 

Index was hit particularly hard, falling by the largest month-over-month amount in nearly seven years to reach the lowest level 

since September 2017. Both the present situation and expectations components eroded, though the latter declined more 

sharply. 

Uncertainty Weighs on Businesses

While nonresidential fixed investment was revised upward substantially for the first quarter from 2.3 percent to 4.4 percent in the 

final estimate, the outlook for the second quarter dampened considerably, as has our forecast for the remainder of this year. 

Investment in structures almost certainly dragged on growth during the second quarter as private nonresidential construction 

spending fell again in May, posting the first back-to-back monthly declines since the start of 2017 to reach the lowest level this 

year. On an annual basis, nonresidential construction spending posted the first contraction in more than a year. Investment in 

equipment also likely slowed as durable goods orders fell for the second consecutive month in May and shipments edged up only 

slightly after posting the largest decline in three years in April. The top-line decrease in orders was mainly driven by the volatile 

nondefense aircraft sector, related to concerns over Boeing’s 737 Max. Core capital goods shipments, which exclude the more 

volatile defense and aircraft orders, have risen for four of the past five months and may provide some relief. A bright spot for 

investment should be spending on intellectual property products, which we expect will maintain its recent strength. 

Weakness in the manufacturing sector has added to mounting worries of 

slowing business investment. A May rise in industrial production was 

driven almost entirely by a weather-related surge in utilities, while the 

gain in the manufacturing index was an anemic 0.2 percent. The 

PMI® survey of purchasing managers showed manufacturing 

continued to lose momentum in June, with the index remaining in 

“growth” territory but declining to its lowest level since October 

2016. The softness in manufacturing data is unlikely to abate in the 

near term as factory orders fell in May for the third time in four 

months, while the new orders component of the ISM Manufacturing 

Index lost its “growth” reading for the first time since December 

2015. Service sector activity also disappointed, according to the ISM 

Nonmanufacturing Index, coming in at the slowest pace of expansion in 

nearly two years in June.

While small business optimism rose on average during the second quarter, sentiment declined sharply in June, driven by 

businesses curbing spending and a more negative outlook on sales and earnings. Business uncertainty in June posted the largest 

monthly gain since the Presidential election and reached the highest level in two years. Confirming the tight labor market, the 

share of firms reporting that their single most important problem was cost of labor rose to an expansion high of 10 percent, while 

quality of labor remained the most prevalent response at 21 percent—but if continued uncertainty erodes business confidence,

we expect both investment and hiring are likely to be delayed or curtailed. 

The U.S. and China Strike a Truce...For Now

After a three-month standoff, the U.S. and Chinese governments agreed to resume trade talks following June’s G-20 summit. With 

trade talks beginning anew, the U.S. agreed not to levy additional tariffs during negotiations and to soften its stance on Huawei, 

30

35

40

45

50

55

60

65

'00 '02 '04 '06 '08 '10 '12 '14 '16 '18 ISM Manufacturing Index (SA, +50 = Expansion)

Manufacturing Sector Continues 

to Lose Momentum
© 2019 Fannie Mae. Trademarks of Fannie Mae. 7.10.2019 3 of 5

China’s largest telecommunications company, which the U.S. had placed on its “Entities List,” making it difficult for the company 

to conduct business with American counterparts. In return, China pledged to resume buying U.S. agricultural products. However, 

the 25 percent tariff on $200 billion of Chinese imports enacted by the U.S. in May, and China’s retaliatory tariff of 25 percent on 

$60 billion of U.S. imports, are still in effect. China’s leadership has repeatedly stated that it would not agree to a trade deal while 

any tariffs on Chinese goods are employed by the U.S., while the U.S. administration has staunchly rejected rolling back any 

existing tariffs. This faceoff suggests that a trade deal will not be reached this year and that, going forward, consumer and 

business sentiment will be weighed down further.

If talks break down completely, we believe the U.S. will follow through on imposing a 25 percent tariff on the remaining $300 

billion of Chinese imports. This would encompass more consumer products than previous rounds of tariffs, affecting items such 

as cell phones, computers, and clothing, and potentially pushing inflation higher. China would have only about $10 billion in U.S. 

imports left to levy tariffs on, but the Chinese government could retaliate in other ways, such as increasing regulatory obstacles 

for U.S. businesses attempting to operate in China. In the absence of countervailing monetary policy or other supportive factors, a 

complete breakdown in trade negotiations would likely trigger some degree of financial turmoil, limiting investment and growth.

After Fed’s Dovish Shift, We Expect July Rate Cut

At its June meeting, the Federal Open Market Committee (FOMC) 

maintained the current federal funds rate target of 2.25 percent to 

2.50 percent while promising to “act as appropriate to sustain the 

expansion,” a notable shift away from the previous emphasis on 

remaining “patient.” The Fed noted increased uncertainties around 

the FOMC’s economic outlook, with Chairman Powell—at that time 

and then again in his semiannual testimonies before the U.S. House 

Financial Services Committee and the U.S. Senate Banking 

Committee in early July—emphasizing muted inflation, weak 

manufacturing production, and “cross-currents, including trade 

developments and global growth,” as sources of concern. Sentiment 

among FOMC members during the June meeting shifted sharply in 

the direction of a rate cut, highlighted by St. Louis Fed President 

James Bullard’s vote in favor of an immediate reduction, the first 

dissent during Powell’s tenure as Chairman. Eight of the seventeen participants said they expect to see a lower federal funds rate 

by the end of 2019, with seven of them expecting the rate at the end of this year to be 50 basis points lower than the current rate. 

Of equal significance, the June FOMC meeting also saw a reduction in

inflation projections, with the forecast for 2019 PCE inflation being 

reduced from 1.8 percent as of the March meeting to 1.5 percent

following the June meeting. In his July testimony, Chairman Powell, 

abandoning his earlier statements that weakness in inflation could 

be attributed to “transitory” factors, reiterated that both headline 

and core (excluding food and energy) PCE inflation were well below 

the Fed’s “symmetric” target of 2 percent and warned that low 

inflation risks were becoming more persistent. Contributing to low 

inflation is the strong U.S. dollar, which helps to make imports 

cheaper. While the U.S. dollar slipped modestly in June, it remained 

at a historically elevated level and rallied in early July after the 

positive jobs report. If the Fed cuts rates later this month as we 

expect, the dollar could weaken, helping to push up inflation measures. 

The inversion of the yield curve that began in late May has continued, with the 10-year/3-month Treasury spread at 19 basis 

points as of this writing. While the Fed has downplayed the importance of an inverted yield curve as a recession predictor, this 

development is widely considered either a sign of overly tight monetary policy or of an expected slowdown in economic activity,

and risks causing further erosion of business confidence and investment. Additionally, the current environment of negative 

longer-term interest rates in many major economies contributes to downward pressure on longer-term rates in the U.S. as well. 

1.75%

2.00%

2.25%

2.50%

2.75%

3.00% FOMC Members' Assessments of the Fed Funds Rate (End of Period 2019)

FOMC Turns Even More Dovish, With Many Members Signaling a Rate Cut this Year March 20, 2019 June 19, 2019

Median: 2.375% Median: 2.375%

Current Level: 2.375%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

'07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 Personal Consumption Expenditures: Chain Price Index (Y-o-Y % Change)

Inflation Languishes Well Below 

the Fed's 2.0-Percent Target

PCE: Price Index

PCE: Less Food and Energy

Federal Reserve Target
© 2019 Fannie Mae. Trademarks of Fannie Mae. 7.10.2019 4 of 5

The longer the inversion remains, the more likely that it will have direct real effects on growth via tighter bank lending, as banks 

find it increasingly difficult to profit from borrowing on the short end of the curve and lending on the long end. 

Even with temporary relief in trade tensions and a solid employment 

report in June, the fed funds futures market continues to price in the

near-certainty of a rate cut in July and 50 to 75 basis points of cuts by 

December. Given the Fed’s highly dovish shift at its June meeting

and Chairman Powell’s equally dovish testimony, along with 

persistent below-target inflation and the continued inversion of the 

yield curve, we now believe the Fed will cut rates in July and could

end the reduction of its balance sheet as early as that same meeting. 

Reducing rates in July should give the Fed enough leeway to 

maintain its “patient” stance long enough to see whether economic 

growth conditions stabilize. We currently forecast that conditions 

will lead the FOMC to cut rates by another 25 basis points in 

December. We will continue to monitor conditions for both upside 

and downside risks to that forecast. 

Housing Has Room to Improve

Home sales diverged in May as sales of existing homes rose while 

sales of new homes declined, both in line with our expectations. 

Existing single-family home sales increased 2.5 percent to the 

second highest sales pace of the year. We continue to believe that 

existing sales in the second quarter were about 2.0 percent higher 

on a seasonally-adjusted basis than in the first quarter, and that 

third quarter sales will gain an additional 2.0 percent before peaking 

during the fourth quarter. Lower mortgage rates and a modest rise 

in inventories of homes for sale should help support an increase in 

existing sales.

Homebuyer sentiment has improved significantly after last year’s 

slowdown. Fannie Mae’s Home Purchase Sentiment Index® declined

slightly in June, but not enough to reverse a large increase in May,

and, on a quarterly basis, reached its highest level in a year. 

Purchase mortgage applications, while inherently volatile, have also 

continued to trend upwards in recent months indicating continued 

sales momentum for the latter half of the year. Still, the chronically 

limited supply of homes for sale, particularly those priced more 

modestly, will likely temper sales through the remainder of the year 

and into 2020, especially if job growth and consumer confidence 

wane.

New single-family home sales fell for the second consecutive month 

in May after spiking earlier this year to near the business cycle high. 

The earlier jump was fueled in part by builders offering discounts on 

a growing inventory of previously started homes for sale that had 

accumulated during last year’s sales slowdown. Much of that supply 

has now been sold off, and at least some sales pullback was likely. In the coming quarters, we continue to view the underlying 

sales trend as modestly positive, despite the recent pullback, and expect a gradual increase in new home sales for the remainder 

of the year.

Like new sales, single-family starts also fell in May. As builders draw down inventories they must increase starts even if sales 

growth is moderate. Indeed, we have now seen inventories of previously started homes for sale decline for four months. 

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

4.1

4.3

4.5

4.7

4.9

5.1

5.3

5.5

5.7

'11 '12 '13 '14 '15 '16 '17 '18 '19 SAAR, Millions of Units

Existing Home Sales Increase For the First Time in 

Three Months While New Home Sales Fall

Existing Home Sales (Left Axis)

New Home Sales (Right Axis)

-0.3

-0.2

-0.1

0

0.1

0.2

0.3

0.4

Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 10-Year/3-Month Treasury Spread (Percentage Points)

The 10-Year/3-Month Treasury Spread Remains Inverted

-15%

-10%

-5%

0%

5%

10%

15%

20%

-30%

-20%

-10%

0%

10%

20%

30%

40%

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

The Uptick In Purchase Applications Is 

Encouraging for Future Existing Home Sales

Purchase Mortgage Applications (YoY %Change, 1 Month Lag)

Existing Home Sales (YoY %Change, Right)
© 2019 Fannie Mae. Trademarks of Fannie Mae. 7.10.2019 5 of 5

Moreover, single-family permits, which provide an underlying indicator of construction trends, rose 3.1 percent in May, the first 

monthly increase of the year and largest since last September, while the share of homes sold that have yet to be started has risen 

for two months. We expect single-family starts to accelerate modestly but more quickly than the pace of sales over the next 

quarter. 

With lower mortgage rates taking effect, the deceleration in house price growth that was so prominent over the past year may be 

pausing. The most recent reading in April of the S&P CoreLogic Case-Shiller Home Price Index measured annual house price 

growth of 3.5 percent, down only two-tenths from March. The CoreLogic National House Price Index, with a more recent reading 

from May, accelerated on an annual basis for the first time in fourteen months from 3.3 percent in April to 3.6 percent. We now 

expect house prices, as measured by the quarterly FHFA Purchase Only Index, to grow 5.4 percent this year, up from our previous 

forecast of 4.6 percent. Despite a stronger comparative pace, we still 

expect deceleration to 3.7 percent growth for 2020. 

Construction activity in the multifamily housing sector continues to 

show strong resilience this year. Multifamily starts data are 

notoriously volatile, but the figure surged nearly 11 percent both in 

April and in May. While permits, which tend to be more stable, pulled 

back slightly in May, they remained near a one-year high. In light of 

this continued strength, we have materially revised upward our 

forecast for multifamily starts in the second quarter and included 

more modest increases for the remaining quarters of this year. For 

the full year, we expect multifamily starts to be slightly higher than 

in 2018. For more information on multifamily market conditions, 

please see the July 2019 Multifamily Market Commentary. 

Mortgage rates have continued to decline. The 30-year fixed mortgage rate averaged 3.80 percent in June, down from 4.07 

percent in May and the seventh straight month of decline, according to Freddie Mac. As of this writing, mortgage rates are 3.75 

percent, the second lowest level since November 2016 and more than a percentage point lower than their recent peak of 4.94 

percent in November. This continued decline in mortgage rates and our upwardly revised view on house price growth have led us 

to increase our forecast for single-family mortgage originations for the remainder of the year. We now expect total originations to 

rise 7.0 percent from 2018 to $1.75 trillion, and we expect refinances to account for 32 percent of total mortgage originations in 

2019, up from 29 percent in 2018. 

Economic & Strategic Research (ESR) Group

July 10, 2019

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: Bureau of Economic Analysis, Bureau of Labor Statistics, Institute of Supply Management, Federal Reserve, National Association of 

REALTORS®, Census Bureau, 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, Business Analyst 

Eric Brescia, Economist Richard Goyette, Business Analyst

0

100

200

300

400

500

600

700

'07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 Multifamily Housing (SAAR, Thous. Units)

Multifamily Home Building Has Remained Resilient This Year 

Permits

Starts