Labor Slowdowns Temper Housing Forecast

While housing activity and consumer spending in Q2 picked up, a slowdown in hiring and business investment has tempered what should have been a rosy forecast from Fannie Mae. The agency’s latest full-year economic growth forecast, however, remains unchanged in June from the prior forecast of 1.7 percent.

Fannie Mae’s findings about slower hiring follows the Bureau of Labor Statistics’ most recent report that the labor force participation rate in May fell by 20 basis points, down to 62.6 percent, and has fallen by 40 basis points over April and May to offset first-quarter gains, after hitting its lowest level since the 1970s in 2015. On the upside, the BLS report also found that the unemployment rate fell from 5 percent to 4.7 percent.

“The bearish May jobs report signaled a further loss of momentum in the labor market. Weak hiring and downward revisions to the prior two months’ payroll gains contributed to the Fed’s decision not to raise interest rates in June,” said Fannie Mae Chief Economist Doug Duncan. “Our expectation, which we’ve held since April, remains one rate hike this year, most likely in September.”

“The bearish May jobs report signaled a further loss of momentum in the labor market.”

Doug Duncan, Chief Economist, Fannie Mae

According to Fannie Mae’s latest weekly economic forecast, looking at May, total housing starts fell slightly after a solid gain in April, but are 10 percent higher through the first five months of the year than the same period a year ago. Single-family construction posted a second consecutive uninspiring monthly gain, failing to make up much ground from a sharp drop in March after reaching an expansion best in February.

“Housing activity is gaining strength heading into the summer, with pending home sales rising to a decade high,” Duncan said. “In addition, new home sales surged to an expansion best, a positive for single-family homebuilding, especially since only a small share of new homes for sale are completed and ready to occupy.

However, Duncan added, recent pullbacks in construction hiring, likely due to a shortage of skilled workers, could weigh on the outlook for the sector. “With little improvement in the current housing supply picture so far, we expect only moderate housing expansion this year,” he said.