Although the U.S. housing market is in a slump, due to lack of supply, rising home prices and tight affordability, Fannie Mae has nonetheless upwardly revised its economic forecast for 2018 and is now calling for 3.0% growth as opposed to the previous projection of 2.8%.
The government-sponsored enterprise says it revised its forecast based on expectations that third and fourth quarter inventory restocking will outweigh slowing consumer spending growth and a decline in net exports.
Currently, Fannie Mae’s ESR Group is forecasting 2.3% growth in 2019 – citing trade policy as a key source of downside risk.
Fannie Mae again notes that fading fiscal policy impacts and tightening monetary policy are central to its 2.3% growth projection for 2019.
“Breakneck headline growth in the second quarter disguised a detail largely responsible for the latest upward revision to our full-year growth forecast: a need to restock declining business inventories, which we expect will support greater growth amid weakness elsewhere,” says Doug Duncan, chief economist for Fannie Mae, in a statement. “Housing continues to drag on growth due to lackluster homebuilding activity, home sales, and brokers’ commissions; and its overall weakness likely reflects continuing inventory shortages, rather than a decline in demand.
“While meaningful wage growth remains elusive, the labor market is strong and inflation appears to be gaining additional steam, making a Fed rate hike in September highly likely,” he adds. “Assuming consumer and business confidence can steer clear of escalating trade tensions, we expect the Fed to raise rates two more times in 2018, including next month.”
The ESR Group expects real consumer spending growth to moderate in the third quarter, despite recent evidence that consumers may have more cushions from savings to support future spending than previously believed.
As anticipated, government spending posted a strong increase in the second quarter, reflecting budget-related legislation, but barring new stimulus its impact on growth should begin to dissipate next year, Fannie Mae says.
Additionally, following last quarter’s rush by international firms to “pull forward” U.S. imports ahead of previously announced tariffs, the ESR Group expects that trade will return to its previous status as a drag on growth, reflecting both a reversal of last quarter’s surge and the negative effects of the strengthening dollar.
For the fourth time in five quarters, residential investment detracted from growth, as housing activity weakened across the board.
Fannie Mae is currently forecasting that mortgage originations will reach $1.67 trillion this year and will reach $1.7 trillion in 2019.