Fannie Mae: U.S. Economy Will Continue to Strengthen in 2020

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Despite a potential breakdown in trade talks between the U.S. and China, as well as ongoing political uncertainty abroad, Fannie Mae’s Economic and Strategic Research (ESR) Group is forecasting real GDP growth of 1.9% for 2020.

The group is predicting that, instead of breaking down, trade tensions with China will ease. Consumer spending – the primary driver of the U.S. economy – will continue rise. In addition, stimulative fiscal polices (aka the Fed’s recent rate cuts) are expected to help grow the economy through the first half of next year.

Consumer spending is expected to remain the primary driver of economic growth for the forecast horizon, with business fixed investment poised to benefit in the new year as additional corporate expenditures work to meet sustained consumer demand, Fannie Mae says in a release.

Housing should also continue to function as a positive contributor to growth in the near term, as indicated by both new and existing single-family home sales advancing in the third quarter, as well as pending home sales, permits and starts.

However, Fannie Mae notes that persistent supply and affordability constraints continue to hold back housing market activity.

Given the range of downside risks and muted inflation, the ESR Group continues to expect one more rate cut from the Federal Reserve in early 2020 before pausing for the remainder of the year.

“Even as global uncertainties mount, we continue to expect the domestic economy to produce solid, if not spectacular, growth,” says Doug Duncan, senior vice president and chief economist for Fannie Mae. “A stronger-than-expected third quarter contributed to the downward revision to our fourth quarter forecast, as some of the previously expected weakness in trade and inventories appears likely to have been pushed back into this quarter. 

“Still, consumer spending is likely to continue driving the expansion forward, and with the passage of the budget act and a reprieve in trade tensions we’ve revised upward our forecast for full-year 2020 growth,” Duncan says. “We also continue to expect the Fed to cut interest rates only one more time in the foreseeable future, in early 2020, as a hedge against the sizeable downside risks and to counteract muted inflation.”

Duncan adds that housing will “continue to play a productive role through the first half of 2020.”

“Positive contributions from single-family housing construction, home improvements, and brokers fees pushed residential fixed investment growth to a robust 5.1 percent annualized pace this past quarter, and we forecast continued but moderating strength as construction activity and home sales growth continue at a slower pace,” he says. “With mortgage rates normalizing, we expect a decline in refinance activity in 2020, with the refinance share of originations dropping from a projected 37 percent in 2019 to 31 percent.

“Of course, the housing market as a whole remains constrained by the persistent supply and affordability issues, which is particularly unfortunate given the current strength of consumer demand for reasonably priced homes,” Duncan concludes.

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