Washington, DC – The Fannie Mae Economic and Strategic Research Group maintained its full-year 2018 and 2019 economic growth forecasts of 3.0% and 2.3%, respectively, despite expectations of slightly stronger third quarter growth than the prior forecast, according to its October 2018 Economic and Housing Outlook. The ESR Group still anticipates that growth slowed from the second quarter’s robust 4.2% annualized rate to a still-strong 3.3% pace. Factors that likely weighed on third quarter growth include a quarter-over-quarter deceleration in consumer spending and business investment growth, as well as trade, which switched from a contributor to growth to a detractor. Residential fixed investment is expected to have fallen for a third consecutive quarter, with home sales and mortgage demand continuing to soften amid rising interest rates. While the amount of for-sale inventory of existing homes is finally showing some improvement, it remains tight in many areas of the country, especially in the lower-priced tiers.
“This month we slightly adjusted upward our forecast for third quarter real GDP growth, largely because of an upgraded projection of consumer spending growth; however, our calls for growth on an annual basis remain unchanged both this year and next,” said Fannie Mae Chief Economist Doug Duncan.
Economic growth likely clocked in at a solid pace last quarter. Despite the expected return of trade as a drag on growth and moderating consumer spending and business investment growth, a swing from a drawdown in business inventories to a buildup likely offset some of those negatives. Economic conditions remain supportive of additional rate hikes in 2018 and 2019, as the labor market has tightened and inflation continues to hover just above the Fed’s 2% target. Trade tensions in North America recently receded following the announcement of a trade agreement, but trade relations with China have worsened as both countries continue to respond with escalating retaliatory tariff announcements. Trade and the potential contagion of Italy’s financial turmoil to elsewhere in the Euro area present downside risks to our forecast. Our expectations for housing have become more pessimistic: Rising interest rates and declining housing sentiment from both consumers and lenders led us to lower our home sales forecast over the duration of 2018 and through 2019. Meanwhile, affordability, especially for first-time homebuyers, remains atop the list of challenges facing the housing market.”
**excerpts from Press Release by Matthew Classick for Fannie Mae via Economic Focus