As trade doubt drags on growth, strong consumer demand backstops slowing economy, the Fannie Mae Economic and Strategic Research (ESR) Group predicts full-year 2019 and 2020 real GDP growth to slow to 2.1 percent and 1.6 percent despite expectations the Federal Reserve will ease monetary policy through the end of the year.
According to a news release, an inverted yield curve, weak business investment, waning consumer and business sentiment, and ongoing trade and global growth concerns contributed to the ESR Group’s updated prediction that the Fed will cut interest rates by 25 basis points in July, followed by another 25 basis points in December.
Consumer spending, buoyed by a strong labor market and a recent rebound in equity valuation, remains the primary driver of domestic growth and is expected be stronger in 2019 than originally thought, helping to offset growing weakness in business investment and government expenditures, the release added.
Housing however continues to benefit from the lower mortgage rate sector, according to the ESR Group. Total origination volume is expected to improve 7 percent in 2019 on the back of a surge in refinances and moderate house price growth. Refinance activity is expected to represent 32 percent of originations in 2019, up from 29 percent in 2018 and more than 2 percentage points higher than was forecast in June, the release said.
While new home sales dipped in May, existing home sales rose, and both are expected to pick up through the remainder of this year as inventories improve. Homebuyer sentiment has also improved, with the Home Purchase Sentiment Index® re-approaching its survey high.
“As the current U.S. expansion celebrates its tenth anniversary, it does so under an economic backdrop of growing domestic and global uncertainty – and slowing growth,” said Fannie Mae Senior Vice President and Chief Economist Doug Duncan in the news release. “The heightened uncertainty, stemming in part from the seemingly intractable trade dispute between the U.S. and China, appears to have reduced business’ investment incentive, which is now poised to be a material drag on growth over the forecast period. With consumer spending the principal remaining GDP growth driver, in addition to the recent re-inversion of the yield curve suggesting that market participants expect economic activity to slow further, we believe that the Fed will take a more accommodative posture beginning with a rate cut at the July meeting of the FOMC.
“Housing remains a net positive to the economy, as the industry anticipates growth fueled by strong household balance sheets, low mortgage rates, and a surge in refinance activity,” Duncan continued. “However, the housing industry still doesn’t have an answer for the related problems of low supply and affordability. While home price appreciation has largely moderated particularly compared to the recent past – and demand for modestly-priced homes has proven strong and resilient, the lack of affordable inventory continues to cap sales and limit the potential pool of would-be homeowners.”
Visit the Economic & Strategic Research site at www.fanniemae.com to read the full July Economic Outlook, including the Economic Developments Commentary, Economic Forecast, Housing Forecast, and Multifamily Market Commentary.
Source: Fannie Mae