WASHINGTON—Strength in labor markets and consumer spending, both of which are expected to lead to further improvement in business fixed investment, contributed to upward revisions of fourth quarter 2019 and full-year 2020 real GDP growth forecasts, according to the latest commentary from the Fannie Mae (FNMA/OTCQB) Economic and Strategic Research (ESR) Group.
Additionally, housing-related elements of the ESR Group’s forecast also strengthened considerably, including expected increases in residential fixed investment driven by a significant uptick in the ESR Group’s forecast for new single-family housing starts and sales, Fannie Mae said.
Fourth Quarter Forecast
The ESR Group now projects fourth quarter 2019 headline growth of 1.8% and full-year 2020 growth of 2.1%, each a two-tenths improvement compared to the prior forecast. Just as labor market strength has carried through to consumer spending, the ESR Group also expects strong consumer spending to translate into positive business fixed investment in the fourth quarter and moving into 2020. While most components of GDP experienced minor adjustments this month, residential fixed investment, which includes housing starts and other aspects of the housing sector, increased more substantially. Owing to this expectation of economic strength, as well as comments from the FOMC indicating an unlikeliness to ease rates further, the ESR Group removed its prediction of one rate cut in early 2020 and now expects no moves from the Fed at all next year, Fannie Mae said.
Housing Construction a Driver
Housing construction is once again poised to become an engine of overall economic growth, Fannie Mae said.
“The ESR Group expects homebuilders to expand production in reaction to continued labor market strength and consumer spending, as well as supportive interest rates and waning risks of a significant near-term economic slowdown. Tight supply conditions in tandem with favorable mortgage demand are likely to apply upward pressure to home prices while also bolstering credit performance in the mortgage market, meaning affordability is likely to remain a challenge for some potential borrowers,” the agency said.
“Housing appears poised to take a leading role in real GDP growth over the forecast horizon for the first time in years, further bolstering our modest-but-solid growth forecasts through 2021,” said Fannie Mae Senior Vice President and Chief Economist Doug Duncan. “In our view, residential fixed investment is likely to benefit from ongoing strength in the labor markets and consumer spending, in addition to the low interest rate environment. Risks to growth have lessened of late, as a ’Phase One’ U.S.-China trade deal appears to be in place and global growth seems likely to reverse course and accelerate in 2020. With these positive economic developments in mind, we now believe that the Fed will hold interest rates steady through 2020.”
‘Ongoing Engine’
“Our expectation that residential fixed investment will function as an ongoing engine for growth is driven primarily by the improvement in our forecast for the single-family market,” continued Duncan. “We now expect single-family housing starts and sales of new homes to increase substantially, aided by a large uptick in new construction as builders work to replenish inventories drawn down by the recent surge in new home sales activity. Despite the expected increase in the pace of construction, the supply of homes for sale remains tight and strong demand for housing is continuing to drive home prices higher, particularly in the more entry-level price tiers. This stronger price appreciation is also having the unfortunate effect of partially offsetting savings to potential homebuyers from lower mortgage rates.”