2018 Growth Forecast Holds But 2019 Gets Modest Downgrade

The forecast for 2018 full-year growth remains unchanged at 2.7 percent, according to the Fannie Mae Economic and Strategic Research Group’s May 2018 Economic and Housing Outlook. However, 2019 economic growth was downgraded to 2.3 percent due to the expectation of fading fiscal stimulus and a tightening labor market.

“We remain confident that, despite a first-quarter hiccup, economic growth will pick up through the rest of 2018. There are signs that consumer spending is poised to strengthen in the months ahead, and we believe recent fiscal policy actions are likely to contribute to growth this year,” said Fannie Mae Chief Economist Doug Duncan. “Come 2019, however, we expect the fiscal boost to fade, and we adjusted our forecast lower accordingly. We also note mounting downside risks to our projections, including growth-constraining protectionist trade policies and rising oil prices, among others. Meanwhile, housing’s upward grind should continue, despite a lackluster first quarter. We expect home sales to post modest gains both this year and next, as prices rise and affordability declines amid low for-sale inventory.”

First quarter economic growth slowed to the weakest pace in a year due to disappointing consumer spending. In particular, a drop off in motor vehicles and parts spending following the fourth quarter surge to replace hurricane-damaged vehicles drove the decline. However, a slight pickup to consumer spending in March suggests growing momentum and sets the stage for a sizeable pickup in the coming quarters with corresponding boosts to GDP. The ESR Group also expects the recent tax and budget acts to benefit business investment and government outlays. Consumer and business confidence measures, including the Home Purchase Sentiment Index^®, remain at or near historical highs amid favorable labor market conditions. Rising oil prices pose a downside risk to the economic outlook, as they may negate some of the increase in disposable income from the recent tax cuts while also putting upward pressure on headline inflation. Such inflation could induce a more aggressive monetary tightening timeline from the Federal Reserve. However, for now, the ESR Group continues to project two more interest rates hikes in 2018, including one next month.