Fannie Mae: Slower Economic Growth Expected in 2019, but ‘Patient Fed’ Could Put Housing on Firmer Footing
Fannie Mae, Washington, D.C., said with economic growth projected to slow to 2.2 percent in 2019, financial conditions could deteriorate, threatening fiscal stimulus.
The company’s monthly Economic and Housing Outlook said while consumer spending was the biggest driver of 2018 economic growth, the boost in household incomes from the Tax Cuts and Jobs Act will likely wane this year, and the government shutdown and additional volatility in the stock market could weigh on Americans’ confidence and willingness to spend. The ESR Group expects consumer spending growth to slow to 2.3 percent in 2019 from an estimated pace of 2.8 percent in 2018. However, the group notes that labor market conditions should remain solid, with strong employment and wage growth offering potential bright spots amid some dark clouds in the form of trade tensions and slower growth abroad.
“Economic growth in 2018 will likely turn out to be the strongest of the current expansion, and inflation remained anchored even as the unemployment rate dipped to multi-decade lows. However, home sales experienced a setback, partly attributable to the most aggressive pace of monetary tightening of the expansion,” said Fannie Mae Chief Economist Doug Duncan.
Fannie Mae said how the Federal Reserve proceeds through the year remains central to the forecast. “Given the Fed’s recent shift to a more dovish stance–acknowledging that it can ‘afford to be patient about further policy firming'”–Fannie Mae expects only one interest rate increase in 2019, with tightening financial conditions and muted inflationary pressure.
The Federal Open Market Committee meets this Tuesday (Jan. 29) and Wednesday (Jan. 30) but is widely expected to leave the federal funds rate alone at 2.25-2.50%. Economists, including those with the Mortgage Bankers Association, have scaled back their predictions of FOMC rate increases from three this year to as few as just one.
“The housing market will likely find stable ground as mortgage rates are expected to change little this year, allowing potential homebuyers time to adjust after last year’s erratic interest rate environment,” Duncan said. He added while the current economic expansion is likely to become the longest on record, the path to continued growth faces a number of downside risks with fewer upside risks.
“With fading impacts of fiscal policy and tight financial conditions around the globe, we’re seeing moderating economic growth in the next couple of years,” Duncan said. “The Fed’s continued efforts to unwind expansionary monetary policies implemented during the recession have the potential to add to the headwinds facing the economy. However, we believe that contained price pressures should afford the Fed sufficient latitude to slow or pause rate hikes this year. This will allow the economy to continue growing, albeit at a slower pace, and housing to regain its footing.”
