2018 Growth Forecast Upped Slightly, but Strong Labor Market not Enough to Boost Housing

Matthew Classick

202-752-3662

WASHINGTON, DC – The Fannie Mae Economic and Strategic Research Group forecasts full-year 2018 economic growth of 3.1 percent, one-tenth higher than last month’s forecast. Third quarter economic growth came in at a 3.5 percent annualized rate, slowing from 4.2 percent in the second quarter. Solid third quarter growth was backed by an impressive labor market, an acceleration in both consumer and government spending, and a build-up in private inventories, despite a widening trade deficit that more than offset its positive contribution in the second quarter. However, according to the November 2018 Economic and Housing Outlook, the ESR Group expects full-year 2019 growth to slow to 2.3 percent as the economy contends with higher short-term interest rates and the waning effects of the fiscal stimulus enacted in February 2018. The housing sector is also expected to continue to face challenges despite the strong economy and job market. Ongoing affordability constraints stemming from further home price appreciation and a lack of for-sale inventory will likely remain headwinds for housing through 2018 and into 2019.

“As we proceed through the fourth quarter, we expect growth to slow further but to remain solid at 2.6 percent,” said Fannie Mae Chief Economist Doug Duncan. “Trade remains a downside risk to growth as a strong dollar is likely to contribute to a further widening of the trade gap. While consumer spending growth is expected to moderate from the robust second and third quarters, both business fixed investment and residential fixed investment should pick up. We also expect the economy to continue to receive strong support from government spending, at least in the near term. Looking further ahead, the Bipartisan Budget Act of 2018 should continue to boost growth through the first half of 2019 before it begins to fade, ultimately acting as a drag on the economy in the second half of 2020.”

“The current labor market hot streak hasn’t been enough to boost the housing sector. Both new and trade-up home buyers remain discouraged by rising mortgage rates, elevated home prices, and a shortage of available inventory, particularly in the lower tier of the market,” said Duncan. “Market conditions also present a challenge for builders, as higher interest rates are driving up construction costs and tight labor conditions are accelerating the average hourly earnings growth of residential construction workers. Given weak housing data over the past month, we lowered our 2018 originations forecast by $11 billion to $1.624 trillion and our 2019 forecast by $21 billion to $1.603 trillion. However, we expect that existing and new home sales will stabilize in 2019 as home price appreciation moderates and mortgage rates begin to stabilize.”

Visit the Economic & Strategic Research site at www.fanniemae.com to read the full November 2018 Economic Outlook, including the Economic Developments Commentary, Economic Forecast, Housing Forecast, and Multifamily Market Commentary. To receive e-mail updates with other housing market research from Fannie Mae’s Economic & Strategic Research Group, please click here.

Opinions, analyses, estimates, forecasts, and other views of Fannie Mae's Economic & Strategic Research (ESR) Group included in these materials should not be construed as indicating Fannie Mae's business prospects or expected results, are based on a number of assumptions, and are subject to change without notice. How this information affects Fannie Mae will depend on many factors. Although the ESR Group bases its opinions, analyses, estimates, forecasts, and other views on information it considers reliable, it does not guarantee that the information provided in these materials is accurate, current, or suitable for any particular purpose. Changes in the assumptions or the information underlying these views could produce materially different results. The analyses, opinions, estimates, forecasts, and other views published by the ESR Group represent the views of that group as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.

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