Economic Growth Expectations Improve Slightly, Remain Tied to Broader COVID-19 Recovery

WASHINGTON, DC – A faster-than-expected pace of recovery in the second quarter contributed to an improvement in expectations for full-year 2020 economic growth, according to the latest commentary from the Fannie Mae (FNMA/OTCQB) Economic and Strategic Research (ESR) Group. Despite the recent resurgence in COVID-19 cases – and the potential for localized measures that may slow otherwise re-opening economies – the ESR Group upgraded its forecast for 2020 annual growth to negative 4.2 percent, compared to last month's forecast of negative 5.4 percent. Incoming data suggest that the recovery in consumer spending was stronger than anticipated in May and that it likely carried forward much of that momentum into June. The ESR Group also noted that housing continues to show remarkable strength and upwardly revised its home sales, home price growth, and purchase mortgage origination forecasts accordingly. Residential fixed investment is now expected to grow significantly in the third quarter before pulling back in the latter part of 2020.

"Our base scenario for the economy improved but did not shift dramatically from last month; we now expect full-year 2020 GDP to decline 4.2 percent before growing in 2021 by 4.0 percent," said Doug Duncan, Fannie Mae Senior Vice President and Chief Economist. "Incoming data have improved, but coronavirus infections have spiked as well. Restaurant reservations may have flattened due to virus transmission concerns, but gasoline purchases have risen as many Americans are opting to drive – rather than fly – to their summer vacation destinations, illustrating in part the recovery’s unevenness to date. On the housing front, we marked up existing home sales by about 200,000 for all of 2020, which contributed to an upward revision of expected purchase mortgage origination volumes of around $40 billion this year. We think existing home sales' strength will largely be dictated by inventory constraints and will depend in large part on current owners re-gaining the confidence to list their homes. Additionally, the continued decline in mortgage rates pushed up our refinance volume forecast by about $100 billion. At the current mortgage rate, we estimate that nearly 60 percent of all outstanding loan balances have at least a half-percentage point incentive to refinance."

The improvement to the ESR Group's second quarter forecast of real GDP growth was muted in part by a large drawdown in business inventories, ultimately leading to a prediction of a 34.8 percent drop compared to the 37.0 percent predicted last month. Looking ahead to the third quarter, given the higher levels of consumption and the likelihood that any further inventory drawdowns will be less severe, the ESR Group also improved its forecast for third quarter growth by 7.9 percentage points to 27.4 percent. Overall, the anticipated recovery path remains "swoosh"-shaped, as the economy is expected to transition from a rapid to a more modest rate of growth, but those expectations remain subject to upward or downward revision based on the trajectory of the COVID-19 pandemic and its impact on the national economy.

Visit the Economic & Strategic Research site at fanniemae.com to read the full July 2020 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.

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