Expectations for full-year 2020 and 2021 real gross domestic product (GDP) growth were improved by one-tenth to 2.2% and 2.1%, respectively, according to the latest commentary from the Fannie Mae Economic and Strategic Research (ESR) Group. The Group’s January jobs report featured solid wage growth and better-than-consensus non-farm payroll growth, including in residential construction.
On housing, the ESR Group expects low mortgage rates and strong demand to help grow residential fixed investment at a 3.9% annualized pace in 2020, following last year’s contraction of 0.1%. That demand is expected to meet the moderate uptick in inventory predicted for the latter part of the year. Consumer sentiment toward housing is approaching an all-time high, and the lower interest rate environment also appears to have fueled a new surge in mortgage refinance applications in January.
While risks remain skewed to the downside and include the potential overvaluation of equity and bond markets and a possible worsening of the coronavirus situation, notable upside risks include a further strengthening of consumer spending and the effects of monetary policy softening domestically and abroad. The ESR Group also maintained its expectation of no further rate cuts from the Federal Reserve in 2020.
“The U.S. economy’s resilience, rooted in labor market strength and improved household balance sheets, was on display in January amid greater market uncertainty, including Boeing’s production schedule and the effect of the coronavirus on the global economy,” said Fannie Mae Senior Vice President and Chief Economist Doug Duncan. “However, corporate earnings continue to impress and a jobs report that came in well above consensus helped mitigate some of the growing cynicism. With business fixed investment poised to rebound in the second half of the year, we upgraded our forecast for full-year 2020 headline growth by one-tenth to 2.2%. We also continue to maintain our call that the Fed will leave the federal funds rate unchanged in 2020, despite forward markets’ beginning to price in the increased probability of a rate cut.”
“Looking ahead, we continue to anticipate that the economy’s resilience will help keep housing on a firm growth track,” Duncan continued. “In fact, our updated housing market forecast shows greater strength in essentially every part of the housing market extending through the first half of 2021. The limiting factor for home sales, as well as the primary driver of home price appreciation, remains the supply shortage. Barring an uptick in the inventory of existing homes put on the market, in the near term we’re forecasting relatively flat home sales until higher construction activity can be sustained, which we foresee will be the case later this year.”