Residential fixed investment and continued strong consumer spending are expected to help counteract weakness in business fixed investment, according to the latest commentary from the Fannie Mae Economic and Strategic Research (ESR) Group.
Risks to the ESR Group’s forecast remain biased to the downside, with trade tensions between the U.S. and China continuing to pose the greatest threat to growth, but housing is expected to be a source of strength in the near term. While the ESR Group had expected housing to contribute positively to third quarter GDP growth, stronger-than-expected recent data led the Group to revise substantially upward its projection for residential fixed investment. The Group’s updated forecast of 4.2% annualized is 3.3 percentage points higher than last month’s projection. According to Fannie Mae, this would represent the first time residential fixed investment has been positive since 2017.
“While consumer spending, supported by a healthy labor market and gains in household wealth, remains the current expansion’s economic engine, the housing sector appears poised to offer meaningful near-term contributions to growth,” said Fannie Mae SVP and Chief Economist Doug Duncan. “Our macroeconomic forecast continues to call for solid, if modest, real GDP growth through 2020 despite the persistence of downside risks associated with U.S.-China trade tensions, slowing global growth, and other geopolitical concerns. Considering these risks and the Fed’s reluctance to roil financial markets, this month we’ve updated our monetary policy expectations. We now expect the federal funds rate cut previously projected for December to occur this month, followed by one more in January, the final such cut of the forecast horizon. The potential January rate cut is more conditioned on the intervening data than normal given the divided views of the voting members of the Fed Board.”
“Unfortunately, expectations for a stronger housing market through the early part of next year are unlikely to offer prospective homebuyers much respite from the longstanding affordability issue,” continued Duncan. “Home prices appear likely to maintain a positive growth trajectory due in part to persistently low mortgage rates and evidence of declining inventory. On the flip side, the supply imbalance should be supportive of new home construction, which we believe will lead to an uptick in single-family housing starts through next year.”