Fannie Mae Forecasts Modest Economic Growth Despite July’s Gains

July's positive economic news did little to change Fannie Mae's ""forecast"":http://www.fanniemae.com/portal/research-and-analysis/emma.html for 2012, the GSE revealed Tuesday.

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Fannie Mae's Economic & Strategic Research Group issued its latest economic outlook, maintaining its expectations for modest growth in 2012. This news comes in spite of reports of strengthening retail sales and job growth in July.

The group pointed to dismal news throughout the first half of the year as reasoning for its unchanging outlook. However, even with slowing job growth, global and domestic economic uncertainty, and a decline in consumer spending, things are not anticipated to get worse.

""Despite a marked slowdown in economic activity, we believe that a repeat of the ‘stall speed' â€" a period of growth of one percent or less seen at the beginning of 2011, is unlikely,"" the group said in its report. ""We expect growth to remain below 2 percent in the second half of the year, a slight downgrade from the prior forecast, leaving full-year growth at its first-half pace of 1.8 percent, with risks remaining tilted toward the downside.""

Fannie Mae chief economist Doug Duncan pointed out that while July's positive news may have demonstrated a brief pickup in activity, growth in the housing sector has remained a cornerstone of economic recovery.

""The July data hasn't changed our forecast for slow growth in 2012, but we're increasingly focused on the looming ‘fiscal cliff' near year-end,"" Duncan said. ""The debt ceiling debate, as well as current legislation that could create a drag of more than 4 percent on GDP in 2013, may spur further caution among consumers and businesses alike. On the bright side, we continue to see positive trends in the housing sector, which is showing signs of a durable, long-term recovery.""

The group's broad housing outlook remained positive, with an expected year-over-year increase of about 9 percent for home sales in 2012. In addition, home price expectations for the remainder of the year are trending upward as inventories drop.

Falling inventory has also had an effect on housing starts, with tight supply boosting homebuilding activity in some areas. Residential investment is expected to contribute about 0.2 percentage points to real GDP for the year, the first annual contribution in seven years.

Despite this news, Fannie Mae projected modest growth for the housing sector, citing tight credit standards and an elevated level of foreclosures facing the market in years to come:

""There remain several factors that will combine to keep the pace of the housing recovery modest, however. The level of foreclosures remains elevated, suggesting a steady flow of distressed properties into the market over coming years. The gradual yet slow recovery in the labor market and the overall economy will restrain the rate of household formation. Moreover, mortgage credit is tight and should remain so, given the great magnitude of uncertainty in the regulatory landscape,"" the report said.