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A calm picture of the economy emerges, but will it last?

Less uncertainty over economic policy helps

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After months of clouded economic data in the wake of financial and congressional uncertainty, the economy is expected to see clearer skies ahead, analysts claim in a new report.

According to the latest report from Fannie Mae, a pullback in economic policy uncertainty regarding fiscal and monetary policy issues is forecasted to lay the foundation for improved private sector activity and accelerated growth in 2014.  

For all of 2014, economic growth is expected to rise 2.9% from an estimated 2.6% in 2013.

"The continued housing recovery also is expected to contribute to gross domestic product, doubling from 0.3 percentage points in 2013 to 0.6 percentage points in 2014, due in large part to new homebuilding activity," said Fannie Mae Chief Economist Doug Duncan.

The last two housing reports that Fannie Mae released in November and December were deeply impacted by the government shutdown and debt ceiling negotiations, which caused Americans to believe the economy is on the wrong track.

But both reports left a little room for hope due to a reduction in fiscal drag and an improvement in labor market conditions. However, how much improvement is real or built on workers simply giving up on finding a job is the subject of continous debate.

"Despite the rise in mortgage rates since the spring, many housing indicators posted strong gains at the end of 2013 and consumer housing attitudes are strengthening, all of which bodes well for continued but measured housing recovery in 2014," Duncan said.

"Overall, although we don’t expect growth to break the 3% barrier this year, we believe the economy is on a sustainable path for continued growth with upside potential."

In November’s outlook, Compass Point Research & Trading explained, "By the Congressional Budget Office’s estimate, the Treasury might be unable to fully pay its obligations starting in March, but depending on the timing and magnitude of tax refunds and receipts in February, March, and April, the Treasury might be able to continue borrowing into May or early June."

The Treasury will release its budget early this afternoon, revealing the current condition of the economy.

Budget aside, this year’s economic forecast is driven by three key factors: an acceleration in spending activity from private sector forces, waning fiscal drag from the federal government and continued improvement in the housing market, Duncan said.

"Much of the policy uncertainty we saw in 2013 has cleared to some degree, which raises the possibility for a pick-up in growth as consumers and businesses, who held back on their spending amid those policy concerns, might loosen their purse strings this year," he added.

"We expect the contribution from consumer spending to rise to about 2 percentage points, up from an estimated 1.6 percentage points last year. In addition, as consumer demand climbs, business confidence should improve and add to growth in the form of stronger hiring and capital investment," Duncan explained.

The coming week will set the pace for the year, especially when it comes to larger financial institutions.

Fourth quarter and year-end earnings from JPMorgan Chase (JPM) and Wells Fargo (WFC) hit the wires this week.

As previously reported on HousingWire.com, "big banks are expected to bust out some of the best bottom-line results of the season."

While this is good in the short term, the success of the economy hinges on the strength of the financial sector.

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