Economic growth is set to remain at 2% for the year as the high growth in the first half of the year is expected to slow.
Economic data shows growth rebounded to 2.7% annually, up from 1.4% in the first quarter, according to Fannie Mae’s economic and strategic research group’s July 2017 Economic and Housing Outlook.
Fannie Mae explained the full percentage point increase since December signals a growing caution among consumers, despite the high levels of consumer confidence.
“While second quarter growth is poised to rebound, we expect growth to moderate through the remainder of 2017,” Fannie Mae Chief Economist Doug Duncan said. “Consumer spending, traditionally the largest contributor to economic growth, is sluggish and is lagging positive consumer sentiment and solid hiring.”
“While labor market slack continues to diminish, wage growth is not accelerating and inflation has moved further below the Fed’s target,” Duncan said. “These conditions support our call that the Fed will continue gradual monetary policy normalization, announce its balance sheet tapering policy in September, and wait until December for additional data, especially on inflation, before raising the fed funds rate for the third time this year.”
Decelerating corporate profit growth, which is commonly seen in the late stages of an economic expansion, presents a challenge to business investment. Businesses are also concerned with the rising uncertainty of tax reform.
Residential investment will likely decline in the second half of the year due to the lackluster homebuilding activity and tight inventory which continues to hold back home sales.
Because of these factors, Fannie Mae predicts economic growth will slow to 1.9% for the second half of the year. And this moderate growth is expected to continue into 2018 as potential changes to fiscal and monetary policy posing both upside and downside risks to the forecast.
“Construction activity has lost some steam following the first quarter’s weather-driven boost,” Duncan said. “Meanwhile, very lean inventory continues to act as a boon for home prices and a bane for affordability, particularly among potential first-time homeowners.”
“According to our second quarter Mortgage Lender Sentiment Survey, lenders expect to ease credit standards further,” he said. “However, we continue to project that the pace of growth in total home sales will slow to 3.3% this year, as we believe rapid home price gains amid scarce supply will remain a hurdle for potential homebuyers despite improvements in credit access.”