Fannie Mae: We expect 2017 to go out with a bang

GDP to come in at 2.5% for the year

This year is almost over, and it will end on a cheerful note, or so says the December 2017 Economic and Housing Outlook from Fannie Mae.

The company increased its 2017 economic growth forecast one-tenth from its previous forecast to 2.5% due to the government’s upgraded third quarter gross domestic product growth estimate and an expected solid fourth quarter finish, according to the report from Fannie Mae’s Economic and Strategic Research Group.

“The economy appears poised to finish 2017 on a cheerful note as fundamentals increasingly align with strong business and consumer sentiment,” Fannie Mae Chief Economist Doug Duncan said. “Domestic demand is building momentum, job growth is solid and broad-based and consumer spending looks likely to strengthen.”

Consumer demand and investment spending growth are expected to pick up in the current quarter, offset partly by slowing inventory investment and the first drag from trade in a year, according to the report. And business equipment investment grew at its fastest pace in three years during the third quarter, hastened in part by a flurry of deregulation activity, a declining dollar and strengthening economic growth abroad.

With tax legislation potentially passing by year end, the ESR Group sees upside risk to growth but will need to review the final bill before assessing the impact. Absent tax reform, 2018 GDP growth is expected to decelerate to 2.1%.

“If enacted, tax reform should be a net positive for GDP growth next year, which we currently have pegged at a modest 2.1% in the absence of tax law changes,” Duncan said.

Consumer demand is expected to continue to sustain near-term growth as a strong labor market and surging stock and house prices helped push household net worth to a 70-plus-year high, the report indicated.

On the heels of the Federal Open Market Committee’s recent decision to raise interest rates for the third time in 2017, the ESR Group predicts two additional hikes in 2018, with further tightening possible based on the potential impact of tax reform on the labor market and inflation.

“As expected, the Fed raised rates once more last week and, barring inflationary pressure, is expected to tighten two more times in 2018,” Duncan said. “Finally, the housing market continues its upward grind, as it struggles to balance strong demand and house price appreciation with inventory shortages and affordability concerns.”

But this prediction is much lower than other experts and even the Federal Reserve itself. Experts explained they expect the Fed to change its forecast from three to four rate hikes in 2018.

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