Fannie Mae: Fiscal policy to increase economic growth in 2018, 2019

GSE increases GDP outlook

Fannie Mae announced it is increasing its outlook on economic growth for 2018 and 2019 due to stimulative fiscal policy, according to its Economic and Strategic Research Group’s March 2018 Economic and Housing Outlook.

The GSE raised its gross domestic product forecast for 2018 and 2019, despite the predicted slowdown in the first quarter of this year, according to the report.

“We’re nearly a quarter of the way through 2018 and, as anticipated, the interplay between fiscal and monetary policy continues to frame the economic landscape,” Fannie Mae Chief Economist Doug Duncan said. “While we expect the economy to shift temporarily into a lower gear in the first quarter, the pace of growth should accelerate through the remainder of this year and into the next.”

The ESR Group raised its full-year 2018 forecast of real GDP by 10 basis points to 2.8%, and increased its full-year 2019 forecast 20 basis points to 2.5%.

But the company pointed out downside risks to growth do remain such as the potential for aggressive monetary tightening from the Federal Reserve and a further escalation of trade tensions due to the recent tariffs placed on steel and aluminum imports.

In fact, Fannie Mae even decreased its first quarter forecast from 2.7% annualized growth in real GDP to 2.2%. This was due to weakening momentum in domestic demand, evidenced by the lack in consumer spending, and slowdowns in business investment and housing activity.

“Beyond the obvious downside risks, the economy appears poised to build on a foundation of strong consumer spending and a historically healthy labor market following the recent passage of the discretionary spending bill on top of tax reform,” Duncan said.

Strong fundamentals are expected to pull economic growth up again after the first quarter due to rising household net worth, upbeat consumer confidence and a strong labor market. The most recent jobs report showed gains in payrolls and labor force participation rate even as cooling wage growth calmed inflation fears.

“On housing, home sales got off to a rough start in 2018, bottle-necked by the persistent challenges of the inventory shortage,” Duncan said. “Of course, there’s a flip side to the demand-supply imbalance, and strong home price appreciation continues to come as welcome news to existing homeowners.”

Fannie Mae predicted the Fed will raise the federal funds rate during its March meeting, followed by two more rate hikes later this year.

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