Economic growth could see a major slowdown in 2019, but not before it picks up slightly in 2018, according to the latest Fannie Mae Economic and Strategic Research Group forecast.

Fannie Mae increased its full-year economic growth forecast by 10% from its estimate last month to 3.1% for 2018. During the third quarter, economic growth came in at 3.5% annualized rate, down from the 4.2% growth in the second quarter.

Fannie Mae explained that the third quarter saw a strong labor market, an acceleration in consumer and government spending and build-up in private inventories.

“As we proceed through the fourth quarter, we expect growth to slow further but to remain solid at 2.6%,” Fannie Mae Chief Economist Doug Duncan said. “Trade remains a downside risk to growth as a strong dollar is likely to contribute to a further widening of the trade gap.”

“While consumer spending growth is expected to moderate from the robust second and third quarters, both business fixed investment and residential fixed investment should pick up,” Duncan said. “We also expect the economy to continue to receive strong support from government spending, at least in the near term.”

However, in-line with other economists’ predictions, Fannie Mae’s forecast isn’t so bright for 2019 and beyond, as growth is predicted to decrease amid challenging conditions in the housing market.

The ESR Group forecasts that 2019's full-year growth will slow to 2.3%. The economy will face challenges such as higher short-term interest rates and the waning effects of the fiscal stimulus enacted in February 2018, Fannie Mae explained.

“Looking further ahead, the Bipartisan Budget Act of 2018 should continue to boost growth through the first half of 2019 before it begins to fade, ultimately acting as a drag on the economy in the second half of 2020.”

The housing market will face troubling times despite a strong economy and labor market due to affordability constraints. Home price appreciation, lack of affordable housing inventory and increasing home prices will continue to present headwinds leading into 2019.

“The current labor market hot streak hasn’t been enough to boost the housing sector,” Duncan said. “Both new and trade-up home buyers remain discouraged by rising mortgage rates, elevated home prices, and a shortage of available inventory, particularly in the lower tier of the market.”

“Market conditions also present a challenge for builders, as higher interest rates are driving up construction costs and tight labor conditions are accelerating the average hourly earnings growth of residential construction workers,” he said. “Given weak housing data over the past month, we lowered our 2018 originations forecast by $11 billion to $1.624 trillion and our 2019 forecast by $21 billion to $1.603 trillion. However, we expect that existing and new home sales will stabilize in 2019 as home price appreciation moderates and mortgage rates begin to stabilize.”

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