Strength in labor markets and consumer spending contributed to upward revisions of fourth quarter 2019 and full-year 2020 real GDP growth forecasts, according to the latest commentary from the Fannie Mae Economic and Strategic Research (ESR) Group. Additionally, housing-related elements of the ESR Group’s forecast also strengthened, including expected increases in residential fixed investment driven by a significant uptick in the ESR Group’s forecast for new single-family housing starts and sales.
The ESR Group now projects fourth quarter 2019 headline growth of 1.8 percent and full-year 2020 growth of 2.1 percent, each a two-tenths improvement compared to the prior forecast. Just as labor market strength has carried through to consumer spending, the ESR Group also expects strong consumer spending to translate into positive business fixed investment in the fourth quarter and moving into 2020. While most components of GDP experienced minor adjustments this month, residential fixed investment, which includes housing starts and other aspects of the housing sector, increased more substantially. Owing to this expectation of economic strength, as well as comments from the FOMC indicating an unlikeliness to ease rates further, the ESR Group removed its prediction of one rate cut in early 2020 and now expects no moves from the Fed at all next year.
Housing construction is once again poised to become an engine of overall economic growth. The ESR Group expects home builders to expand production in reaction to continued labor market strength and consumer spending, as well as supportive interest rates and waning risks of a significant near-term economic slowdown. Tight supply conditions in tandem with favorable mortgage demand are likely to apply upward pressure to home prices while also bolstering credit performance in the mortgage market, meaning affordability is likely to remain a challenge for some potential borrowers.