Economic growth is estimated to have picked up strongly in the second quarter despite rising trade tensions, according to Fannie Mae’s July 2018 Economic and Housing Outlook.
That spells a full-year real GDP growth of 2.8 percent, which is slightly higher than Fannie predicted in June ‘s report, but not likely to last. Per the report, Fannie Mae “believes the second quarter’s estimated 4.2 percent annualized growth pace is unsustainable for the balance of the year, as the contribution from trade was likely temporary.”
Fannie said the effects of fiscal policy look to fade in the second half of 2019 and the GSE expects full-year 2019 growth to moderate to 2.2 percent.
“As we celebrate the ninth anniversary of the economic expansion with what’s likely to be a robust second quarter, we’re also examining whether last quarter’s headline growth will mark a high point for the remainder of the cycle,” said Doug Duncan, Chief Economist, Fannie Mae. “Along with ongoing tightening of monetary policy, we expect fiscal stimulus, which has supported consumer, business, and government spending, to weaken as we move into 2019. And while trade provided a meaningful lift last quarter – owing in part to overseas firms pulling forward their imports from the U.S. ahead of the announced tariffs – we expect trade will likely once again be a drag on growth moving forward.”
Fannie said consumer and government spending growth, inventory investment, and a leaner goods deficit to have contributed to Q2’s GDP uptick. However, the report stated, “while fiscal stimulus should continue to support such spending through the second half of 2018, a strengthening dollar and the potential for a wider range of tariffs could make trade a significant detractor from growth.”
The GSE is also nervous about how “trade wars” between the U.S. and other nations will play out.
“Worsening rhetoric and uncertainty over trade policy has the potential to adversely impact business sentiment and investment spending and hiring,” Fannie reported.
The effects on the housing market, however, should be steady as the next year-and-a-half plays out, though inventory is likely to remain a constraint. “On housing, the same inventory constraints continue to haunt affordability and sales, with demand outstripping supply and home prices continuing to rise at a fast clip as a result,” Duncan said.
According to the report, Fannie expects to see 2018 finish with about 18.4 million housing starts overall, then build to 19.4 million by the end of 2019.
Median home prices should also stay in the mid-$300,000s through the next 12 months, while mortgage rates look to level off at 4.6 percent through the end of next year, Fannie reported.
However, Fannie expects two additional interest rate hikes this year, given “a firming inflation outlook and the Fed signaling that it is willing to tolerate an inverted yield curve. The hikes will most likely occur in September and December.
June’s labor market also improved in June. Fannie called that news a “boost” to consumer spending growth.