Consumer Spending to Drive Growth for 2016

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The economic growth outlook for the second half of the year remains unchanged from the prior forecast at about 2.0 percent, according to Fannie Mae’s Economic & Strategic Research (ESR) Group’s July 2016 Economic and Housing Outlook. Consumer spending is expected to drive growth for the rest of 2016 as businesses face headwinds from shrinking profits, weak productivity, and rising labor costs in the face of uncertainty stemming from Brexit and the U.S. presidential election. Government spending and residential investment should be positive contributors to economic growth this year, while nonresidential and inventory investment and net exports are expected to drag on growth. Although job creation picked up at the end of the second quarter, the hiring trend has slowed considerably from the start of the year.

“Financial volatility resulting from Brexit has created some uncertainty among investors as yields on government bonds have dropped sharply, Treasury yield curves have flattened over the past month, and the Chinese Yuan has depreciated to a six-year low against the dollar,” says Fannie Mae Chief Economist Doug Duncan. “In addition, our view on interest rates continues to be ‘low for long’ as we believe a Fed decision to raise interest rates will likely be on hold until June of 2017. Brexit’s economic impact on the U.S. will likely be limited, especially from a trade perspective, and should be a near-term positive for the housing and mortgage market as falling mortgage rates have prompted new refinance demand.” The ESR Group now projects a 2.2 percent rise in mortgage origination volume in 2016 from 2015 to $1.75 trillion, versus a 2.8 percent drop in the prior forecast.

“We still expect moderate housing expansion for 2016. While new home sales have pulled back from their expansion-best, existing home sales rose to the highest level in more than nine years amid the largest year-over-year drop in for-sale inventory since October of 2015,” says Duncan. “Without relief from new construction, housing inventory will likely remain tight, boosting home prices and constraining affordability.”

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