Despite expectations that the Federal Reserve will significantly ease monetary policy through the end of the year, the Fannie Mae Economic and Strategic Research (ESR) Group expects 2019 and 2020 real GDP growth to slow to 2.1% and 1.6%, respectively. This prediction has been driven by an inverted yield curve, weak business investment, waning consumer and business sentiment, and ongoing trade and global growth concerns. The ESR Group also predicted that the Fed will cut interest rates by 25 basis points in July, followed by another 25 basis points in December.
“As the current U.S. expansion celebrates its tenth anniversary, it does so under an economic backdrop of growing domestic and global uncertainty – and slowing growth,” said Fannie Mae SVP and Chief Economist Doug Duncan. “The heightened uncertainty, stemming in part from the seemingly intractable trade dispute between the U.S. and China, appears to have reduced business’ investment incentive, which is now poised to be a material drag on growth over the forecast period. With consumer spending the principal remaining GDP growth driver, in addition to the recent re-inversion of the yield curve suggesting that market participants expect economic activity to slow further, we believe that the Fed will take a more accommodative posture beginning with a rate cut at the July meeting of the FOMC.”
The ESR Group notes that housing continues to benefit from the lower mortgage rate environment. Total origination volume is expected to improve 7% in 2019 on the back of a surge in refinances and moderate house price growth. Refinance activity is expected to represent 32% of originations in 2019, up from 29% in 2018 and more than 2%age points higher than was forecast last month.
“Housing remains a net positive to the economy, as the industry anticipates growth fueled by strong household balance sheets, low mortgage rates, and a surge in refinance activity,” Duncan continued. “However, the housing industry still doesn’t have an answer for the related problems of low supply and affordability. While home price appreciation has largely moderated – particularly compared to the recent past – and demand for modestly priced homes has proven strong and resilient, the lack of affordable inventory continues to cap sales and limit the potential pool of would-be homeowners.”