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Economic Outlook Is Strong, but What About Housing?

Two reports released on Wednesday remain bullish on the U.S. economy. The U.S. Federal Reserve [1], which upgraded its economic outlook in a statement [2] at the end of a Federal Open Market Committee (FOMC) meeting, kept the rates unchanged as it monitored the economy for inflation.

A report to the Secretary of the Treasury [3] from the Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets Association also highlighted strong economic growth in the second quarter. The report said that economic activity picked up during the quarter with 4.1 percent annualized real GDP growth, rebounding after a slowdown in growth in the first quarter of the year.

“Over the past four quarters real GDP rose 2.8 percent, and growth is expected to remain strong over the remainder of 2018, with a continued fiscal boost after recently enacted tax and spending legislation,” the report [4] to Secretary Steven Mnuchin said.

The Fed, in its statement, said that the labor market continued to strengthen and economic activity rose at a strong rate. “Job gains have been strong, on average, in recent months, and the unemployment rate has stayed low. Household spending and business fixed investment have grown strongly,” the Fed said.

According to the Treasury report, the two-year Treasury yield rose slightly as markets came to expect more monetary tightening from the Fed. “In contrast, the 10-year yield declined in May amidst concern about political developments in Italy and has remained in the 2.8-3 percent range in recent weeks, leading to a further flattening of the yield curve,” the report said.

Are these changes in Treasury yields and a flattening yield curve likely to impact housing? While the report remained silent on the impact, it did mention that residential investment decreased during the quarter and taken together with a “recent decline in new home sales and existing home sales, housing momentum appears to have slowed down recently.”

However, a strong consumer spending pattern boded well for the economy, the report indicated. “Consumer spending picked up in the second quarter, with real personal consumption expenditures growing at a 4 percent annualized rate,” the report found.