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Fannie Mae: Economy to Make a Comeback in Second Quarter

The first quarter of 2015 experienced slow economic growth due to "temporary factors," but the economy is expected to make a comeback starting in the second quarter, according to Fannie Mae's Economic & Research Strategic Research (ESR) Group's March 2015 Economic Outlook released Monday.

Notably, the slower economic growth did not deter Fannie Mae's prediction that the economy will "drag housing upward" in 2015.

"The economy is getting a boost from the strong employment numbers we’ve seen last year and at the start of 2015," Fannie Mae Chief Economist Doug Duncan said. "When this employment growth partners with income growth and consumers experience a rise in their personal household income, we should see a similar boost in the housing sector. Overall, we expect an improving 2015 with continued economic growth bringing housing above 2014 levels."

The temporary factors that slowed economic growth include a drawdown in inventory, unusually high snowfall in some parts of the country, and the West Coast port slowdown. Fannie Mae expects the reducing of those factors in the second quarter combined with upbeat labor market conditions and positive consumer and business fundamentals to push GDP growth to 2.8 percent in 2015, ahead of 2014's pace of 2.4 percent.

The downside risks to growth include slowing global growth abroad, geopolitical events, and increased financial volatility due to speculation around the target Fed funds rate, according to Fannie Mae.

Fannie Mae's report indicated that housing started off 2015 as "flattened at best or weakened" in the first quarter compared to the fourth quarter of 2014, which supported an earlier prediction made by Fannie Mae. Single-family starts declined sharply from December to January, as did existing home sales, while new home sales remained flat. Pending home sales picked up, and loan performance improved – in fact, Fannie Mae pointed out the correlation between the labor market improvements and the sharply lower rate of early-stage delinquency loans.

Meanwhile, the U.S. labor market experienced net job gains of 295,000 in February and has a three-month average of 288,000; the 3.3 million jobs created in the last year are the most since 2000, according to the Bureau of Labor Statistics. Wage gains were muted, however, with an increase in the average hourly wage of just 3 cents from January to February (up to $24.78). While the unemployment rate is at its lowest rate (5.5 percent) since 2008, the labor force participation (62.8 percent) is just one-tenth higher than a three-decade low point, according to Fannie Mae's report.

Duncan indicated in Fannie Mae's report that the Agency's forecast for housing is little changed from the previous forecast, in which he stated that stronger housing recovery will follow stronger wage growth, which he expects to occur.

"Housing also should receive an additional tailwind in the mortgage market," Duncan wrote. "The Fannie Mae Mortgage Lender Sentiment Survey showed that lenders believed that lending standards have eased, and the February Fannie Mae National Housing Survey showed that a record high percentage of consumers believed that it is easy to get a mortgage."

About Author: Seth Welborn

Seth Welborn is a Harding University graduate with a degree in English and a minor in writing. He is a contributing writer for MReport. An East Texas Native, he has studied abroad in Athens, Greece and works part-time as a photographer.
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