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Slow Q1 Does Not Change Fannie Mae’s 2015 Forecast for Economic Growth

fannie-maeFannie Mae's Economic & Strategic Research Group is expecting the nation's economy to reach its anticipated levels of growth by the end of the year despite slowdowns in the first quarter due to West Coast port disruptions and harsh winter weather.

In the ESR Group's April 2015 Economic Outlook, the projection for economic growth in 2015 held steady at 2.8 percent despite a downward adjustment for Q1 growth from the prior forecast. However, Fannie Mae is expecting some volatility in financial markets due to the Federal Reserve's expected interest rate increase later in the year.

"We have downsized our first-quarter economic growth expectations in light of several transitory factors that weighed on consumption, but our outlook is largely the same as what we forecasted in March," Fannie Mae Chief Economist Doug Duncan said. "Although some momentum was lost in the first quarter as consumers remained cautious in their spending, perhaps putting an emphasis on repairing their personal balance sheets and replenishing savings, we expect that consumer spending will catch up during the second quarter and continue in subsequent months, supporting our forecast of 2.8 percent growth for the year. We believe this momentum will carry over into the housing market, as well, particularly if strong consumer income growth continues."

Consumer spending, manufacturing, and job growth have all experienced a loss in momentum recently. March's job summary from the Bureau of Labor Statistics reported only 126,000 jobs added for the month and downward revisions of 69,000 for the previous two months. March's job gains were less than half of the monthly average for the previous 12 months (266,000). Hourly wage earnings rose just 2.1 percent year-over-year in March, but the silver lining is in the three-month annualized growth for wage gains, which surged to 4.0 percent in March – the largest annualized gain this expansion has experienced.

Most metrics pointed to anemic housing growth in the first quarter, according to Fannie Mae. Homebuilding activity and residential construction spending both took a dive in February, and housing starts posted their largest monthly decline in four years during the month. Existing home sales rose modestly in February after declining sharply in January. Most home price gains were solid; the CoreLogic national home price index rose 5.6 percent year-over-year in February, the largest gain in six months.

Purchase mortgage applications rebounded sharply in April from a recent slowdown, reaching their highest level in almost two years, marking the second monthly surge in purchase apps this year. Combined with continued low mortgage rates, the rise in purchase apps could indicate a strong homebuying season in the spring and summer.

Inventory remained particularly tight for the lower end of the housing market, which makes it difficult for first-time buyers to purchase their first home. The supply of entry-level homes may increase as home equity recovers due to a potential rise in confidence among would-be move-up buyers in their ability to extract equity from their current home to use toward a down payment on their next home. Overall, the report said an increase in the inventory of starter homes may push renters into owning and drive in increase in organic move-up homebuying activity.

"For all of 2015, we expect housing starts and home sales to rise about 13 percent and 5 percent, respectively—little changed from the prior forecast," the report said. "However, we revised higher our projected purchase originations as we downgraded our assumption of the share of cash sales. In addition, we upgraded our forecast of refinance originations due to higher incoming volume in early 2015 than we had expected, especially in the government segment."

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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