Stimulative fiscal policy is expected to provide a boost to an already strong 2018 economic growth forecast, despite a projected first quarter slowdown, according to the Fannie Mae Economic and Strategic Research Group’s March 2018 Economic and Housing Outlook.
The ESR Group raised its full-year 2018 forecast of real GDP growth by one-tenth to 2.8%, as well as its full-year 2019 forecast by two-tenths to 2.5%. Downside risks to growth remain, however, including the potential for aggressive monetary tightening from the Fed and a further escalation of trade tensions following the recent tariffs placed on steel and aluminum imports.
Weakening momentum in domestic demand – evidenced most notably by lackluster consumer spending – as well as slowdowns in both business investment and housing activity, prompted the ESR Group to downgrade its first quarter forecast to 2.2% annualized from 2.7%.
Still, the downshift is expected to be temporary as economic fundamentals remain positive. Rising household net worth, upbeat consumer confidence, and a strong labor market have now been buoyed by legislative stimulus. February’s jobs report boasted impressive gains in payrolls and the labor force participation rate. However, cooling wage gains helped calm some of the market’s recent inflation concerns. Additionally, Fed Chair Jerome Powell provided an upbeat assessment of the economy and inflation trends during Congressional testimony ahead of this week’s Federal Open Market Committee meeting. The ESR Group continues to expect the first rate increase of the year at the March meeting, followed by two more increases later this year.
“We’re nearly a quarter of the way through 2018 and, as anticipated, the interplay between fiscal and monetary policy continues to frame the economic landscape,” said Fannie Mae Chief Economist Doug Duncan. “While we expect the economy to shift temporarily into a lower gear in the first quarter, the pace of growth should accelerate through the remainder of this year and into the next. Beyond the obvious downside risks, the economy appears poised to build on a foundation of strong consumer spending and a historically healthy labor market following the recent passage of the discretionary spending bill on top of tax reform. On housing, home sales got off to a rough start in 2018, bottle-necked by the persistent challenges of the inventory shortage. Of course, there’s a flipside to the demand-supply imbalance, and strong home price appreciation continues to come as welcome news to existing homeowners.”
