Fannie Mae is out Monday with its Economic and Strategic Research Group’s April 2018 Economic and Housing Outlook, which says full-year 2018 economic growth is expected to come in at a still-strong 2.7% even as downside risks stemming from trade policy have risen.
The ESR Group’s latest forecast is one-tenth of a pecentage point lower than its previous forecast of 2.8% and comes on the heels of a greater-than-expected slowdown in first quarter growth. Lackluster consumer spending in January and February, following an unsustainable fourth quarter pace, drove the slight downgrade, though tax refunds and reduced withholdings are expected to boost consumer spending in March and the months ahead.
Elsewhere, Fannie says economic fundamentals remain strong, with healthy income growth, optimistic consumer and business sentiments, and fiscal stimulus stemming from tax reform and the federal spending bill likely to lift demand. Continued strength in business equipment investment growth is also critical to the ESR Group’s forecast, as it would likely support productivity growth and keep unit labor costs contained amid the ongoing fiscal stimulus. The ESR Group continues to project two more interest rate hikes in 2018, including one in June, with risks on both sides should inflation pick up or restrictive trade policy hamper growth.
“While first quarter consumer caution drew down our 2018 growth forecast a tick, we still forecast growth to come in at a solid pace. However, downside risks are emerging – the most notable being the increasingly heated rhetoric on trade,” said Fannie Mae Chief Economist Doug Duncan. “If rhetoric becomes reality, a trade war could reverse much of the upside from recently passed fiscal stimulus, or it could trigger an even worse outcome: recession. Threats and counter-threats aside, economic growth should pick up this quarter amid a rebound in consumer spending and business investment growth, in addition to a healthy labor market. Soft residential investment last quarter should prove temporary, as home sales resume their slow upward grind, with inventory shortages playing friend to prices but foe to affordability and sales.”
