Sliding Into an Economic Slowdown

According to the Fannie Mae’s July 2017 Economic and Housing Outlook report, economic growth is expected to slow down in the second half of the year.

The data reveals that economic growth rebounded to 2.7 percent annually during Q2, up from 1.4 percent in Q1, however, Fannie Mae noted the full percentage growth in the saving rate since December signals caution amongst consumers.

“While second quarter growth is poised to rebound, we expect growth to moderate through the remainder of 2017,” Fannie Mae Chief Economist Doug Duncan said. “Consumer spending, traditionally the largest contributor to economic growth, is sluggish and is lagging positive consumer sentiment and solid hiring.”

“While labor market slack continues to diminish, wage growth is not accelerating and inflation has moved further below the Fed’s target,” Duncan added. “These conditions support our call that the Fed will continue gradual monetary policy normalization, announce its balance sheet tapering policy in September, and wait until December for additional data, especially on inflation, before raising the fed funds rate for the third time this year.”

Fannie Mae predicts economic growth will slow to 1.9 percent for the second half of the year due to certain factors. The moderate growth is expected to continue into 2018.

Factors that are contributing to the deceleration include residential investment that will decline in the second half of the year due to the shortage of homebuilding activity and tight inventory, which continues to hold back home sales.

Decelerating corporate profit growth, which is commonly seen in the late stages of an economic expansion, presents a challenge to business investment, which is also concerned with the rising uncertainty of tax reform.

“Construction activity has lost some steam following the first quarter’s weather-driven boost,” Duncan said. “Meanwhile, very lean inventory continues to act as a boon for home prices and a bane for affordability, particularly among potential first-time homeowners.”