Business News

Will Slow Growth Persist for the Remainder of the Year?

By Susanna Kim | September 20, 2016

 

Will Slow Growth Persist for the Remainder of the Year?The economy will soon be entering the final quarter of the year, and with events like the Brexit announcement behind us the good news is that housing continues to grow, according to Doug Duncan, Fannie Mae’s chief economist.

“Slowly, but it is growing,” he says.

While business investment is struggling, consumer spending is boosting the economic outlook for 2016.

With “quite strong” signals in the second quarter, the hope is consumer-spending strength has continued through the summer. The economic growth outlook remains 1.8 percent for the full year, Duncan says, with consumers the primary driver.

Household balance sheets are strong, according to Duncan, and the savings rate is between 5 and 6 percent, which is near historical averages.

“There’s reason to believe consumers are now more resilient and have strength to support consumption,” he says. “Whether they have the confidence to do that or not is another question. Current data suggest they do.”

Back to Work

What factors are needed for consumption to continue through the end of the year? More pickup in the labor market could be one of them. The workforce participation rate has increased a bit, which is encouraging. It was 62.8 percent in August, compared to 62.6 percent in the same month last year, according to the Bureau of Labor Statistics.

But if consumers see lower returns on their savings and investments, they will have to earn more to achieve the level of consumption they would like to have, Duncan points out. Unfortunately, consumers won’t be earning that much interest on their savings accounts due to continuing low interest rates.

“We don’t see interest rates going anywhere anytime soon,” Duncan says, adding that he doesn’t think there’s a high probability the Federal Reserve will make a move in September or December, though the latter is the more likely of the two.  

Duncan expects intermediate and long-term interest rates a year from now to be “roughly” what they are today. He projects that the 30-year fixed-rate mortgage rate will average 3.4 percent during the fourth quarter.

Buyers Benefit

While recent income growth has not been as robust compared to previous generations, homeowners are still benefitting from some growth, low mortgage rates, and more favorable lending standards.

People who are already homeowners can benefit from real price appreciation and the ability to refinance. But thin inventory and a lack of new construction have created an affordability problem for people who are not homeowners.

“The biggest challenge to affordability today is the lack of availability of lower-priced homes and rental apartments,” he says. “The question is, will we see a pickup in construction in that space?”

The Commerce Department reported on Aug. 16 that housing starts in July were at a seasonally adjusted annual rate of over 1.2 million – 5.6 percent above the same month last year. It is reporting starts for August today.

“The direction is correct, though not with the speed we’d like to see,” Duncan says.

Because of the short supply at the lower-end of the housing market, home prices and rents are accelerating faster there than those in the higher-priced segment.

“Until there’s an increase in supply, that’s probably not going to change,”
he says. 

The Need to Invest

Another concern for Duncan in his economic outlook is that businesses aren’t investing in plants and equipment.

“It’s been falling for some time. That to me is a sign that businesses are not optimistic about either their profits or their sales,” he says.

While the vote to leave the U.K. shouldn’t weigh on businesses until new trade rules come along, Duncan says, the slowing of the Chinese economy is having an impact.

“The slowing of demand in China has affected prices around the globe for many commodities,” he says.


Estimates, forecasts, and other views expressed in this article should not be construed as indicating Fannie Mae’s expected results, are based on a number of assumptions, and may change without notice. How this information affects Fannie Mae will depend on many factors. Neither Fannie Mae nor its Economic & Strategic Research (ESR) Group guarantees that the information in this article is accurate, current, or suitable for any particular purpose. Changes in the assumptions or underlying information could produce materially different results. The ESR Group’s views expressed in this article speak only as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.