Economy Stuck in Lower Gear But Expected to Accelerate in Q2 2014

Stubborn Drag From Declining Inventory Buildup Should Diminish Throughout the Year

Pete Bakel

202-752-2034

WASHINGTON, DC – A slow growth pattern dominated the first quarter of the year, but the economy is expected to gain momentum in the second quarter amid an increase in government spending and diminishing drag from a slowdown in inventory stockpiling, according to Fannie Mae’s (FNMA/OTC) Economic & Strategic Research Group. Factors including consumer and business capital spending, relief from fiscal policy concerns, and improvements in the housing sector also may contribute to growth. Although economic activity in the first quarter likely slowed more than expected in the prior forecast, the group continues to forecast 2.7 percent growth for all of 2014, comparable to the 2.6 percent pace in 2013.

“The April economic forecast is similar to February and March, where slow growth has been the common denominator, but we expect to see a slight pickup beginning this quarter,” said Fannie Mae Chief Economist Doug Duncan. “A slower pace of inventory accumulation is likely to weigh on GDP in the first half of 2014 but loosen its hold in the second half of the year as businesses increase production. Government spending is expected to contribute to growth for the first time in five years, and the lack of additional broad-based tax increases combined with less uncertainty over fiscal policy should enable some strengthening in the private sector. Consumer confidence will likely trend up throughout the year, supported by improving financial market conditions and household net worth. However, the long-term effects of new healthcare rules and related costs on real consumer spending will need to be monitored in the coming months. Overall, we expect real consumer spending to accelerate to 2.8 percent in 2014, a 0.5 percentage point increase from 2013.”

“We have downgraded our housing forecast slightly due to a lackluster sales picture, but the recent loss of momentum is likely a temporary one,” said Duncan. “Overall, we expect housing to add 0.3 percentage points to economic growth this year. While existing home sales have remained essentially flat, we continue to believe that new home sales will increase at a double-digit pace. Housing starts are expected to rise to about 1.05 million units in 2014, up from 925,000 in 2013 but approximately 50,000 fewer than we expected at the beginning of the year due to builders’ credit and labor constraints.”

For an audio synopsis of the April 2014 Economic Outlook, listen to the podcast on the Economic & Strategic Research site at www.fanniemae.com. Visit the site to read the full April 2014 Economic Outlook, including the Economic Developments Commentary, Economic Forecast, Housing Forecast, and Multifamily Market Commentary.