Fannie Mae economists have upgraded the economic outlook for the coming year, and a big reason behind that is expected growth in the housing market. Housing added to economic growth in the third quarter for the first time in more than a year and a half. That momentum will likely continue in the fourth quarter and the first half of 2020, according to the latest forecast from Fannie Mae’s Economic and Strategic Research Group.
While consumer spending will be the primary driver of economic growth, housing should continue to function as a positive contributor in the near term, economists say. Both new and existing single-family home sales rose in the third quarter, as did pending home sales, housing permits, and starts, the paper notes.
That said, researchers note that challenges persist in housing, particularly the supply and affordability constraints that are holding back household formations and inhibiting some market activity.
Other risks to the economy include ongoing trade tensions between the U.S. and China as well as ongoing political uncertainty abroad. Still, Fannie Mae economists are predicting one more rate cut from the Federal Reserve in early 2020 before a pause for the remainder of the year.
“Even as global uncertainties mount, we continue to expect the domestic economy to produce solid, if not spectacular, growth,” says Doug Duncan, Fannie Mae’s senior vice president and chief economist.
“As we forecasted, housing supported the larger economy in the third quarter, and we expect it to continue to play a productive role through the first half of 2020. Positive contributions from single-family housing construction, home improvements, and broker fees pushed residential fixed investment growth to a robust 5.1 percent annualized pace this past quarter, and we forecast continued but moderating strength as construction activity and home sales growth continue at a slower pace.”
With mortgage rates normalizing, Duncan says they expect a decline in refinance activity in 2020. The refinance share of mortgage originations will likely drop from a projected 37% in 2019 to 31%.
There remain downside risks to the forecast of increased business investment, however. Nonfarm business productivity declined in the third quarter for the first time since the end of 2015, and a sustained decline in productivity would reduce the incentive for increased BFI.
However, the third-quarter decline was driven by a strong increase in hours worked, which rebounded from a decline in the second quarter to the fastest annualized pace since the fourth quarter of 2017.
The second-quarter decline in hours worked is seen as a one-off event and the third-quarter decline in productivity will likewise be temporary as growth in both hours and output stabilize.
Weak business equipment investment is a key reason for the forecast continued lackluster BFI investment in the fourth quarter of this year. Banks responding to the Federal Reserve’s Senior Loan Officer Opinion Survey (SLOOS) reported a decline in demand for commercial and industrial (C&I) loans in the three months ending in October, the fifth consecutive quarter of lower demand.
Almost 90 percent of respondents cited decreased customer investment in plants or equipment as a somewhat or very important factor driving overall weakness in demand for C&I loans.
Credit availability could present another obstacle to BFI growth in 2020, as SLOOS also reported tightening standards for C&I loans in the three months ending in October, making 2019 the first year to see tightening standards, on net, since 2016.
Nevertheless, this trend is expected to reverse next year with businesses adding at least three-tenths to growth over 2020 compared to a likely zero percentage points this year.