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U.S. Economic Forecast Upgraded Despite Heightened Risks

Fannie Mae: Despite continued downside risks due to the ongoing impact of COVID-19, full-year 2020 real GDP growth is now forecast to contract only by 2.6%.

WASHINGTON – Despite continued downside risks, full-year 2020 real GDP is now forecast to contract by 2.6%, an improvement from the prior month's forecast of a 3.1% contraction, according to the latest commentary from the Fannie Mae Economic and Strategic Research Group.

The upgrade was attributed to continued strength in consumer spending – and data suggesting that such spending is likely to support economic growth through the remainder of the year. In fact, the ESR Group improved its forecast for real GDP growth for the third quarter 2020 to 30.4% – from the prior forecast of 27.2% – but reduced its expectations for fourth quarter growth to 6.2% from 8.7% due in part to the lack of further COVID 19-related legislative stimulus.

Risks to the forecast remain skewed to the downside, including the potential for a re-acceleration nationally of COVID-19 cases, a slowdown in global growth and consumer retrenchment owing to diminished unemployment benefits and the expiration of federal relief programs. To the upside, many households continue to save at elevated levels and appear to have the means to offer additional support to the economy through increased spending.

Housing also continues to play an important supportive role in the country's economic recovery, according to the ESR Group. The pace of existing home sales jumped in July to a level not seen since 2006 and, importantly, was followed by strong pending sales, purchase mortgage applications and construction data. As a result, the ESR Group substantially upgraded its full-year 2020 forecasts for both new and existing home sales—and, with robust refinance demand, for total mortgage originations to $3.87 trillion, which would be the highest nominal dollar annual total in the series' 32-year history.

"The most important factor in our expectations for U.S. economic performance remains the impact of COVID-19 on household, business, and policymaker actions," said Doug Duncan, Fannie Mae senior vice president and chief economist. "Optimism regarding a potential vaccine and declining infection and mortality rates are all supportive of stronger growth; however, any delays or disappointment in the development and deployment of a vaccine could result in a reduced rate of growth.

“As expected, the pace of economic recovery is slowing, but housing remains highly supportive. The Federal Reserve has made clear that it has no intention of raising interest rates in the near future, and, as mortgage spreads continue compressing, households are seizing the opportunity to refinance their existing mortgages. Historically, low interest rates are also an inducement to buy homes, but slow supply growth continues to result in high levels of home price appreciation, which is offsetting some of the affordability benefits of the lower rate environment."

Source: Fannie Mae

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