Economy Expected to Heat Up Through the Summer as Inflation Risks Mount
On May 19, 2021, Fannie Mae revised its 2021 economic growth forecast upward to 7.0 percent, up from 6.8 percent. This adjustment follows stronger-than-expected first quarter GDP growth and optimism in consumer spending due to increased COVID-19 vaccinations. However, 2022 GDP growth expectations were downgraded to 2.8 percent. The housing market is anticipated to see a 6.3 percent rise in home sales, but supply constraints and labor shortages could hinder construction. Mortgage origination is projected at $4.1 trillion, with refinance share increasing to 55 percent.
- Economic growth forecast revised to 7.0% for 2021.
- Home sales expected to rise by 6.3% amidst strong demand.
- 2022 GDP growth expectations reduced by 0.2 percentage points to 2.8%.
- Risks from supply chain disruptions, labor scarcity, and inflationary pressure.
WASHINGTON, May 19, 2021 /PRNewswire/ -- Expectations for full-year 2021 economic growth were revised upward in May to 7.0 percent, a modest improvement from last month's projection of 6.8 percent, attributable primarily to stronger-than-expected first quarter real GDP growth and an improved near-term outlook for consumer spending, according to the May 2021 commentary from the Fannie Mae (OTCQB: FNMA) Economic and Strategic Research (ESR) Group. The additional strength in consumer spending was previously projected to occur later in 2021 or early 2022, but recent incoming data increasingly points to eagerness on the part of consumers amid continued progress mobilizing COVID-19 vaccinations and waning virus-related restrictions. With stronger growth expected in the current year, the ESR Group slightly downgraded its expectations for 2022 real GDP growth by 0.2 percentage points to 2.8 percent. Despite expectations that the economy will continue to grow over the forecast horizon, downside risks to the forecast are increasing and include supply chain disruptions, labor scarcity, and rising inflationary pressure.
On housing, the ESR Group expects home sales in 2021 to increase 6.3 percent as the industry continues to grapple with strong demand and limited supply. While a lack of existing homes for sale is heightening the demand for new homes, supply constraints – most notably lumber – and a dearth of buildable lots, as well as hiring difficulties, are limiting homebuilders' pace of single-family construction, which is still forecast to be 24.8 percent higher in 2021 than 2020. The ESR Group's mortgage origination forecast remains largely unchanged at
"While most indictors point toward brisk economic growth over the second quarter, the combination of a disappointing employment report and an unexpectedly strong burst of inflation has raised in the minds of many market participants the potential confluence of broad-based supply restraints, very strong house price growth, and the posture of monetary and fiscal policies," said Doug Duncan, Fannie Mae Senior Vice President and Chief Economist. "Supply constraints across multiple sectors are pointing toward ongoing price pressure, most prominently in microchips and the auto sector. This has yet to significantly affect mortgage rates, except to the extent that the rise in the 10-year Treasury since the beginning of the year contains an increased expected inflation component and has prevented mortgage rates from retreating further from their temporary recent peak."
Duncan continued: "Stronger inflation and a resultant move in interest rates are risks that we believe should be monitored. As the effects of expansionary monetary policy continue to work their way through the economy, inflationary expectations may continue to rise. This could lead to prices rising further even with growth concurrently slowing in the presence of diminished labor market slack and waning fiscal policy support. If such a scenario were to play out, the question then becomes whether this necessitates a response by the Federal Reserve. While momentum in the housing market will likely continue in the near term, this is an increasingly important consideration for 2022."
Visit the Economic & Strategic Research site at fanniemae.com to read the full May 2021 Economic Outlook, including the Economic Developments Commentary, Economic Forecast, Housing Forecast, and Multifamily Market Commentary. To receive e-mail updates with other housing market research from Fannie Mae's Economic & Strategic Research Group, please click here.
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Opinions, analyses, estimates, forecasts, and other views of Fannie Mae's Economic & Strategic Research (ESR) group included in these materials should not be construed as indicating Fannie Mae's business prospects or expected results, are based on a number of assumptions, and are subject to change without notice. How this information affects Fannie Mae will depend on many factors. Although the ESR group bases its opinions, analyses, estimates, forecasts, and other views on information it considers reliable, it does not guarantee that the information provided in these materials is accurate, current or suitable for any particular purpose. Changes in the assumptions or the information underlying these views could produce materially different results. The analyses, opinions, estimates, forecasts, and other views published by the ESR group represent the views of that group as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.
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