U.S. Economy Poised for Substantial Rebound Following Historic Second Quarter Contraction
The U.S. economy experienced a historic contraction of 32.9% in Q2, the largest since WWII. However, a strong recovery is anticipated in Q3 with GDP growth projected at 27.2%. With falling COVID-19 cases, fiscal support, and high household savings likely to enhance consumer spending, the ESR Group revised its full-year GDP contraction expectation to 3.1%, an improvement from 4.2%. The housing sector remains robust, with home sales and mortgage origination volume expected to rise, potentially reaching $3.4 trillion in 2020, marking the highest level since 2003.
- Q3 GDP growth forecast increased to 27.2%.
- Full-year GDP contraction revised to 3.1%, improving from 4.2%.
- Mortgage market origination volume expected to reach $3.4 trillion in 2020, the highest since 2003.
- Strong demand in the housing sector supported by increased purchase activity.
- Risks remain from potential COVID-19 flare-ups leading to stricter measures.
WASHINGTON, Aug. 17, 2020 /PRNewswire/ -- The U.S. economy contracted in the second quarter by 32.9 percent annualized – the largest such decline since demobilization efforts following World War II – but the strong rate of economic recovery observed in May and June sets up the third quarter for a substantial rebound, according to the latest commentary from the Fannie Mae (OTCQB: FNMA) Economic and Strategic Research (ESR) Group. Third quarter GDP growth is now forecast to come in at 27.2 percent annualized. Further, the now-falling coronavirus case rate, supportive fiscal and monetary policy, and an elevated level of household savings supportive of future consumer spending are all expected to drive further recovery through the remainder of the year. While substantial downside risks remain, including the possible worsening of the coronavirus crisis leading to more stringent shutdown and social distancing measures, for full-year 2020 the ESR Group now expects real GDP to contract only 3.1 percent compared to the previously forecast 4.2 percent. This improvement reflects in part the expectation that future localized or regional flare-ups of the coronavirus (of a similar magnitude observed thus far) are unlikely to lead to a further contraction in economic output but rather a temporary pause in the rate of growth.
Citing the ongoing strength of the housing sector amid sustained increases in purchase demand, the ESR Group revised upward its expectations for home sales, as well as its estimate of total mortgage market originations, in 2020 and 2021. The ESR Group now expects total origination volume to hit
"The economy's climb back from the sudden and severe setback of the second quarter is fully underway, but we believe the future pace will be driven largely by the path of the novel coronavirus and how the public responds to coronavirus-related information," said Doug Duncan, Fannie Mae Senior Vice President and Chief Economist. "Consumers have savings to draw on, but some are holding that savings in reserve until the economy and labor markets improve. Others are spending on a discretionary basis as they await evidence that the virus has receded sustainably. Our base scenario assumes that Congress will agree upon additional fiscal stimulus in support of consumers and businesses, and that the economy will only shrink 3.1 percent in 2020 relative to 2019, measured on a fourth-quarter-over-fourth-quarter basis."
"We believe housing will continue to be a sector with relative strength amid the larger downturn, as long-running supply constraints exacerbate demographic and interest rate demand-side factors that are supporting home price growth," Duncan continued. "The recently observed increase in purchase demand is largely due to pent-up demand as buyers are acting now after delaying purchases in the spring. We are, however, seeing some early signs of shifting buyer preference to locate to lower density areas, potentially driving some additional purchase activity. Here, our baseline forecast sees purchase volumes of
Visit the Economic & Strategic Research site at fanniemae.com to read the full August 2020 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, including assumptions about the duration and magnitude of shutdowns and social distancing, 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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