Economic Growth Outlook Less Upbeat in 2H

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The first print of second quarter economic growth was weaker than expected, and its composition presents a less optimistic outlook for the rest of the year, according to Fannie Mae's (OTC Bulletin Board: FNMA) Economic & Strategic Research (ESR) Group. The federal government's upward revision to first quarter growth was essentially offset in the second quarter, due in large part to a drop in nonresidential investment in equipment and structures. These factors, coupled with continued headwinds from a strong dollar and renewed declines in crude oil prices, are expected to continue to pose challenges in the current quarter, although consumer and government spending will likely provide support. Housing also is expected to contribute to 2015's growth, with year-to-date main housing indicators staying well above year-ago levels.

"While consumer spending growth picked up as we expected in the second quarter of this year, other components disappointed," said Fannie Mae Chief Economist Doug Duncan. "However, incoming data suggest some upward revisions may be in the cards for the second quarter. Furthermore, job creation remains steady, with full-time employment getting closer to pre-recession numbers, and household net worth continues its gradual rise. On balance, our full-year growth outlook remains unchanged from the prior forecast at 2.1 percent."

"We hold by our previous comments that income growth still needs to strengthen, particularly for younger households, in order to drive significant housing growth, but we are nonetheless seeing some positive improvements in the housing sector," said Duncan. "Home sales have trended up and inventories are lean, supporting strong home price appreciation. That price growth, driven by laggard supply response, helps build equity for existing owners but is a headwind for first-time buyers. Given significant uncertainties from Greece and China, continued global monetary easing, and an expected slow pace of monetary tightening by the Fed, we anticipate mortgage rates to rise only gradually through next year, which should continue to help support mortgage demand."