Economic Growth Ends 2015 on Course, Paves Way for Fed Rate Liftoff

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Economic activity in the fourth quarter appears to be weaker than expected, but the forecast for all of 2015 and heading into 2016 remains largely unchanged, with current economic conditions suggesting the fed funds rate liftoff will occur this month, according to Fannie Mae's  Economic & Strategic Research (ESR) Group. After softening this quarter, real consumer spending is expected to rebound early next year amid a tightening labor market and a renewed decline in gasoline prices, helping to offset persistent economic headwinds. The ESR Group expects the economy to grow 2.2 percent for all of 2015 before edging up to 2.4 percent in 2016, consistent with the Group's prior forecasts. The possibility of a sharp slowdown in China and other emerging market economies, a further rise in the dollar, and geopolitical turmoil remain downside risks to growth.

"After a year of modest improvement, we continue to believe economic growth will close out 2015 at 2.2 percent before gaining momentum early in 2016. Overall conditions suggest the Fed will begin to raise the fed funds rate at the December Federal Open Market Committee meeting, but we don't expect the financial markets to experience any sizable shocks as a result," said Fannie Mae Chief Economist Doug Duncan. "Although consumers have been more cautious in recent months, preferring to save rather than spend, we believe they will pick up their spending pace next year amid solid job gains and resulting growth in incomes. The unsustainable third-quarter inventory investment will likely subtract significantly from economic growth in the current quarter as that stockpile unwinds, but the inventory correction should wrap up early in the year. The trade deficit also continues to weigh on growth, driven by a strong dollar and lackluster overseas growth, but recent housing data support our view that residential investment will help fill the void."

"Home sales will likely remain subdued in the near term, but private residential construction spending started the fourth quarter on a strong note and housing demand is looking up as we head into next year," said Duncan. "The rebound in purchase applications suggests that sales will gain momentum in the first quarter after retreating slightly in the current quarter. For all of 2016, total home sales are projected to rise 3.9 percent. We believe that further easing of mortgage lending standards will combine with a positive household formation outlook to help the housing sector expand."