Fannie Mae: Fiscal Cliff Remains Key Risk Factor to Near-Term Growth

By Pete Bakel

The accelerated pace of economic activity seen in the third quarter has ebbed, revealing a continued sluggish recovery in the fourth quarter, according to Fannie Mae’s Economic & Strategic Research Group. Full data regarding the disruptions from Hurricane Sandy and the effect on consumer and business confidence due to fiscal cliff uncertainties are not yet available, but both are likely to restrain growth in the current quarter and near term. Other factors including the Euro zone recession, sovereign debt crisis, and tensions in the Middle East also continue to pose potential risks to future growth. However, despite an expected 1.2 percentage point drag due to fiscal tightening, modest economic growth of sub-2 percent remains forecasted through early 2013 with a pickup in activity beginning in the second half of the year.

"With data pointing to soft economic conditions and the fiscal policy debate hanging in the balance, we expect growth in the current quarter to moderate from the pace seen last quarter," says Fannie Mae Chief Economist Doug Duncan. "On the bright side, the housing market has stayed resilient and continues to show signs of a strong, sustained recovery. Mortgage rates remain close to historic lows and home sales and home prices are trending positively. For the first time since 2005, residential investment is poised to contribute to annual economic growth this year, albeit on a small scale."

“Despite unsteady macroeconomic conditions, we anticipate housing and mortgage activity to gain momentum in 2013,” continues Duncan. “As expected, the Federal Open Market Committee’s action last week shifts monetary policy into cruise control, as long as the unemployment rate remains elevated and inflation stays under control. We expect mortgage rates to remain low next year, continuing to support the housing market. Total home sales should increase by approximately 8 percent in 2013, following an estimated 10 percent rise in 2012. Although home prices have dipped during the seasonally weak fall and winter seasons, year-over-year gains have strengthened significantly above 2011 levels, and we expect that trend to continue in coming years.”

For an audio synopsis of the December 2012 Economic Outlook, listen to the podcast on the Economic & Strategic Research site at www.fanniemae.com.

For more information, visit www.fanniemae.com.