Consumer spending data has led to an increase in the projected economic growth for 2021.

Economic growth expectations for full-year 2021 were revised modestly upward to 7.1 percent, one-tenth higher than the previous forecast, due to stronger-than-expected consumer spending data year to date, according to the latest commentary from the Fannie Mae (FNMA/OTCQB) Economic and Strategic Research (ESR) Group. The ESR Group also continues to forecast a deceleration in the recently rapid growth trajectory, projecting economic growth to slow to 5.5 percent in the fourth quarter of 2021 and 2.2 percent in the fourth quarter of 2022. However, as discussed in the ESR Group’s latest Housing Insights piece, housing appears poised to become a meaningful driver of inflation over the next year and a half, contributing to the ESR Group’s prediction that domestic inflation measures will remain near 5 percent through year-end 2021 – before decelerating to approximately 3 percent by the end of 2022 – well above the Federal Reserve’s 2.0-percent inflation target. At the moment, the ESR Group’s large upward revision to its inflation expectations has not materially changed its growth forecast, because while it sees underlying inflation pressure building, it believes the factors driving current inflation to be largely transitory. Even so, the downside risks associated with potentially persistently higher inflation, including a more aggressive pace of monetary tightening by the Federal Reserve, could drag on growth over the forecast horizon. While demand for housing remains quite strong, the ESR Group’s latest forecast reiterates that supply-side factors continue to significantly limit construction, mortgage origination, and home sale activity. In fact, the ESR Group meaningfully downgraded its forecast for second and third quarter home sales – to 6.6 million and 6.5 million, respectively, from 6.9 million and 6.7 million in the prior forecast – due to the ongoing lack of available listings and a softening pace of new construction due to supply constraints. The ESR Group’s 30-year fixed mortgage rate forecast was little changed at 3.0 percent and 3.3 percent on a full-year 2021 and 2022 basis, respectively.

Source: Fannie Mae