The U.S. economy is expected to continue growing modestly in 2017, but the unknown about policies to be enacted by
Economic growth is still forecast to come in at 1.8% for this year, and a similar pace is anticipated for the following year, Fannie Mae said Monday. But uncertainty remains about Trump's approach to economic and housing issues once he assumes office in January.
"We haven't changed the general tone of our forecast at this time, but we will incorporate new policy assumptions as they become more concrete," Fannie Mae Chief Economist Doug Duncan said in a news release. "Depending on the incoming President's policy priorities, our forecast for 2017 is subject to both upside and downside risks. For example, we expect near-term growth would get a boost from any tax cuts and spending increases that are made, but if new policies result in sharply higher tariffs on China and Mexico, rethinking the Trans-Pacific Partnership, and renegotiating the North American Free Trade Agreement, it would likely drag on growth."
Still,
"Demand from first-time buyers has increased with household formation and is outpacing supply, leading to significant price increases and affordability challenges for entry-level buyers," Duncan said. "Home purchase affordability will be constrained further if the recent pickup in mortgage rates persists, which would present a downside risk to our forecast of housing and mortgage activity."
The response to Trump's policies could be magnified as a result of where the economy stands in the growth cycle. The economy has moved into a late-cycle phase, as evidenced by slower job growth and business investment. Therefore, at this point in the process, the economy is more vulnerable to shocks, Fannie Mae said.
As it did with the surprise result in the U.K.'s Brexit vote, the market did not price in a Trump electoral victory, so judging its response in the immediate aftermath is difficult. Thus, the rapid increase in long-term Treasury yields and the widening gap between 10- and 2-year Treasury yields may not provide all that information.
"It is possible that the markets overreacted, and we will have to wait and see what the lasting impact on market conditions will be," Fannie Mae's Economic and Strategic Research Group wrote in a Nov. 18 report.
Still, other economic indicators, including the October jobs report, suggested that the conditions are in place for the Federal Reserve to hike short-term interest rates in December. In particular, Fannie Mae's research group noted that the Fed has acknowledged "that the disinflationary pressures from past declines in energy prices have run their course," suggesting expectations of higher inflation. Going forward, rate increases will be gradual in the coming years, barring fiscal stimulus policies that could accelerate inflation, Fannie Mae's economists predicted.
