Although the economy seems to be transitioning to a slightly stronger growth path, unresolved fiscal policy decisions pose significant headwinds in early 2013, according to the Fannie Mae (FNMA/OTC) Economic & Strategic Research Group. Increased taxes and reduced government spending will keep growth at a subdued pace in the first half of the year before activity picks up in the second half. Net exports are also expected to create a drag as Europe remains in recession and U.S. export growth tries to bounce back from a slowdown in late 2012.
Fannie Mae Research Shows Stronger Housing Market, Despite Slow Economy
On the more positive side, the improving performance of the housing market is expected to continue through 2013. Boosted by strengthening home prices, which may incite more potential buyers to enter the market, housing should contribute to GDP on a growing basis and help to counteract the fiscal headwinds. Other primary growth drivers will include consumer spending, manufacturing and business capital investment. However, consumer spending growth is likely to weaken somewhat in the first half of the year, as tax hikes take a toll on Americans’ income. Overall, the Fannie Mae research says economic growth is expected to come in at 2.0 percent for all of 2013, in line with average growth since the recovery began more than three years ago, assuming only part of the government sequestration will occur this year.
“The question mark surrounding potential tax increases and government spending cuts produces significant economic uncertainty,” Fannie Mae Chief Economist Doug Duncan said. “Our February forecast accounts for a modified version of sequestration unfolding in 2013, which we expect will result in less fiscal constraint–roughly a 0.2 percentage point drag. Our outlook is bolstered by the employment picture, which is trending better than previously reported, as well as the momentum in manufacturing and energy production. We also expect the housing recovery to broaden this year. However, the degree to which these drivers will serve to offset the headwinds from ongoing and forthcoming fiscal contraction is still to be determined.”