WASHINGTON, D.C.- Consumer confidence and job creation have remained resilient in the face of all the talk about dysfunction and partisan sniping in the nation's capital, says a new study just released by Fannie Mae's Economic and Strategic Research group. “Activity in both the stock and housing markets also picked up recently and continues to act as a tailwind for the economy,” the study also says. Most other economic indicators have remained positive, including the pace of manufacturing, and will help grow the economy in the next quarter.
But all this good news does not mean that businesses should have no concerns. “While consumers seemed to have shrugged off their concerns about the fiscal policy debate earlier in the year, they will likely face headwinds in coming months from the delayed impact of higher social security taxes and sequestration,” says Fannie Mae Chief Economist Doug Duncan. “Our March forecast indicates that the first quarter will be stronger than we originally thought, and we've certainly stepped back from any perception of there being a recession anytime soon. The broad-based gains in the jobs report suggest that the recovery is widening across the economy, but the impact of sequestration, which includes both layoffs and furloughs, may seep into the employment sector in coming months.”
Still, Fannie Mae expects economic growth to hit 2.1% this year, hoping that a strong housing market and robust business investment will overcome the fiscal tightening required by sequestration. However, this prediction assumes that the contending parties in Washington will reach a deal to lessen the impact of sequestration. If they don't reach a deal, Fannie estimates that full sequestration could shave one-half of a percentage point off projected economic growth.
Furthermore, consumer spending growth might also weaken due to higher social security taxes. But consumers' improving net worth could provide a buffer to higher taxes, since “household net worth increased by $1.17 trillion in the fourth quarter, reaching the highest level in five years,” according to the researchers. The headwinds behind the manufacturing sector should also serve as a counterbalance. In December, the Institute for Supply Management's manufacturing index surpassed 50, meaning an expansion of activity, and still remains above that mark.
And robust job creation and home sales should further buoy the economy, Fannie believes. Job gains in February, totaling 236,000, “were broad-based, suggesting that the recovery is widening across the economy. Construction employment increased a robust 48,000, the largest monthly gain witnessed in nearly six years.” Likewise, “new home sales jumped 15.6 percent in January-the biggest monthly gain in nearly two decades- sending the sales pace to the highest level since July 2008 and 35.0 percent above last year's level.”
“On balance,” Duncan said, “we see some improvement in our outlook for growth this year, primarily because of continued strength in the housing market and the kicking the can down the road as remaining fiscal issues continue to unfold.”
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Brian J. Rogal
Brian J. Rogal is a Chicago-based freelance writer with years of experience as an investigative reporter and editor, most notably at The Chicago Reporter, where he concentrated on housing issues. He also has written extensively on alternative energy and the payments card industry for national trade publications.
