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Fannie Mae: Shutdown weakens GDP outlook

The partial government shutdown, at a record 33 days and counting as of Wednesday, has already damaged the economy, according to Fannie Mae’s chief economist.

“Absolutely, it is having an impact,” Doug Duncan told Scotsman Guide News during an interview.

dduncan“It is not large, but it probably increases over time.”

Duncan estimated that for every two weeks that government offices remain closed and workers stay at home without paychecks, the economy will lose a tenth of 1 percent of gross domestic product (GDP) growth.

Should the budget impasse keep offices closed for the entire first quarter ending in March, Duncan said, GDP growth would fall from a projected 1.8 percent annualized growth in the first quarter of 2019 to around 1.2 percent.

Around 800,000 federal workers have been furloughed. Duncan said these workers will likely run into problems paying their bills, including making mortgage payments. He said the longer the shutdown continues, the harder it will be on them financially. This also affects other service industries, such as restaurants, in areas with a large pool of federal workers.

“I have gone into a couple of restaurants in D.C. and asked what is happening to business,” Duncan said. “They both said business is down. They have had to adjust the shifts of some of their workers. Those aren’t government workers. Those are private sector workers that are impacted by the reduction in discretionary income from furloughed workers.”

Home sales will be flat

The economy faces other uncertainty this year despite near record unemployment and strong job growth, Duncan said. The initial boost to the economy from last year’s tax overhaul, for example, is now over, he said. Also, homeowners in states with high taxes and home prices are only now beginning to feel the pain from changes in the tax code that limited deductions on mortgage interest, and state and local taxes.

Signs also point to a global slowdown in growth, revealed by weakening economies in China and Germany. Duncan also said the U.S. economy may be hurt by trade tensions. Full-year GDP growth in the U.S. will likely end the year around 2.2 percent in 2019, down from a strong 2018 of around 3.1 percent.  

Duncan wasn’t optimistic that home sales would perk up in 2019. Although mortgage rates would likely stay flat this year, the housing market appears to have peaked in terms of sales in 2017, he said.

The housing market still faces a supply shortage. “Existing home supplies haven’t moved much at all,” Duncan said. “New-home supplies, builders have kept building, and there is actually an increase in supply on that side.”

Meanwhile, he said, home prices are still projected to rise at around 4 percent nationally, hurting affordability. All this translates into a “pretty flat” outlook for home sales in 2019, he said. He also cautioned that interest rates bear watching.

“And if the Fed gets aggressive, it won’t be flat, it will be down,” Duncan said.                    


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