Cite more government spending, declining inventories

Slow growth dominated the first quarter, but Fannie Mae’s Economic & Strategic Research Group believes the economy is expected to gain momentum in the second quarter amid an increase in government spending and diminishing drag from a slowdown in inventory stockpiling.

The somewhat optimistic report says that consumer and business capital spending, relief from fiscal policy concerns, and improvements in the housing sector also may contribute to growth.Although economic activity in the first quarter likely slowed more than expected in the prior forecast, the group is sticking with its forecast of 2.7% growth for all of 2014, comparable to the 2.6% pace in 2013.“The April economic forecast is similar to February and March, where slow growth has been the common denominator, but we expect to see a slight pickup beginning this quarter,” said Fannie Mae chief economist Doug Duncan. “A slower pace of inventory accumulation is likely to weigh on GDP in the first half of 2014 but loosen its hold in the second half of the year as businesses increase production.”The report from the group says that government spending is expected to contribute to growth for the first time in five years, and the lack of additional broad-based tax increases combined with less uncertainty over fiscal policy should enable some strengthening in the private sector.“We have downgraded our housing forecast slightly due to a lackluster sales picture, but the recent loss of momentum is likely a temporary one,” said Duncan. “Overall, we expect housing to add 0.3 percentage points to economic growth this year. While existing home sales have remained essentially flat, we continue to believe that new home sales will increase at a double-digit pace. Housing starts are expected to rise to about 1.05 million units in 2014, up from 925,000 in 2013 but approximately 50,000 fewer than we expected at the beginning of the year due to builders’ credit and labor constraints.”