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Signs point to economic volatility in the near term

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Consumers Brace for Winter of Discontent.

The temporary government shutdown and debt ceiling negotiations dealt a blow to consumers in October, and foreshadows likely continued market volatility during the next few months, according to a recent forecast by Fannie Mae.

In line with previous forecasts, Fannie Mae expects modest economic growth of approximately 2.0% for 2013 as a number of unresolved fiscal and monetary policy decisions weigh on consumer confidence. Factors including the appointment of a new Federal Reserve chair in January and the budget and debt ceiling issues that will remain through the first few months of next year are expected to suppress consumer spending – a key driver of economic growth.

"Growth is still expected to pick up to 2.5% for 2014 once the fiscal drags wane and as labor market conditions improve further."

However, growth is still expected to pick up to 2.5% for 2014 once the fiscal drags wane and as labor market conditions improve further.

"The November economic and housing forecast reflects many of the themes we saw last month, specifically regarding the effect of the policy decision process on consumer attitudes," said Fannie Mae Chief Economist Doug Duncan. "Monthly data showed weakening momentum in real consumer spending and suggest a reluctance among consumers to take on more debt.

“Notably, third quarter data show that consumption grew at 1.5%, which is significantly lower than the average annual increase of 3.4% between the end of World War II and the year 2000. The modest consumer spending levels in recent months are consistent with the bearish trend in consumer confidence, which dropped significantly in the fall amid the fiscal standoff. Since many remaining policy decisions will spill over into the beginning of next year, it seems likely that both consumers and businesses will continue to pull back in the interim, lending to increased volatility in the markets."

Sentiment toward housing also worsened following the government shutdown and debt ceiling debate despite low single-family mortgage rates and continued robust year-over-year home price gains. According to Fannie Mae's October National Housing Survey results, home price growth expectations continued to moderate, the share of consumers who expect home prices to go up in the next 12 months fell sharply, and the share who say it's a good time to buy a home had the biggest ever one-month change, declining to a survey low.

 

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