U.S. Economy Predicted To Grow 6.7 Percent In 2021

U.S. Economy Predicted To Grow 6.7 Percent In 2021

February 18, 2021
Photo depicting economic and housing growth. Woodcut house, stack of coins and a clock.

Fannie Mae's Economic and Strategic Research Group is predicting the U.S. economy to grow 6.7% in 2021, up from last year's 2.5% contraction and January's forecast of 5.3%. The ESR Group shared the details on their prediction in its February 2021 Commentary.

The ESR Group's economic growth prediction was attributed to the "greater-than-expected consumer spending in the winter months, slowing COVID-19 case rates and hospitalizations and the likelihood of an impending stimulus package," according to a press release. The group also pulled some of its optimism from its 2022 expectations, which is now predicted to increase 2.8%, a 0.8% decrease from earlier economic growth predictions, according to the release.

"If 2020 was the year of the virus, then 2021 will more than likely be the year of the vaccine," said Doug Duncan, Fannie Mae senior vice president and chief economist. "Whether the vaccines are effective, including with the new virus strains, and how broadly and timely they can be distributed remain key questions; our forecast assumes such efficacy and that they'll be widely administered by summer. Further, the recent upward creep of Treasury rates suggests that financial markets currently expect the same."

Fannie's ESR Group still expects housing to moderate in the new year from its unsustainably high pace in the second half of 2020. The Group increased its 2021 sales forecast on new data suggesting that the expected cooling will occur over a longer time frame than previously anticipated, according to the release. Annual single-family starts were also upgraded to 18.6% growth in 2021, up from last month's forecast of 12.5%. With the combination of continued strength in refinances and an otherwise upgraded housing forecast, the ESR Group predicts mortgage originations in 2021 to hit $4.1 trillion, a $0.2 trillion improvement from its previous forecast.

"Consumer interest in locking-in historically low mortgage rates helped drive continued high volumes of refinancing and aggressive levels of homebuying," Duncan continued. "We believe that this will continue in 2021. We assume that the proposed fiscal stimulus of around $1.7 trillion will be passed in mid-March and that growth will accelerate sharply beginning in the second quarter. However, with the Fed committed to low rates for the foreseeable future, a recovering economy, and already the highest level of debt-funded stimulus in place since World War II, the proposed additional stimulus heightens the risk of rising inflation and interest rates, as well as a potential boom-and-bust scenario. Very strong growth in the second half of 2021 could push inflation, and thereby rates, up significantly in 2022, thus invoking a Fed response of tightening and a significant deceleration later in 2022. This is not our base case scenario, but we see it as a significant risk moving forward."

Click here to see the full February 2021 Commentary from Fannie's ESR Group.

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