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Growth slowed in Q1, but consumers still spending

April 19th, 2012

Fannie MaeDespite economic growth of 3.0 percent annualized for the fourth quarter of 2011, incoming data suggest that economic growth slowed during the first quarter of 2012.

In line with previous forecasts, Fannie Mae’s (OTC Bulletin Board: FNMA) Economic & Strategic Research Group expects growth to slow to slightly more than 2 percent in the first quarter of the year.

The slowdown in economic growth is not indicative of a significant deterioration in the underlying strength of economic activity, but a fading inventory boost to GDP growth.

For all of 2012, the Group expects growth to be modest at 2.3 percent as a number of factors combine to constrain activity, including slow real disposable income growth, which should restrain household spending activity; a very small contribution from net exports; and continued fiscal contraction by the federal government, as well as ongoing cutbacks by state and local governments acting as a drag on growth during the year.

Consumer spending continued upward

“Consumer spending continued its upward trajectory with strong spending on autos and other durable goods, and spending on services showing the largest gain in nearly two years,” said Fannie Mae Chief Economist Doug Duncan.

“However, the pickup in consumer spending has outpaced income growth, which means that consumers are increasing their spending by borrowing from their savings. Real disposable income has been flat and that needs to change for a higher pace of economic activity to occur.”

Employment showed weakening momentum

On the employment front, the March employment report showed weakening momentum, as the economy created just 120,000 jobs – less than half of the average monthly gain over the prior three months and the smallest gain in five months.

However, the setback in the employment report should not necessarily be interpreted too negatively. Other job-related data continue to show signs of improvement with initial jobless claims hovering near a new low of the recovery at the end of March.

Despite the unemployment rate dropping to 8.2 percent, the lowest rate in more than three years, it is not indicative of improving labor market conditions, as the rate was driven by a substantial decline in the labor force.

The Group expects the unemployment rate to trend down to about 7.5 percent by the end of 2013, with a monthly average gain of approximately 190,000 jobs during 2012 and slightly stronger gains during 2013.

For an audio synopsis of the April 2012 Economic Outlook, listen to the podcast on the Economic & Strategic Research site at www.fanniemae.com. Visit the site to read the full April 2012 Economic Outlook, including the Economic Developments Commentary, Economic Forecast, Housing Forecast, and Multifamily Market Commentary.

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