Full-year 2019 real GDP growth is now projected at 2.3 percent, one-tenth higher than previously forecasted, after strong – although likely unsustainable – first quarter growth, according to the Fannie Mae Economic and Strategic Research (ESR) Group's May outlook. For the first time in the current expansion, net exports were the largest contributor to quarterly growth, adding a full percentage point to the quarter's hearty 3.2 percent annualized rate. While exports rose, imports declined, a potential indicator of weakening domestic demand. Inventory growth was the other likely-transient positive contributor. After increasing at its fastest pace in nearly four years, the ESR Group expects this component, like net exports, to also drag on growth going forward as businesses rein in inventory building to better align with final sales growth. Overall, risks to the forecast remain roughly balanced, with U.S.-China trade tensions and elevated corporate debt acting as primary headwinds, while stronger prospects for global demand growth and productivity growth offer potential upside. Additionally, the ESR Group no longer expects the Fed to raise interest rates within its two-year forecast horizon, citing recent Fed statements reiterating monetary policy patience, muted inflationary pressure, and a lack of optimism around a growth-inducing trade deal with China.

Leading indicators continue to suggest a solid spring home-buying season, with the ESR Group revising upward its forecast for second quarter and full-year 2019 home sales. Pending sales and purchase mortgage applications are trending upward, while the lower mortgage rate environment and builders' renewed focus on modestly sized homes are likely to support affordability.

"On the heels of a strong first quarter, we upgraded our full-year 2019 forecast of real GDP growth by one-tenth to 2.3 percent," said Fannie Mae Chief Economist Doug Duncan. "Prior quarter upticks in net exports and inventories may have fueled the growth, but a deeper dive into the underlying data of each suggests weakness. Escalating trade tensions between the United States and China continue to represent a real downside risk to headline growth, while improving productivity and stronger-than-expected growth out of the Euro Area offer roughly offsetting upside risk. As the Fed continues to preach patience and inflation remains well below target levels, we revised our forecast in May to reflect our expectation of zero rate hikes in 2019 and 2020."

"Residential fixed investment may have dragged on growth for the fifth consecutive quarter, but we remain optimistic that the spring home-buying season will be a productive one," Duncan continued. "We revised upward our 2019 purchase and refinance mortgage origination forecasts amid continued strong demand and a boost to entry-level inventory, the pullback in mortgage rates, and slowing home price appreciation."