Lackluster Consumer Spending Presages Continued Moderate Economic Growth Outlook Remains Positive for Gradual Housing Recovery

Economic activity slowed during the first half of 2012, fueled by a decline in the pace of consumer spending amid a sluggish labor market. Inflation-adjusted consumer spending growth dropped nearly a percentage point during the second quarter to a one-year low of 1.5 percent, as spending fell in June for the first time since last August.

Washington, D.C.—Economic activity slowed during the first half of 2012, fueled by a decline in the pace of consumer spending amid a sluggish labor market. Inflation-adjusted consumer spending growth dropped nearly a percentage point during the second quarter to a one-year low of 1.5 percent, as spending fell in June for the first time since last August. However, strong July retail sales helped soothe concern of another pullback. In addition, the July jobs report posted the strongest gain in five months with 163,000 new jobs created. If sustained, such job growth may bolster weak consumer and small business confidence, helping to offset headwinds presented by the domestic policy environment and European debt markets. While modest economic growth is still expected through the end of this year, risks to the outlook remain on the downside, according to Fannie Mae’s Economic & Strategic Research Group.

In contrast to an otherwise dim economy, the broad housing outlook has stayed generally positive. The expected increase in home sales in 2012 over 2011 remains steady at approximately 9 percent and home price expectations for the remainder of the year are now trending upward. Inventories have dropped significantly during the past 12 months, and the resulting tighter supply has helped boost homebuilding activity in some areas. Overall, residential investment is expected to contribute approximately 0.2 percentage points to real GDP in 2012 – the first annual contribution since 2005. However, despite many positive indicators across the housing sector, any growth is likely to keep a modest pace due to other factors, including tight credit standards and an elevated level of foreclosures facing the market in the coming years.