The forthcoming change in the U.S. administration poses new uncertainties about the economy, but modest growth is still expected for 2016 and 2017, according to Fannie Mae's (OTC Bulletin Board: FNMA) Economic & Strategic Research (ESR) Group's November 2016 Economic and Housing Outlook.

The slowdown in job growth and business investment suggests the economic expansion has transitioned to a late-cycle phase, in which growth tends to moderate and, in turn, makes the economy more vulnerable to shocks. Although increased market volatility may occur in the medium term as policy developments take shape, the ESR Group continues to expect economic growth to pick up in the second half of this year, averaging 2.4%, following 1.1% growth during the first half. The full-year 2016 growth forecast remains at 1.8%, with a similar pace of growth expected for 2017.

"We haven't changed the general tone of our forecast at this time, but we will incorporate new policy assumptions as they become more concrete. Given campaign themes, we may see some changes in policies regarding corporate and individual tax rates, infrastructure investment, government spending, health care, and immigration," said Fannie Mae Chief Economist Doug Duncan. "Depending on the incoming President's policy priorities, our forecast for 2017 is subject to both upside and downside risks. For example, we expect near-term growth would get a boost from any tax cuts and spending increases that are made, but if new policies result in sharply higher tariffs on China and Mexico, rethinking the Trans-Pacific Partnership, and renegotiating the North American Free Trade Agreement, it would likely drag on growth."

"In our fourth quarter GDP forecast, we expect domestic sales to strengthen and business investment in equipment to rebound, given a recent improving trend in core durable goods orders. However, we don't anticipate a substantial turnaround going forward given the uncertainty of government policy facing businesses," said Duncan. "Consumer spending is also likely to be a key growth driver, although we expect consumers will remain cautious given recent weakening in real disposable income. We also expect that residential investment will no longer drag on GDP as single-family construction spending has showed signs of stabilizing. However, the lack of homes for sale, particularly at the lower end of the market, continues to be a significant challenge for housing. Demand from first-time buyers has increased with household formation and is outpacing supply, leading to significant price increases and affordability challenges for entry-level buyers. Home purchase affordability will be constrained further if the recent pickup in mortgage rates persists, which would present a downside risk to our forecast of housing and mortgage activity."