WASHINGTON -- Economic growth slowed sharply in the first quarter to 1.8 percent from 3.1 percent in the fourth quarter of 2010, according to the May 2011 Economic Outlook released today by Fannie Mae's Economics & Mortgage Market Analysis Group. However, the long-term forecast remains intact with expected sustainable growth of above 3 percent during the next couple of years. The first-quarter slowdown was due, in large part, to a number of significant temporary factors, including severe winter weather, the tragedy in Japan, political unrest in the Middle East and North Africa, and rising gas prices. Temporary factors notwithstanding, near-term gains are anticipated for the second quarter as the economy is expected to recoup some of the losses experienced in the first quarter of 2011.

Consumer spending growth held up well despite the sharp rise in gasoline prices, with spending expected to track firmly into the second quarter. Importantly, strong job gains in April marked the third consecutive month of solid growth - a good indication that the labor market is gaining momentum and an upside factor for consumer confidence, which inched up slightly during the quarter. Consumer confidence needs to maintain an upward trajectory in order to have a positive impact on housing.

Sustained improvement in housing continues to remain elusive, but some positive movement is expected as we move through 2011. Single-family homebuilding activity remained weak during the quarter, with housing starts and new home sales staying flat at depressed levels. Existing home sales are showing some rebound, however, distressed sales continue to account for a large share of sales and the share of distressed sales has risen in recent months.

"The confluence of low interest rates, historically low home prices, and improving employment has not yet reached all the way through to consumer attitudes, which we continue to survey on a regular basis," said Fannie Mae Chief Economist Doug Duncan. "In spite of the positives surrounding the housing market, we see that consumers are still hesitant to take on a large financial obligation. Nevertheless, we do forecast some improvement in home sales over the course of 2011 compared to 2010."