Modest Recession to Occur in Q2, Says New Fannie Mae Forecast; Plus Other Predictions

WASHINGTON—While the economy is off to a “surprising” start in 2023, expect a modest recession in the second quarter of the year, according to a new forecast from Fannie Mae.

“Due to economic headwinds from unsustainably high consumer spending relative to income, significant declines in monetary aggregates, an increasingly inverted yield curve, and stickier-than-expected inflationary pressures,” the Fannie Mae Economic and Strategic Research (ESR) Group said it continues to forecast the economy will fall into a modest recession and now believe the likely start date will be in the second quarter of 2023.

As CUToday.info has reported, a series of recent data releases, including a blowout labor report, updated seasonal adjustment factors to the Consumer Price Index (CPI) that showed the rate of disinflation has been slower than previously thought, and unexpected robustness in retail sales and manufacturing output growth, presents substantial upside risk to the ESR Group’s Q1 2023 GDP forecast, the group stated.

The ’Side Effects’

“While some of the recently reported economic strength is probably a side effect of abnormal seasonal consumption and hiring/layoff patterns overstating the true strength of the economy, these data releases were consistent with an easing in financial market conditions to start the year,” Fannie Mae said. “Importantly, it raises the possibility of the Federal Reserve both pushing its federal funds rate target higher than currently expected and keeping it there for longer to meaningful slow economic momentum and inflation, posing larger and longer-term risks to the economy and financial stability.”

Additional Findings
The report noted that housing also started 2023 on a relative high note given a roughly 100 basis point pullback in mortgage rates since November; although the ESR Group expects this, too, to likely prove temporary.

Ongoing affordability constraints, the “lock-in” effect creating a financial disincentive for the majority of current homeowners with mortgages to move, and still-tight inventories are expected to continue to limit home sales, according to the ESR Group.

“Additionally, the 10-year Treasury has increased meaningfully in recent weeks, suggesting that mortgage rates are likely to begin rising again,” Fannie Mae stated. “The ESR Group expects housing starts activity to soften as well, as there remains an elevated number of new homes for sale that are already under construction or completed; these projects will likely be prioritized by builders, rather than breaking ground on new ones.”

‘Difficult to Ascertain’

Doug Duncan, SVP and chief economist with Fannie Mae, said, “Recent data have been stronger than expected in ways that we believe are likely to lead to tighter monetary policy with attendant increases in interest rates. While some optimism appears to have crept into the housing sector, it represents an increase from very low levels of activity and is at risk of declining again if rates reverse. Right now, it’s difficult to ascertain whether COVID-induced consumer behavior changes and business practices are altering seasonal data adjustments, or if the real underlying economic activity is as strong as some recent economic indicators suggest. While we now believe the expected economic downturn will not start until the second quarter of 2023, we still think a mild recession is in the cards.”

02/23/2023 CUToday

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