Fannie Mae Economic and Strategic Research Group (ESR) delivered a less-than-festive forecast for the economy last week.
What Happened: According to the ESR's January 2023 commentary, despite ending the year on a stronger-than-anticipated footing, the economy is still expected to slip into a modest recession in the first half of 2023.
The ESR views the current rate of consumption as unsustainable and predicts that an eventual retrenchment of the consumer will be a major factor in the upcoming economic contraction.
The ESR predicts Q4/Q4 GDP growth for 2023 to be negative 0.6%, one-tenth lower than its previous forecast.
Noting cooling inflationary pressure in the past three Consumer Price Index (CPI) reports, the ESR believes the Federal Reserve is likely nearing its eventual terminal rate but notes that upside risk remains for tighter-for-longer monetary policy should a recession be delayed or avoided altogether, or, alternatively, if inflation measures fail to cool further.
As for the housing market, the ESR expects a cumulative 6.7% home price decline over the next two years as housing affordability remains unsustainably stretched.
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Read also: Expert Economist Predictions For The Housing Market In 2023: Will Home Prices Decrease?
Don’t worry, though. A housing decline like the Great Financial Crisis is not expected, as far fewer borrowers are facing interest rate shocks, loan workout and modification programs are more robust, and aggregate residential real estate and the broader financial system are substantially less leveraged compared to the 2006-2008 period.
Why It Matters: Instead, housing affordability is forecast to improve gradually over the longer term due to a combination of home price declines, modestly lower mortgage rates, and stronger-than-usual nominal income growth.
“There are economic signals pointing to recession but also signs that a ‘soft landing’ may be in the offing,” said Doug Duncan, Senior Vice President and Chief Economist, Fannie Mae.
“In our view, the balance still suggests a modest recession, particularly if the Federal Reserve maintains its focus on labor market tightness. While limited and tentative signs of a slowing labor market are appearing, overall, labor remains robust.”
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