Even with the forecasted recession looming overhead, the economy appears to be an unexpectedly good place to start off the year according to Fannie Mae.
According to Fannie Mae’s Economic and Strategic Research Group (ESR), due to economic headwinds from “unsustainably high” consumer spending relative to income, significant declines in monetary aggregates, an increasingly inverted yield curve, and continued inflationary pressures will tip the economy into a recession during the second quarter of 2023.
According to recent data, the rate of disinflation has been slower than previously thought, and when put together with unexpected robustness in retail sales and manufacturing output growth, presents substantial upside risk to the ESR Group’s Q1 2023 GDP forecast.
“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,” the ESR 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.”
Housing activity also reported a bump, but market fundamentals point to further weakness ahead of the forecasted recession.
The relatively high note the market started 2023 began with a roughly 100 point drop in mortgage rates since November 2022. However, the ESR expects this, too, to be temporary due to ongoing affordability constraints, the “lock-in” effect keeping people from selling their homes, and still low inventory levels. 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.
“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,” said Doug Duncan, Fannie Mae’s SVP and Chief Economist. “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,” Duncan concluded. “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.”