WASHINGTON—The economy is still expected to enter a modest recession in the second half of the year, al though “unusual dynamics” in the current economic cycle continue to “complicate forecasting the exact timing,” according to Fannie Mae’s Economic and Strategic Research (ESR) Group’s latest monthly commentary.
Fundamentally, observed the ESR Group, consumer spending remains unsustainably high compared to incomes and that recession is the typical conclusion to a monetary policy tightening regimen.
“However, the usual channels through which monetary policy helps slow the economy may be disrupted, as evidenced by recent increases in new auto sales resulting from improving supply conditions and a more upbeat outlook from homebuilders,” the ESR Group said in releasing its forecast.
Still, the ESR Group said it believes a modest recession is the likeliest outcome, and that its timing remains the principal outstanding question – as the Fed is likely to maintain tighter policy for longer if “wage-related inflationary pressures do not subside.”
‘Lock-In Effect’
The ESR Group said its newest forecast notes existing home sales have been largely in line with its recent forecasts for further gradual declines throughout the year due to affordability constraints and an extraordinarily tight inventory of existing homes for sale.
“This is partially a result of the so-called ‘lock-in effect,’ in which existing homeowners are disincentivized from listing their homes for sale because their existing mortgage rate is well below current market rates,” Fannie Mae said. “As such, housing demand has shifted further toward the new home market, bolstering builder optimism and the ESR Group’s single-family starts forecast.”
However, on the multifamily side, the ESR Group said it continues to expect a significant slowdown in starts later this year resulting from tightening credit conditions, slower rent growth, and higher vacancy rates.”
‘Alternative Views’
“There are select data available to support several alternative views of the path of the economy, though we maintain our view that a modest recession will begin in the second half of 2023,” said Doug Duncan, senior vice president and chief economist, Fannie Mae, in a statement. “Housing remains exhibit number one for why we expect the recession to be modest. It continues to outperform our expectations, and we expect that its relative strength will help kickstart the economy into expanding again in 2024. Inflation has been resistant to Fed efforts to drive it down, and we view the risks to our baseline forecast as tilted toward more tightening rather than easing – although, for the moment, the Fed has adopted a wait-and-see approach.”
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