WASHINGTON—Economic growth is projected to resume in the second half of 2022, but the combination of high inflation, monetary policy tightening, and a slowing housing market is likely to tip the economy into a modest recession in the new year, according to the September 2022 commentary from the Fannie Mae Economic and Strategic Research (ESR) Group.
The ESR Group continues to forecast 0.0% real GDP growth on a full-year basis through 2022, but it revised downward its expectations for full-year 2023 growth by one-tenth of a percentage point to negative 0.5%.
Core inflation remains considerably higher than the Federal Reserve’s stated target; the ESR Group noted.
The Federal Reserve said the same thing in releasing its statement this week after announcing an increase in rates.
The Baseline
The ESR Group’s baseline forecast anticipates the federal funds rate topping out at a range of 3.50 to 3.75% in early 2023, though it sees significant upside risk to the eventual terminal rate. The Federal Reserve also indicated the same.
Due largely to the higher mortgage rate environment, the ESR Group lowered its forecast for single-family total home sales in 2022 and 2023 to 5.71 million and 4.98 million, which would represent declines of 17.2% and 12.8%, respectively. While multifamily construction remains strong, the ESR Group also revised downward its multifamily starts forecast for 2022 to 542,000 units but continues to expect demand for rental units to remain strong because of the single-family market’s relative unaffordability.
‘Two Critical Factors’
“In our view, the recent interest rate surge is due to the market’s recognition of two critical factors: that inflation is indeed not transitory, and that, to tame it, the Federal Reserve will need to be resolute, even at the risk of possible recession,” said Doug Duncan, Fannie Mae senior vice president and chief economist. “Inflation’s entrenchment – and the policy action likely required of the Fed – confirms the expectation in our forecast of a moderate recession beginning in the first quarter of 2023. That said, the rise in rates is having the Fed’s desired effect on housing, as house price growth began to slow in June. We expect the slowdown in housing to continue through 2023 as affordability constraints mount for potential homebuyers, and considering, too, that refinance activity has been significantly curtailed by the rise in mortgage rates.”
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