WASHINGTON—A recession may be a little further off in 2023, but the likelihood of an economic downturn is now greater due to the recent issues among banks, according to a new forecast from Fannie Mae, which added the bank troubles may eventually resemble the savings & loan crisis from the 1980s.
From 1986 to 1996, 1,043 of the 3,234 (32%) of the savings loans in the U.S. failed.
Due to stronger-than-expected economic data, Fannie Mae’s Economic and Strategic Research (ESR) Group said it was revising upward its first quarter 2023 GDP forecast, which it finalized prior to the recent financial turmoil, and now projects a modest recession to begin in the second half of 2023, compared to the previously forecasted second quarter of 2023.
A Foreshadowing?
While uncertainty has risen following turbulence in the banking sector, the ESR Group noted in its latest monthly commentary that bank failures often foreshadow economic downturns.
“As such, the ESR Group believes that the recent events may act as the catalyst that tips an already precarious economy into recession, primarily via the combination of tighter lending standards among small and midsized regional banks and weakened business and consumer confidence,” Fannie Mae said.
A ‘Better Analog’
“Importantly, the ESR Group does not anticipate a repeat of the 2008 financial crisis. Instead, it believes the savings & loan crisis from the 1980s to be a better analog, specifically regarding the significant interest rate rises that set in motion banking system stress and the resultant macroeconomic effects that contributed to a modest recession in 1991,” Fannie Mae said.
The ESR Group also highlighted downside risk to its interest rate forecast, as “banking-related stress may slow the economy and relieve inflationary pressure – in effect relieving the Federal Reserve of potentially having to raise rates as high as previously expected.”
The analysis continued, “While home sales experienced a large bump in February following a pullback in mortgage rates, the ESR Group noted that recent mortgage application data suggest that last month’s level of homes sales will be temporary. Additionally, the ESR Group posits that ongoing banking instability may affect the availability of jumbo mortgages and residential construction loans due to the high concentration of those originations stemming from small and midsized banks.”
Fannie Mae said the ESR Group further expects home sales to remain subdued due to ongoing affordability constraints and the “lock-in effect” continuing to create a strong financial disincentive for homeowners to move.
‘Financial Stability Concerns’
“Inflation has now been joined by financial stability concerns as threats to sustained growth,” said Doug Duncan, senior vice president and chief economist, Fannie Mae. “These particular pre-recessionary conditions are not unusual, as bank failures often follow monetary tightening – but this may well be the catalyst for the modest recession we’ve been expecting since April 2022.
“While housing writ large has responded to the Fed’s monetary tightening in a relatively predictable fashion, the rapid uptick in home sales in response to modest rate declines earlier this year corroborates our long-standing expectation that the housing sector will help moderate any future recession due to the significant pent-up demand,” continued Duncan.
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