Fannie’s newest forecast maintains likelihood of ‘modest’ recession

With momentum 'running out of steam,' GSE still foresees economic contraction by second-half 2023

Fannie Mae’s Economic and Strategic Research (ESR) Group doubled down on its predictions of a looming recession in its newest forecast, acknowledging a robust start to the year by some metrics while maintaining that the U.S. economy is nonetheless “running out of steam.”

Fannie’s data on consumer production to open 2023 was strong, with real personal consumption expenditures (PCE) metrics growing by a healthy 1.5% in January. Because of this, the ESR group upwardly revised its previous gross domestic product growth prediction for the first quarter, even with a slight PCE backtrack of 0.1% in February and a similar stepback anticipated for March. Fannie expects consumer spending to stay subdued moving forward, and with other economic fundamentals such as employment data, retail sales and industrial production slowing notably to end Q1, it points to what Fannie still terms “a modest economic contraction” beginning in the second half of 2023.

Meanwhile, the ESR group is still awaiting the full economic impact of the turbulence seen in the banking sector during the first quarter. “The immediate acute event appears to have passed without further escalation,” according to Fannie’s outlook, “but future risks remain.”

“The economic slowdown has resumed – whether the end result is a modest recession or simply a soft landing remains unanswered – although we continue to expect the former, as we have since April of last year, when we first made our 2023 recession call,” said Doug Duncan, Fannie Mae senior vice president and chief economist.

While residential real estate demand and prices have shown more resilience than Fannie’s previous forecasts have predicted, many would assert that the housing market has already beaten the economy at large to the punch when it comes to a recession. Housing and mortgage activity have remained firmly entrenched in a downturn for months, and the ESR Group expects sales to stay muted. Demand on a national level is still supportive of home prices, Fannie’s most recent forecast noted, but supply remains obstinately low. This is due in large part to the lock-in effect of existing homeowners staying put because their mortgage rates are far lower than those currently being offered.

Still, in Duncan’s view, the real estate market’s buoyancy thus far has been heartening.

“The greater-than-expected resilience of the housing sector to the affordability pressures of higher home prices and mortgages rates is central to our expectation that the recession will be modest,” he said. “In our view, while it would be premature to expect no further difficulties in the banking sector other than credit tightening, we’re maintaining our baseline expectation of a modest recession, as we see signs of a weakening employment market, slowing retail sales and declining manufacturing activity. However, the rapid response of hopeful homeowners to periodic declines in mortgage rates, even from the currently higher rates, gives us additional confidence in our use of the word ‘modest.’”


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