Fannie Mae: Economic Growth Stagnating
According to the July commentary from the Fannie Mae Economic and Strategic Research (ESR) Group, expectations for full-year 2022 and 2023 real GDP growth were downgraded in July due to softening consumer spending and a downward revision to business inventory investment data. This came amid record inflation and higher interest rates.
Photo Insert: The ESR Group now anticipates that a recession will begin in the first quarter of 2023, which is earlier than what was previously predicted.
The ESR Group now predicts that the real GDP will expand by 0.1 percent in 2022 and shrink by 0.4 percent in 2023, which is a decrease from the earlier predictions of 1.2 percent growth and 0.1 percent decline, respectively.
Notably, the ESR Group now anticipates that a recession will begin in the first quarter of 2023, which is earlier than what was previously predicted.
This is primarily attributable to the aggressive monetary policy response that the Federal Reserve will need to implement in order to bring inflation down from its current decade-high levels.
Inflation, as measured by the Consumer Price Index (CPI), is expected to have moderated to 5.7 percent on a year-over-year basis by the fourth quarter of 2022, down from the reading in June of 9.1 percent, and then to 1.6 percent by the end of 2023, which is below the Fed's target of 2 percent. These projections were made by the ESR Group.
The ESR Group revised its forecast for total home sales growth in 2022 to a decline of 15.6%, compared to a decline of 13.5% that was predicted last month. On the other hand, the ESR Group revised upward its forecast for home price appreciation to a 16.0 percent year-over-year growth in 2022 from the previously projected 10.8% growth.
The ESR Group remains certain that there will be a significant slowdown in the increase of home prices in the years to come due to the lagged effects of higher mortgage rates and the deteriorating economy, both of which will weigh heavily on purchase demand.
According to Doug Duncan, Fannie Mae's Senior Vice President and Chief Economist, "the economy slowed significantly, though unevenly, in the first half of 2022 on the expectation that the Fed will aggressively raise interest rates," adding that "with inflation running well above the target rate, the market's expectation that further, substantial monetary tightening is needed has driven interest rates even higher, and interest rate-sensitive sectors, including housing, are slowing in response. Homes listed for sale are increasingly seeing asking-price reductions, and both construction and home sales – both existing and new – are slowing."
Duncan went on to say: "Consumer confidence measures increasingly indicate dissatisfaction with current levels of inflation, offering support to the Fed's aggressive posture. We continue to believe that it's unlikely the economy will avoid a modest recession, but given recently released consumer spending and business investment data, we currently anticipate that it'll begin in the first quarter of 2023, slightly earlier than we previously predicted."