No balloons or candles to mark this one-year anniversary of Fannie Mae’s “modest recession” prediction.
Doubling-down on March’s revised forecast for stronger first-quarter GDP growth, the latest projections by Fannie Mae’s Economic and Strategic Research (ESR) Group indicate an economic slowdown has resumed. The group maintains its prediction — first made in April of last year — that a “modest recession” will begin in the second half of 2023.
The report underscores how recent bank failures have helped tighten financial conditions in a manner akin to additional fed fund rate hikes. Though initial panic has subsided following the collapse of Silicon Valley Bank and Signature Bank in March, the group believes “the additional, incremental tightening in credit conditions owing to the financial fallout will contribute to a modest recession beginning in the second half of 2023.”
As a result, the ESR Group projects only a single additional 25-basis point hike from the Federal Reserve in May, with the re-introduction of monetary easing to follow closer to year’s end.
“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,” said Doug Duncan, Fannie Mae’s senior vice president and chief economist.
The report also highlighted persistently strong demand and rising prices within housing markets. Citing persistently low inventory of homes for sale, the group believes sales activity will remain subdued as ever-resilient demand continues to buffer home prices. The report does note significant regional variation in actual and expected home price movements.
In large part, the group attributes low home sales to the “lock-in effect,” with existing homeowners reluctant to trade in their low interest rates.
With mortgage rates over 6%, low home sales, and now the spring home-building season off to a slow start, low inventory is a sore that continues to fester. Single-family housing starts in March were up 2.7% from February, but down 27.7% from a year earlier, according to the joint monthly report from the U.S. Census Bureau and the U.S. Department of Housing and Urban Development.
However, rapid responses from hopeful homeowners at periodic declines in mortgage rates has bolstered confidence within the ESR Group that its year-long prediction of a “modest recession” beginning in the latter half of 2023, will be just that — “modest.”
