The economy is now expected to eke out positive growth of 0.4% in 2022 before entering a modest recession in the new year, according to the December 2022 commentary from the Fannie Mae Economic and Strategic Research (ESR) Group.
The group’s updated prediction follows an upward revision to the third quarter of 2022 real gross domestic product (GDP) and stronger-than-expected incoming personal consumption data to begin the fourth quarter,
With many cyclical indicators continuing to point toward economic contraction, including an inverted yield curve, the ESR Group forecasts 2023 GDP growth to be -0.5%, a slight improvement from last month’s forecast of -0.6%.
The ESR Group also expects the economy to begin expanding again at a 2.2% annual growth rate in 2024. Since inflation decelerated again in November, the ESR Group expects the Federal Reserve to closely monitor historically stickier wage growth metrics to help determine how long it should continue its restrictive monetary policy.
With a recession predicted to begin in the first quarter of 2023, the ESR Group notes as plausible a scenario in which the Federal Reserve begins once again cutting the federal funds rate in mid-2023.
The ESR Group modestly revised upward its total single-family home sales projections for 2022 and 2023 to 5.72 million and 4.57 million units, respectively, due to the recent significant pullback in mortgage rates. The projection of a home sales decline in 2023 is due largely to the expected economic slowdown and the fact that most mortgage holders continue to have rates substantially below current market rates, creating a disincentive to move.
In 2024, the ESR Group expects home sales to rebound 14.7% to 5.24 million, due to the expectation that economic growth will resume and mortgage rates will stabilize.
“The economy caught its breath in the second half of 2022, but that doesn’t change our expectation that it will run out of air in early 2023 via a mild recession,” said Doug Duncan, senior vice president and chief economist for Fannie Mae. “While uncertainty still exists, a growing set of signs — including an inverted yield curve, weakness in the Conference Board’s Leading Economic Index, and a slowdown of manufacturing activity — support our ongoing contention that the economy is likely to contract next year.”
Duncan added: “We expect housing to continue to slow, even though mortgage rates have come down recently. Home purchases remain unaffordable for many due to the rapid rise in rates over the last year and the fact that house prices — though certainly slowing and in some places declining — remain elevated compared to pre-pandemic levels. Of course, refinancing is still not practical for the vast majority of current mortgage holders, which we expect will also continue to constrain mortgage origination activity.”
