Fannie Mae’s Economic and Strategic Research Group Expects US Economy to Enter and Exit a Modest Recession in 2023

According to the November 2022 commentary released today (11-21-22) by Fannie Mae’s Economic and Strategic Research (ESR) Group, after rebounding at a 2.6% annualized rate in 22Q3 on the strength of net exports, real gross domestic product (GDP) is project to turn negative again in 22Q4 as the temporary boost from international trade moderates. The Group is also expecting declines in residential fixed and business investment, as well as a slowing in personal consumption growth, which will further contribute to negative growth in Q4 2022.

Overall, the Group continues to expect the economy to tip into a modest recession in 23Q1. Full year growth in 2022 is now expected to be 0.0%, an upgrade of 0.1 percentage points from the previous forecast. Additionally, the inaugural forecast for 2024 shows economic growth rebounding to 2.0% on a Q4/Q4 basis, reflecting the beginning of an expected economic recovery.

Finally, although inflation showed signs of cooling in October, the possibility of a strong labor market contributing to more persistent wage pressures in the future suggests to the ESR Group that the Federal Open Market Committee (FOMC) will once again raise the federal funds rate at its next meeting, and it forecasts the federal funds rate topping out at approximately 5.0% in early 2023.

Regarding single-family housing, the ESR Group has made only modest updates to its forecast of total single-family home sales in 2022 and 2023, which are projected to be 5.67 million and 4.42 million, respectively. In 2024, single-family home sales are expected to rebound 18.6% from the year prior to 5.25 million, reflecting an anticipated modest pullback in mortgage rates, the broader economic recovery, and a continued lack of housing supply that should support new home construction.

A significant contributor to the ESR Group’s pessimistic home sales path remains the so-called “lock-in effect,” in which homeowners have a significant financial disincentive to move because they hold mortgages well below current market rates. Right now, the Group estimates that, as of the end of October, more than 80% of borrowers had a mortgage rate at least 200 basis points below current market rates—by far the largest share in decades.