Fannie Mae’s Economic and Strategic Research Group’s June Economic Commentary: Recession Likely

Fannie Mae’s Economic and Strategic Research (ESR) Group on Monday (6-26-23) released its commentary on June’s economic conditions. According to the report, recent months of mixed macroeconomic information has painted a jumbled picture of conditions; however, they continue to believe a recession is the most likely outcome of the rapid tightening of monetary policy and the late stages of business cycle dynamics.

In their June commentary, the ESR Group said that while inflation has moderated—partly due to slowing domestic and global economic growth—they believe continued robustness in the labor market risks an entrenchment of some core inflationary pressures. Lessons learned from the inflationary era of the 1970-80s, a time when price pressures eased and then quickly reaccelerated, lead the ESR Group to expect that the Federal Reserve will maintain its restrictive monetary policy stance until it is abundantly clear that inflation pressures from the labor market have eased. However, based on the timing of data releases, that evidence is unlikely to appear until a recession is already unavoidable, making the question of a downturn more a matter of “when” than “if,” according to the ESR Group.

In regard to current housing market dynamics, the Group says market conditions are being fueled by a lack of existing homes available for sale—a trend that that did not improve during the spring homebuying season, when more homes are typically put on the market. In turn, this has supported a return to home price growth in recent months and continued to boost new home construction. While the ESR Group continues to expect housing starts to weaken in coming quarters, this is predicated on the business cycle turning. In the absence of a recession, the Group notes substantial upside risk to its new home sales and starts forecasts.