WASHINGTON, DC – After rebounding at a 2.6 percent annualized rate in Q3 2022 on the strength of net exports, real gross domestic product (GDP) is projected to turn negative again in the fourth quarter as the temporary boost from international trade moderates, according to the
November 2022 commentary from the Fannie Mae (FNMA/OTCQB) Economic and Strategic Research (ESR) Group.The ESR Group also expects declines in residential
fixed and business investment, as well as slowing personal consumption growth, to contribute to negative growth in Q4 2022, and it continues to expect the economy to tip into a modest recession in the first quarter of 2023. Full-year 2022 GDP growth is now expected to be 0.0 percent, an upgrade of one-tenth from the previous forecast, while forecasted 2023 GDP was downgraded by one-tenth to a 0.6 percent contraction. Additionally, the ESR Group’s inaugural forecast for 2024 shows economic growth
rebounding to 2.0 percent 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 percent in early
2023. The ESR Group 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 percent 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 ESR Group estimates that, as of October month-end, more than 80 percent of borrowers had a mortgage rate at least 200 basis points below current market rates, by far the largest share in decades. “The
economy continues to slide toward a modest recession, which we anticipate will begin in the new year, with housing leading the slowdown,” said Doug Duncan, Senior Vice President and Chief Economist, Fannie Mae. “Higher interest rates have ignited the typical reduction in residential fixed investment, which historically has led into either an economic slowdown or recession. From our perspective, the good news is that demographics remain favorable for housing, so the sector appears well-positioned
to help lead the economy out of what we expect will be a brief recession.” Visit the Economic & Strategic Research site at fanniemae.com to read the full November 2022 Economic Outlook, including the Economic
Developments Commentary, Economic Forecast, Housing Forecast, and Multifamily Market Commentary. To receive e-mail updates with other housing market research from Fannie Mae’s Economic &
Strategic Research Group, please click here. Opinions, analyses, estimates, forecasts, and other views of Fannie Mae's Economic & Strategic Research (ESR) group included in these materials should not be construed as indicating Fannie Mae's business prospects or expected results, are based on a number of assumptions, and are subject to change without notice. How this information affects
Fannie Mae will depend on many factors. Although the ESR group bases its opinions, analyses, estimates, forecasts, and other views on information it considers reliable, it does not guarantee that the information provided in these materials is accurate, current or suitable for any particular purpose. Changes in the assumptions or the information underlying these views could produce materially different results. The analyses, opinions, estimates, forecasts, and other views published by the ESR
group represent the views of that group as of the date indicated and do not necessarily represent the views of Fannie Mae or its management. About the ESR Group The U.S. economy has little chance of falling into a recession this year or next unless the Federal Reserve raises interest rates more than they are currently projecting, according to a new forecast released yesterday at the 13th annual Inland Empire Economic Forecast Conference, hosted by the UC Riverside School of Business. “Although there are signs of stress in parts of the economy, the wealth created by the excessive fiscal stimulus enacted in 2020 and 2021 continues to drive a consumer consumption binge that will propel the economy forward,” said Christopher Thornberg, director of the UC Riverside School of Business Center for Economic Forecasting and one of the forecast authors. “The only possible thing that could tip things downward in the near-term is if the Fed applies even more aggressive quantitative tightening to control inflation than they’re now projecting.” If the Fed stamps out inflation in the near-term by forcefully reducing its balance sheet, it will drive up interest rates, cool financial markets sharply, and possibly create a modest recession next year led by consumer cutbacks, according to the new outlook. However, in the longer term, if Fed action is inadequate, the United States may be looking at several years of very weak growth, with consumers in a relatively poor financial position at the end. “This is now a balancing act,” said Thornberg. “Functionally speaking, policymakers went from maximum acceleration – the stimulus – to maximum braking – tightening by the Fed – over a single year, something that would create turbulence in even the healthiest economy.” Although the new forecast is predicting economic growth to continue in the nation, California, and the Inland Empire in the short run, albeit at a slower pace (“we’ve cooled from white-hot to red-hot”), in the longer term, the major economic wildcard comes from the growing Federal deficit. According to the new forecast, much will depend on how long bond markets are willing to tolerate the excessive level of today’s U.S. government debt. In California, the state is on the brink of a milestone: recovering all the jobs it lost during the pandemic-driven downturn and mass retirement. While many states have already reached full recovery, as of this writing, California still has a 47,300 job deficit. However, it’s increasingly likely that the state’s job count will be above water by the end of this year, according to the forecast. Key Findings: • In the United States, inflation is moderating and may have peaked, but it won’t decelerate rapidly. Expect price growth and interest rates to remain elevated in the near term. • Consumer spending now accounts for the highest share of U.S. GDP since 2006. This consumption is also apparent in the rapidly growing U.S. trade deficit, which accounts for the largest a share of GDP since the runup to the Great Recession. • There is a massive amount of equity in the current U.S. housing market driven by a decade of low mortgage debt accumulation. The industry also has very low inventories of existing homes for sale and vacancy rates are still at a record low level. This is not a market that is due for a collapse—at least not yet. • The major problem for new housing is the ultra-low mortgage rates homeowners currently enjoy. Anyone who sells now will have to go from a sub-3 rate to something in the 5+ category. That is not a move most homeowners make—unless they have to. The ‘move-up’ market is all but frozen. • California's employment recovery has been uneven, with inland communities faring better than coastal areas. The Inland Empire has 5% more jobs today than it had prior to the pandemic, while at the other end of the spectrum, there are still 3% fewer jobs in Ventura County. • California's labor force contracted during the pandemic and employers have struggled to find workers, especially in coastal communities. The primary reason behind the labor force changes is population growth. From 2019 to 2022, population grew in inland communities and declined in coastal communities, driven by affordability. • After two years in which California’s housing market went gangbusters, and home prices increased an average 43%, the rising interest rate environment, in addition to stretched prices, has led to a major slowdown in 2022. A price crash in the market is nowhere in sight, although a slowdown in price growth is expected. • The share of homes purchased by investors in the Inland Empire is at record highs. This parallels the nationwide interest by private equity in purchasing large swaths of residential real estate. This forecast expects the share of homes purchased by investors to increase. • Current sale price cuts for homes in the Inland Empire are more of a reality check than a price decline warranting concern. The rate of bidding wars has only dipped to levels seen in the early part of 2020. • The Inland Empire has experienced a tremendous boom in Transport and Logistics employment (16.6% of all jobs in the region are now in this sector). The Information sector has grown, but lags other employment categories, highlighting the relative underrepresentation of knowledge workers in the region. This forecast expects employment in the Inland Empire to continue growing, although at a tapered pace. The 13th annual Inland Empire Economic Forecast Conference was held on
October 5th. A copy of the forecast book can be downloaded in its entirety here. Why will there be a recession in 2023?Many analysts are predicting a potential recession in 2023. Although there are different reasons for this, many investors and companies are taking a bearish approach in these uncertain times. A few of the top concerns include high inflation, rising interest rates, and geopolitical instability.
What will the economy look like in 2023?This outlook is associated with persistent inflation and rising hawkishness by the Federal Reserve. We forecast that 2022 Real GDP growth will come in at 1.8 percent year-over-year and 2023 growth will slow to zero percent year-over-year.
Will there be recession in 2024?A later recession is most likely, one beginning in late 2023 or early 2024. Predictions of recession timing are much more difficult than the eventual arrival of recession, so this forecast should be taken with a grain a salt.
How can we prepare for a recession in 2023?To help prepare for a recession, job loss or other financial hurdle, aim to build an emergency fund that covers three to six months of living expenses. If you're falling behind in debt payments, reach out to your creditors and ask for hardship concessions.
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