Due to economic headwinds from unsustainably high consumer spending relative to income, significant declines in monetary aggregates, an increasingly inverted yield curve, and stickier-than-expected inflationary pressures, the Fannie Mae (FNMA/OTCQB) Economic and Strategic Research (ESR) Group continues to expect the economy to fall into a modest recession and now believe the likely start date will be in the second quarter of 2023. A series of recent data releases, including a blowout labor report, updated seasonal adjustment factors to the Consumer Price Index (CPI) that showed the rate of disinflation has been slower than previously thought, and unexpected robustness in retail sales and manufacturing output growth, presents substantial upside risk to the ESR Group’s Q1 2023 GDP forecast. While some of the recently reported economic strength is probably a side effect of abnormal seasonal consumption and hiring/layoff patterns overstating the true strength of the economy, these data releases were consistent with an easing in financial market conditions to start the year. Importantly, it raises the possibility of the Federal Reserve both pushing its federal funds rate target higher than currently expected and keeping it there for longer to meaningful slow economic momentum and inflation, posing larger and longer-term risks to the economy and financial stability.
Housing also started 2023 on a relative high note given a roughly 100 basis point pullback in mortgage rates since November; although the ESR Group expects this, too, to likely prove temporary. Ongoing affordability constraints, the “lock-in” effect creating a financial disincentive for the majority of current homeowners with mortgages to move, and still-tight inventories are expected to continue to limit home sales, according to the ESR Group. Additionally, the 10-year Treasury has increased meaningfully in recent weeks, suggesting that mortgage rates are likely to begin rising again. The ESR…
Read the full article here
