Group upgrades its outlook as US economy banking turmoil subsides
An upward revision in consumer spending data has put the US economy in a stronger position, but risks of a modest recession remain due to tightening credit conditions.
Fannie Mae's Economic and Strategic Research (ESR) Group has upgraded its first-quarter GDP forecast to be -0.4%, an improvement of 0.1% from its previous outlook. However, the group noted that the full economic impact of March's banking turmoil has yet to be seen.
"While the acute panic following the bank failures in March appears to have subsided, importantly, the banking turmoil occurred during an already-tightening credit cycle, and the ESR Group believes the additional, incremental tightening in credit conditions owing to the financial fallout will contribute to a modest recession beginning in the second half of 2023," the group wrote in its latest monthly commentary.
Factoring in the slowing economy, Fannie Mae said unemployment will likely rise to 4.4% by year-end and increase to 5.4% by the end of 2024. The group expects the headline and core consumer price indices close 2023 at around 3.3% and 3.9% annually. As such, Fannie Mae now anticipates the Federal Reserve to start easing its monetary policy, with only a single 25-basis point hike in May.
While housing demand and home prices have remained stronger than previously forecasted, the group expects a slight pickup in sales for the spring homebuying season and a smaller decline in house prices in 2023. Fannie Mae's home price index forecasted a -1.2% growth compared to its previous -4.2% projected growth.
"The greater-than-expected resilience of the housing sector to the affordability pressures of higher home prices and mortgage rates is central to our expectation that the recession will be modest," said Fannie Mae chief economist Doug Duncan.
"In our view, while it would be premature to expect no further difficulties in the banking sector other than credit tightening, we're maintaining our baseline expectation of a modest recession as we see signs of a weakening employment market, slowing retail sales, and declining manufacturing activity. However, the rapid response of hopeful homeowners to periodic declines in mortgage rates, even from the current higher rates, gives us additional confidence in our use of the word 'modest.'"
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