What does Fannie Mae mean by a "modest" recession?

There’s a good chance the economy will tip into a “modest recession” in the first quarter of 2023, according to Fannie Mae’s Economic and Strategic Research (ESR) Group.

Due to raging inflation and a weakening housing market, the ESR Group expects headline GDP growth to remain negative through the third quarter of 2023 as the economy enters a modest recession. GDP will likely increase by 2.3% in Q3 2022 due to strong net export and inventory investment activity before dwindling by 0.7% in Q4 2022.

“Core inflation remains considerably higher than the Federal Reserve’s stated target; and despite the historic decline in August job openings, the continued strength in labor has futures markets expecting the Federal Open Market Committee (FOMC) to raise the federal funds rate by an additional 75 basis points at its November meeting,” the group said in its latest commentary.

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The impact of the higher mortgage rate environment will be felt in both the single-family and multifamily sectors. The ESR Group lowered its total single-family home sales forecast in 2022 and 2023 to 5.64 million and 4.47 million, respectively. The downward revision will represent annual declines of 18.1% and 20.8%.

While multifamily construction remains strong, the group also downgraded its multifamily starts forecast for 2023 to 390,000 units. Annual home price growth will also turn negative in the second quarter of 2023, with prices declining 1.5% - down from the previous prediction of home price growth of 4.4% in 2023.

“Over the last few weeks, markets have increasingly – and perhaps reluctantly – reflected the resolve of the Fed to lower inflation via rapid tightening of monetary policy,” said Fannie Mae chief economist Doug Duncan. “At times, the market has reacted to incoming economic data suggesting the Fed is making progress in its fight with inflation by anticipating a potential policy ‘pivot’ toward a less restrictive regimen, prompting the Fed to restate its resolve.

“Of course, the slowing effect on the housing market of the higher mortgage rate environment has been largely predictable, and home prices appear to have already begun trending downward. Looking ahead to the full year 2023, on a national basis, we expect an average home price decline of 1.5%. Given the ongoing tension between potential homebuyers and home-sellers at the moment, we believe the pace of sales is likely to slow even further, too.”