According to June 2023 commentary from the Fannie Mae Economic and Strategic Research (ESR) Group, mixed data has painted a muddled picture of macroeconomic conditions in recent months and a recession remains the most likely outcome of the rapid tightening of monetary policy and late-stage business cycle dynamics.
While inflation has moderated partly due to slowing domestic and global economic growth, the ESR Group believes continued vigor in the labor market risks an entrenchment of some core inflationary pressures.
During the inflationary era of the 1970-80s, price pressures eased and then quickly reaccelerated. Lessons learned from those years 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.
“Core inflation remains sticky, having not fallen as rapidly as other price measures,” says Doug Duncan, senior vice president and chief economist, Fannie Mae.
Current housing market dynamics continue to be fueled by the lack of existing homes available for sale, a trend that did not improve during the spring homebuying season. 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 ESR Group notes substantial upside risk to its new home sales and starts forecasts.
Those who have locked in historically low mortgage rates, whether they are aging in place or brand new homeowners, have helped keep housing supply at historically low levels says the ESR Group.
“Homebuilders continue to add to that supply, but years of meager homebuilding over the past business cycle means the imbalance will likely continue for some time,” says Duncan. “We do expect housing will be supportive of the overall economy as it exits the modest recession.”
Photo by Ken Teegardin from Flickr.
