Despite recent optimism surrounding the Federal Reserve’s “soft landing” strategy, economists at Fannie Mae are still expecting a mild recession next year.
Fannie Mae’s Economic and Strategic Research Group wrote in a note that mixed economic signals this month make it difficult to guess the near future, but a “modest contraction” in early 2024 remains the most likely outcome of the Fed’s inflation fight.
They cite consumption outpacing incomes, big differences between gross domestic product and gross domestic income over the past three quarters, and previous policy tightening still moving through the systems as signs of what’s to come.
Additionally, households are expected to restrict spending in the latter part of the year as inflated prices catch up to budgets.
“[P]andemic-related fiscal transfers and built-up household savings have supported consumer spending longer than we had expected, providing unforeseen support to the macroeconomy,” said Doug Duncan, Fannie Mae Senior Vice President and Chief Economist.
“Our current prediction for a mild downturn in the first half of 2024 is predicated on the belief that consumers will begin pausing their spending, in part due to the exhaustion of those funds and having to realign to a more sustainable relationship between spending and incomes.”
Risk to the housing market is limited, according to the group, because demand remains robust despite 7%+ rates.
Life events are impacting homebuyers more than finances, so while new home sales are expected to pull back moving forward, the impact won’t shatter the market.
Duncan noted that “recession-level” home sales are driven by a lack of inventory and high rates, leading to most consumers believing it’s a bad time to buy.
“We expect that total housing market activity will remain at a low level into 2024 as the Federal Reserve continues to hold the line on interest rates against inflation,” he added.
The Federal Open Markets Commission begins its two-day September meeting today. Analysts expect a pause in rate hikes this month, but at least one more increase in November or December.
Invesco Chief Global Market Strategist Kristina Hooper told Yahoo Finance that the Fed could start cutting interest rates as early as Q1 2024.
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