Economy Expected to Contract Further in 2023, as the Fed Appears Resolved to Tame Inflation

WASHINGTON, DC – The combination of high inflation, monetary policy tightening, and a slowing housing market is still projected to tip the economy into a modest recession in the first quarter of 2023, according to the October 2022 commentary from the Fannie Mae (FNMA/OTCQB) Economic and Strategic Research (ESR) Group. The ESR Group expects real gross domestic product (GDP) to grow 2.3 percent annualized in the third quarter of 2022 due to strong net export and inventory investment activity, before contracting 0.7 percent annualized in the fourth quarter as the effects of that activity wane. Headline GDP growth is expected to remain negative through the third quarter of 2023 as the economy enters a modest recession. The ESR Group forecasts negative 0.1 percent real GDP growth on a full-year basis for 2022, a slight downward revision from its prior month prediction of 0.0 percent, and it maintained its expectation for a 0.5 percent contraction in real GDP in 2023. 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.

Due largely to the higher mortgage rate environment, the ESR Group lowered its forecast for total single-family home sales in 2022 and 2023 to 5.64 million and 4.47 million, respectively, which would represent annual declines of 18.1 percent and 20.8 percent. While multifamily construction remains strong, the ESR Group also revised downward its multifamily starts forecast for 2023 to 390,000 units. Further, the ESR Group significantly revised its outlook for national home price growth and now expects year-over-year home price growth to turn negative in Q2 2023. From a full-year perspective, the ESR Group expects Q4/Q4 national home price growth in 2022 to be 9.0 percent, down from last month’s prediction of 16.0 percent. The ESR Group expects home price declines of 1.5 percent in 2023, down from its previous prediction of home price growth of 4.4 percent 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 Doug Duncan, Fannie Mae Senior Vice President and Chief Economist. “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.”

Visit the Economic & Strategic Research site at fanniemae.com to read the full October 2022 Economic Outlook, including the Economic Developments Commentary, Economic Forecast, Housing Forecast, and Multifamily Market Commentary. To receive e-mail updates with other housing market research from Fannie Mae’s Economic & Strategic Research Group, please click here.

Opinions, analyses, estimates, forecasts, and other views of Fannie Mae's Economic & Strategic Research (ESR) group included in these materials should not be construed as indicating Fannie Mae's business prospects or expected results, are based on a number of assumptions, and are subject to change without notice. How this information affects Fannie Mae will depend on many factors. Although the ESR group bases its opinions, analyses, estimates, forecasts, and other views on information it considers reliable, it does not guarantee that the information provided in these materials is accurate, current or suitable for any particular purpose. Changes in the assumptions or the information underlying these views could produce materially different results. The analyses, opinions, estimates, forecasts, and other views published by the ESR group represent the views of that group as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.

About the ESR Group
Fannie Mae’s Economic and Strategic Research Group, led by Chief Economist Doug Duncan, studies current data, analyzes historical and emerging trends, and conducts surveys of consumer and mortgage lender groups to provide forecasts and analyses on the economy, housing, and mortgage markets. The ESR Group was recently awarded the prestigious 2022 Lawrence R. Klein Award for Blue Chip Forecast Accuracy based on the accuracy of its macroeconomic forecasts published over the 4-year period from 2018 to 2021.