Economy Off to Surprisingly Strong Start in 2023, But It’s Not Expected to Last

WASHINGTON, DC – Due to economic headwinds from unsustainably high consumer spending relative to income, significant declines in monetary aggregates, an increasingly inverted yield curve, and stickier-than-expected inflationary pressures, the Fannie Mae (FNMA/OTCQB) Economic and Strategic Research (ESR) Group continues to expect the economy to fall into a modest recession and now believe the likely start date will be in the second quarter of 2023. A series of recent data releases, including a blowout labor report, updated seasonal adjustment factors to the Consumer Price Index (CPI) that showed the rate of disinflation has been slower than previously thought, and unexpected robustness in retail sales and manufacturing output growth, presents substantial upside risk to the ESR Group’s Q1 2023 GDP forecast. While some of the recently reported economic strength is probably a side effect of abnormal seasonal consumption and hiring/layoff patterns overstating the true strength of the economy, these data releases were consistent with an easing in financial market conditions to start the year. Importantly, it raises the possibility of the Federal Reserve both pushing its federal funds rate target higher than currently expected and keeping it there for longer to meaningful slow economic momentum and inflation, posing larger and longer-term risks to the economy and financial stability.  

Housing also started 2023 on a relative high note given a roughly 100 basis point pullback in mortgage rates since November; although the ESR Group expects this, too, to likely prove temporary. Ongoing affordability constraints, the “lock-in” effect creating a financial disincentive for the majority of current homeowners with mortgages to move, and still-tight inventories are expected to continue to limit home sales, according to the ESR Group. Additionally, the 10-year Treasury has increased meaningfully in recent weeks, suggesting that mortgage rates are likely to begin rising again. The ESR Group expects housing starts activity to soften as well, as there remains an elevated number of new homes for sale that are already under construction or completed; these projects will likely be prioritized by builders, rather than breaking ground on new ones.

“Recent data have been stronger than expected in ways that we believe are likely to lead to tighter monetary policy with attendant increases in interest rates,” said Doug Duncan, Senior Vice President and Chief Economist. “While some optimism appears to have crept into the housing sector, it represents an increase from very low levels of activity and is at risk of declining again if rates reverse. Right now, it’s difficult to ascertain whether COVID-induced consumer behavior changes and business practices are altering seasonal data adjustments, or if the real underlying economic activity is as strong as some recent economic indicators suggest. While we now believe the expected economic downturn will not start until the second quarter of 2023, we still think a mild recession is in the cards.”

Visit the Economic & Strategic Research site at fanniemae.com to read the full February 2023 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.