Sticking the 'Soft Landing' Remains a Difficult Task

WASHINGTON, DC – Recent economic data has pointed to a stronger economy than previously expected, but the current business cycle contours still point to an eventual downturn, according to the August 2023 commentary from the Fannie Mae (FNMA/OTCQB) Economic and Strategic Research (ESR) Group. Given the recent flurry of strong consumption data combined with two consecutive months of annualized Consumer Price Index (CPI) measures coming in close to the Fed’s 2 percent inflation target, the ESR Group notes that the odds of a “soft landing” have increased. However, the full lagged effects of monetary policy tightening are still working their way through the economy, according to the ESR Group. Wage growth also likely remains too high to be consistent with 2 percent inflation over the long run, which the ESR Group believes will keep monetary policy tight. Additionally, the ESR Group posits that the recent rise in medium- and longer-term Treasury yields will likely weigh on interest-rate-sensitive sectors in coming quarters. While the ESR Group notes that both the “if” and “when” of a recession are uncertain given the strength of recent economic data and decelerating inflation, their baseline forecast is for one to occur, now expected to begin in the first half of 2024.

Regardless of whether the economy enters a recession, the ESR Group forecasts home sales to remain subdued within a tight range. If the economy avoids a recession, the ESR Group expects home sales activity would continue to be suppressed by a lack of existing home inventory for sale combined with continued affordability constraints and homeowners remaining “locked in” to their low mortgage rate. Alternatively, if the economy enters a recession, improvements in affordability and inventory stemming from likely lower interest rates is expected to be offset at least in part by a weaker labor market, tighter credit, and worsened consumer confidence. Regarding new homes, both sales and construction have performed comparatively well despite higher mortgage rates to date; however, the ESR Group notes some downside risk given mortgage rates are again near 7 percent and homebuilder confidence pulled back in August.

“It is easy to run your forecast ship aground by underestimating the American consumer,” said Doug Duncan, Senior Vice President and Chief Economist, Fannie Mae. “Despite reduced saving, increased rollover credit card balances, and rising credit costs, consumers are sustaining consumption, supported by a decline in inflation. Nonetheless, tightening monetary policy takes a toll. Will it result in a recession? Our base case forecast is a mild recession, and it looks as though the alternative is a soft landing, which is slow growth with only a small increase in unemployment. The difference between those two alternative outcomes is not expected to make much difference to home sales. The risk to housing activity is that inflation has bottomed out and begins to reaccelerate, requiring additional tightening from the Fed.”

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

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 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.