Consumer demand for new cars and homes is why a modest recession is possible: Fannie Mae

Fannie Mae's latest economic forecast revealed little new as the economy continues to slow and move towards a recession for the second half of 2023.  

The mortgage giant's Economic and Strategic Research (ESR) Group slightly revised its 2023 home sales forecast up to 4.86 million units from 4.84 million. The group also made a slight downward revision for 2024, projecting 5.01 million units instead of 5.03 million units forecasted as being sold.

The improved outlook for home sales is mainly spurred by more new single-family homes being built, according to the forecast. Existing single-family home sales have slowed as sellers, looking to avoid higher mortgage rates, stay put in their homes.

Fannie Mae has forecasted a recession in 2023 since last April and said tightening credit lending would likely lead to slower future business investment this year. However, the government-sponsored enterprise said that hopes for a soft landing remain alive thanks to continued consumer demand for new auto purchases and home constructions. 

"There are select data available to support several alternative views of the path of the economy, though we maintain our view that a modest recession will begin in the second half of 2023," Fannie Mae Senior Vice President and Chief Economist Doug Duncan said in a statement. 

"Housing remains exhibit number one for why we expect the recession to be modest. It continues to outperform our expectations, and we expect that its relative strength will help kickstart the economy into expanding again in 2024.

"Inflation has been resistant to Fed efforts to drive it down, and we view the risks to our baseline forecast as tilted toward more tightening rather than easing – although, for the moment, the Fed has adopted a wait-and-see approach," Duncan continued.

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DEMAND FOR USED CARS LIKELY TO GROW AS CONSUMER SEEK AFFORDABILITY: EDMUNDS

Fed hints that it may pause interest rate hikes

Federal Reserve Chair Jerome Powell said at a recent monetary policy conference that the Fed might forgo an additional interest rate increase when it meets in June. Powell cited the current banking turmoil and said it had served to restrict lending further and, by default, consumer spending.

"Until very recently, it has been clear that further policy firming would be required," Powell said. "As policy has become more restrictive, the risks of doing too much versus doing too little are becoming more balanced."

The Fed raised interest rates by another 25 basis points in May, raising the federal funds rate to a targeted range of 5% to 5.25%, the highest level in 16 years. 

Although economic growth has slowed, Powell told reporters at a press conference that the labor market remains tight, with the unemployment rate still low in April, at 3.4%. Inflation also remains well above the central bank's 2% target, coming in at 4.9% in April, according to the Consumer Price Index (CPI), a measure of inflation.  

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MANY AMERICANS EYE BUY NOW, PAY LATER TO GAIN MORE FINANCIAL FLEXIBILITY: SURVEY

Many Americans are bracing for a recession

Most Americans, however, are less optimistic about where the economy is headed. Roughly 68% of Americans are bracing for a recession within the next six months; of this group, 80% expect it to be severe, according to a recent Nationwide survey.

Additionally, the number of Americans that feel positive about the U.S. economy dropped by 8 points to 16% since September 2022. 

Souring consumers' outlook on the U.S. economy is the Federal Reserve's restrictive monetary policy, which has raised the federal funds rate to a targeted range of 5% to 5.25%, the highest level in 16 years. Seventy percent of Americans said they are concerned about interest rates, an increase from 61% last September.

"Despite elevated inflation, trouble in the banking sector, and ten consecutive interest rate hikes, we continue to forecast a moderate recession in the second half of this year, which stands in contrast to fears that we're heading for another Great Recession," Nationwide's Chief Economist Kathy Bostjancic said in a statement. "Consumers are understandably worried, but consumer and business debt burdens are much less than they were 15 years ago, and that should limit the degree of the economic downturn." 

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FED'S MAY INTEREST RATE HIKE COULD HARM REGIONAL BANK LENDING, MORTGAGES, EXPERT WARNS

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