Economic Growth Stagnating as Record Inflation Persists

WASHINGTON, DC – Amid record inflation and higher interest rates, expectations for full-year 2022 and 2023 real GDP growth were downgraded in July due to softening consumer spending and a downward revision to business inventory investment data, according to the July 2022 commentary from the Fannie Mae (FNMA/OTCQB) Economic and Strategic Research (ESR) Group. The ESR Group forecasts real GDP will increase 0.1 percent in 2022 and decrease 0.4 percent in 2023, down from the previously predicted 1.2 percent increase and 0.1 percent decrease, respectively. Notably, the ESR Group now expects a recession to begin in the first quarter of 2023, earlier than previously forecast, due to the aggressive monetary policy response required of the Federal Reserve to bring inflation down from its current decade-high levels. By Q4 2022, the ESR Group expects inflation, as measured by the Consumer Price Index, to have moderated to 5.7 percent on a year-over-year basis, down from the June reading of 9.1 percent, and then to 1.6 percent by the end of 2023, below the Fed’s 2-percent target.

The ESR Group revised downward its forecast for total home sales growth in 2022 to a decline of 15.6 percent, compared to a decline of 13.5 percent predicted last month, but revised upward its home price appreciation forecast to 16.0 percent year-over-year-growth in 2022 from the previously projected 10.8 percent. The ESR Group continues to anticipate strong deceleration in home price growth going forward due to the lagged effects of higher mortgage rates and the slowing economy weighing on purchase demand.

“The economy slowed significantly, though unevenly, in the first half of 2022 on the expectation that the Fed will aggressively raise interest rates,” said Doug Duncan, Fannie Mae Senior Vice President and Chief Economist. “With inflation running well above the target rate, the market’s expectation that further, substantial monetary tightening is needed has driven interest rates even higher, and interest rate-sensitive sectors, including housing, are slowing in response. Homes listed for sale are increasingly seeing asking-price reductions, and both construction and home sales – both existing and new – are slowing.”

Duncan continued: “Consumer confidence measures increasingly indicate dissatisfaction with current levels of inflation, offering support to the Fed’s aggressive posture. We continue to believe that it’s unlikely the economy will avoid a modest recession, but given recently released consumer spending and business investment data, we currently anticipate that it’ll begin in the first quarter of 2023, slightly earlier than we previously predicted.”

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