Economy Finishes 2021 Strong; Inflation is Top Risk Concern for 2022

WASHINGTON, DC – The outlook for full-year 2021 economic growth was revised upward to 5.5 percent, an improvement of 0.7 percentage points compared to last month’s projection, due primarily to stronger-than-anticipated consumer spending and inventory investment data, according to the December 2021 commentary from the Fannie Mae (FNMA/OTCQB) Economic and Strategic Research (ESR) Group. The ESR Group also adjusted downward its forecast for 2022 real gross domestic product (GDP) growth to 3.2 percent, noting that strong recent data likely reflects a pull-forward of activity from the first half of 2022 and is unlikely to be sustained. The principal macroeconomic concern for 2022 remains accelerating inflation – and how the market and policymakers respond to it. While there’s significant room for uncertainty regarding the near-term path of inflation, the ESR Group projects it to peak at approximately 7.0 percent annualized in the first quarter of 2022 before gradually decelerating to 3.8 percent by year-end. The ESR Group expects the Federal Reserve to begin a more aggressive pace of monetary tightening in the new year as part of its effort to combat rising price pressures without tipping the economy into recession. The forecast is now calling for interest rate increases in the second and fourth quarters of 2022, and then quarterly through 2023. The market forwards showed a high probability of a third increase in 2022 at the time of writing.

The ESR Group upgraded its home sales growth projection for 2021 to 7.1 percent, with a strong end-of-year sales surge expected, from the previously projected 5.3 percent, but forecasts a decline of 1.4 percent in 2022 due to limited listings and growing affordability constraints. The expectation that mortgage rates will continue to drift upward, averaging 3.2 percent in 2022, coupled with additional home price appreciation, are likely to make affordability a growing constraint on home sales in the new year. According to the ESR Group, the impact of monetary policy tightening to combat inflation will combine with ongoing supply issues and still appreciating home prices to slow sales activity.

“While the economy picked up steam late in the year, unfortunately, so did inflation, and the market expects the Fed to recalibrate its monetary policy as a result,” said Doug Duncan, Fannie Mae Senior Vice President and Chief Economist. “The public registered its ill-will toward inflation in our most recent National Housing Survey®, which found that 70 percent of consumers believe the economy to be on the wrong track – the most since 2011, when consumer sentiment was weighed down by the aftermath of the Great Recession. The Fed recently acknowledged that inflation is unlikely to be transitory, and it will now attempt to engineer a soft landing, one in which inflation moderates to acceptable levels and economic growth decelerates but doesn’t contract. Whether the Fed is able to thread this historically difficult policy needle is shaping up to be one of the most consequential economic storylines of 2022.”

Visit the Economic & Strategic Research site at fanniemae.com to read the full December 2021 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.