A recession will likely begin in the fourth quarter of this year or the first quarter of 2024. 

The recent data is mixed enough to create a “muddled picture” of the U.S. economy, but a recession “remains the most likely outcome". Fannie Mae’s Economic and Strategic Research (ESR) Group released its forecasts for the economy and the housing market, stating that while inflation has moderated, it still believes “continued robustness in the labor market risks an entrenchment of some core inflationary pressures.” The commentary continued, “Lessons learned from the inflationary era of the 1970-80s, a time when price pressures eased and then quickly reaccelerated, lead the ESR Group to expect that the Fed will maintain its restrictive monetary policy stance until it is abundantly clear that inflation pressures from the labor market have eased.” The group added, however, that “based on the timing of data releases, that evidence is unlikely to appear until a recession is already unavoidable, making the question of a downturn more a matter of ‘when’ than ‘if.’” According to its revised economic forecast, a recession will likely begin in the fourth quarter of this year or the first quarter of 2024. The Federal Reserve announced in June it was pausing its rate hikes as it tries to bring annual inflation down to its goal of 2%. Fed Chairman Jerome Powell, however, told Congress soon afterwards that interest rates will have to be increased again to curb economic growth and control inflation. The ESR Group said in its commentary that the housing market’s struggles continue to be caused by the lack of existing homes for sale, a trend that did not improve during the spring homebuying season.  “This has supported a return to home price growth in recent months and continued to boost new home construction,” the group said. While the ESR Group said it continues to expect housing starts to weaken in coming quarters, that is predicated on the business cycle turning. “ “Core inflation remains sticky, having not fallen as rapidly as other price measures, creating upside risk to the fed funds rate, as noted in the Federal Reserve's Summary of Economic Projections, and making it likely in our view that it maintains a restrictive posture for longer than most market participants initially anticipated,” said Doug Duncan, Fannie Mae’s senior vice president and chief economist, Fannie Mae. Duncan added that the housing market's performance is “a testimony to the strength of demographic-related demand in the face of Baby Boomers aging in place and Gen-Xers locking in historically low rates, both of which have helped keep housing supply at historically low levels.”  

Source: Fannie Mae