Soft landing or mild recession. Which will it be? 

With underlying inflation decelerating and signs that the labor market is cooling, the central question for economists remains whether the economy is headed for a soft landing or a mild recession. According to the September 2023 commentary from the Fannie Mae Economic and Strategic Research (ESR) Group, mixed signals from key economic data releases continue to muddle the near-term outlook – and the answer to that question – but a modest contraction remains the most likely outcome as consumption continues to outpace incomes and previous monetary policy tightening works its way through the system. The ESR Group notes that robust consumption growth in July was likely due to a series of temporary factors, and credit card transaction data and control group retail sales suggest real consumption growth will pull back in August. The housing market faces renewed headwinds with mortgage rates settling above 7 percent, according to the ESR Group. Still, the downside risk to total home sales is limited as more sales are being driven by life events rather than discretionary factors, and the cash share of purchases remains high. New home sales were surprisingly strong in the first half of the year, due partly to homebuilder rate buydowns, which become more expensive when mortgage rates rise. Going forward, the ESR Group expects new home sales to pull back slightly due to the higher mortgage rate environment and recent decline in homebuilder confidence. “In April 2022 we noted our expectation that the combination of dissipating stimulus impact and tightening monetary policy would result in a mild recession in the second half of 2023; mild in part because we expected the housing supply shortage to keep production from falling significantly,” said Doug Duncan, Senior Vice President and Chief Economist, Fannie Mae. “Housing production has indeed held up. However, the pandemic-related fiscal transfers and built-up household savings have supported consumer spending longer than we had expected, providing unforeseen support to the macroeconomy.

Our current prediction for a mild downturn in the first half of 2024 is predicated on the belief that consumers will begin pausing their spending, in part due to the exhaustion of those funds and having to realign to a more sustainable relationship between spending and incomes.” 

Source: Fannie Mae