The economy could experience modest growth in the second half of 2022 before sliding into a minor recession early next year, according to the latest forecast by Fannie Mae.
The mortgage company’s Economics and Strategy Research (ESR) group forecast gross domestic product (GDP) could hit 1.4% in the third quarter. The group then forecast that the year would end at 1.1% of annual GDP, reflecting modest growth before dropping to a contraction of 0.6% in the first quarter of 2023.
GDP shrank in the second quarter of this year, marking the second consecutive contraction in GDP – the common definition of a recession. Real GDP contracted 0.9% per year in the second quarter, better than its 1.6% per year contraction in the first quarter, the Bureau of Economic Analysis (BEA) reported.
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GDP CONTRACTION PROVOKS RECESSION DEBATE: WHAT CONSUMERS CAN DO NOW
Negative GDP sparks recession debate
Back-to-back negative GDP readings in the first half of 2022 have created debate over whether or not the US is in a recession. Typically, economists consider a recession to occur after two consecutive quarters of negative GDP growth. But the White House has said that may not be the case in this case.
“What is a recession? While some argue that two consecutive quarters of real GDP decline constitutes a recession, this is neither the official definition nor how economists assess the state of the business cycle” , White House economic advisers said in a recent blog post.
The National Bureau of Economic Research defines a recession as “a significant drop in economic activity that extends to the entire economy and lasts for more than a few months”. The office will typically wait up to a year to declare a recession has started.
Fannie Mae’s ESR Group economists have predicted that a recession will not occur until early 2023.
“Indicators paint a mixed picture, mostly negative first-half GDP readings despite strong job growth over the same period,” Fannie Mae said in its forecast. “As the full effects of tighter monetary policy and fading fiscal stimulus ripple through the economy and repress consumer spending, we expect a moderate contraction to occur in 2023, accompanied by a weakening labor market.
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FED MINUTES REVEAL INTEREST RATES COULD REMAIN ‘RESTRICTIOUS’ FOR SOME TIME
Fed expected to raise interest rates despite recession risk
Although there is debate over the current state of the economy, the Federal Reserve should continue to raise interest rates to bring inflation down.
At his most recent meeting, the Fed raised interest rates for the fourth time this year by 75 basis points, bringing the target range for the federal funds rate to 2.25% to 2.5%. This comes as inflation remains near its highest level in 40 years, hitting 8.5% a year in July.
Although inflation was slightly lower in July, economists expect the Fed to continue raising rates in the coming months. But we don’t know if it will be 50 or 75 basis points.
“These comments are much more hawkish than dovish, again, and a 50-75 basis point hike in the fed funds rate should be expected at the next Fed meeting, as those increases only start to slow. ‘at some point in the future,’ Rusty Vanneman, chief investment strategist at Orion Advisor Solutions, said in a statement when the Fed’s latest minutes were released.
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