Dive Brief:

• The U.S. economy will probably fall into recession during the second quarter of 2024 as consumers cut spending and high borrowing costs slow business investment, Fannie Mae said.
• Gross domestic product, after expanding 2.6% this year on a Q4/Q4 basis, will likely shrink 0.4% next year before rising 1.6% in 2025, according to Fannie Mae. Meanwhile, the Federal Reserve will trim the benchmark interest rate from its current range between 5.25% and 5.5% — a 22-year high — to 5.1% next year and 4.5% in 2025, Fannie Mae forecast.
• “We continue to expect a slowdown over coming quarters as consumer spending growth has exceeded income growth and higher real interest rates weigh on business investment,” Fannie Mae said.

Dive Insight:

The Fannie Mae forecast for a decline in consumer spending preceded a report by the University of Michigan that consumer sentiment sagged in November to a six-month low.

“More favorable current assessments and expectations of personal finances were offset by a notable deterioration in expected business conditions,” Joanne Hsu, the university’s consumers director, said Wednesday in a survey report.

“In particular, long run business conditions plunged by 15% to its lowest since July 2022,” Hsu said, adding that “younger and middle-aged consumers exhibited strong declines in economic attitudes.”

Consumers drive nearly 70% of U.S. economic growth.

The economy is already showing signs of cooling from the 4.9% annual pace during the third quarter. Hiring and inflation have declined in recent months while wage growth has slowed.

“The slowdown in employment gains has continued and stress is growing on consumers’ ability to sustain their high levels of spending — unsurprising results that we attribute to the often-lagged economic effect of monetary policy tightening,” Fannie Mae Chief Economist Doug Duncan said in a statement.

Orders for durable goods, a measure of business investment in equipment, fell 5.4% last month, more than expected. Orders declined during the third quarter at a 3.8% annual rate.

The pace of GDP expansion will probably fall during the current quarter to a 2.1% annual rate, the Atlanta Fed said Wednesday.

Despite reduced hiring and slower economic growth, Fed officials at an Oct. 31-Nov. 1 meeting gave no indication that they have concluded their most rapid tightening of monetary policy in four decades, according to meeting minutes. They have pledged to restore inflation to their 2% target.

“Participants expected that the data arriving in coming months would help clarify the extent to which” increases in the main interest rate since March 2022 have curbed inflation and economic growth, according to the minutes released Tuesday. Policymakers have held off from hiking the federal funds rate at two meetings since July.

Consumer expectations for price pressures give the Fed cause for caution. Their long-run expectations for inflation rose to the highest level since 2011, Hsu said.

“These expectations have risen in spite of the fact that consumers have taken note of the continued slowdown in inflation,” she said. “Consumers appear worried that the softening of inflation could reverse in the months and years ahead.”

Fed officials have said for years that they carefully track inflation expectations as a sign of future price stability. They note that the anticipation among consumers that price pressures will rise can become self-reinforcing.

Fannie Mae predicted that inflation will likely slow further and that the central bank during this tightening cycle is probably finished hiking interest rates.

“Our baseline expectation is that the Fed will not raise rates further this cycle but will keep policy tight until it is clear that inflationary pressures have abated,” Fannie Mae said.