Underlying inflation is decelerating and there are signs the labor market is cooling, but a modest contraction in the US economy remains the most likely outcome in the first half of 2024, according to commentary by Fannie Mae’s Economic Strategic and Research Group.

The group had initially projected a mild recession in the second half of this year. In an April 2022 report, the group said the impact of Covid-19 economic stimulus programs was dissipating and that tightening monetary supply would likely push the US to a recession in the first half of this year. At the time, the group forecast the housing supply shortage would keep production from falling significantly, making the recession mild.

“Housing production has indeed held up,” Doug Duncan, senior VP and chief economist at Fannie Mae, said in a press release today. “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.”

Duncan continued, “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.”

He also pointed out that households remain confident in their own employment despite misgivings about the overall economy.