The CPI data for May, which printed on Friday, June 10, were a game changer for us. Not only did the overall rate of CPI inflation jump to a year-over-year rate of 8.6% in May, but the underlying details showed that price pressures remain broad-based. Inflation is starting to become more entrenched, and it likely will take sharp deceleration in demand, if not outright contraction, to bring inflation down to more tolerable rates in the foreseeable future.
Higher interest rates will weigh on interest rate-sensitive spending. We look for real consumer spending on durable goods to slip 5% between late 2022 and the end of next year. We also forecast that the sharp rise in mortgage rates will cause housing starts to tumble about 13% in 2023 relative to the 1.65 million pace that we project for this year.
We forecast that real GDP will decline for two consecutive quarters in mid-2023, with a peak-to-trough contraction of about 1%. On average, downturns have lasted four quarters, with a peak-to-trough contraction in real GDP of 2.7%. So our forecasted recession would be one of the milder downturns in the post-WWII era. It would be roughly similar in magnitude to the recession of the early 1990s, when real GDP fell by 1.4% between Q3-1990 and Q1-1991.
The elevated rate of inflation and the Fed's response to it are making prospects of a soft landing looking increasingly less credible, in our view. In short, our base case has changed from an economic soft landing to a mild and relatively brief recession starting in mid-2023. - Wells Fargo Securities
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