MADISON, Wis.–What will the economic environment look like over the next few years? And what about the Fed and interest rates? Those are questions on the minds of many, including credit union leaders, a new analysis from TruStage acknowledges.
In a forecast included as part of TruStage’s newest Trends Report, which is based on CU data through November 2024.
“Looking in the rear-view mirror, the economy performed surprisingly well in 2024 producing 2.8% more goods and services compared to 2023, which is above the 2% long-run natural growth rate for the U.S. economy,” said Rick. “Growth was broad-based as consumer, residential, government and export spending reported robust growth.”
Rick said other signs of recent economic strength include strong monthly job growth across most sectors and industries, a very low 4.1% unemployment rate, and wage and price pressures continuing to decline.
The Forecast
“As the inflation rate falls throughout 2025 this should allow the Federal Reserve to continue lowering short-term interest rates another 50 basis points in the second half of the year,” Rick forecast. “So, with this economic backdrop we are forecasting real gross domestic product to rise 2.3% in 2025, slightly above the long-run average of 2%, creating the ‘soft landing’ scenario the Federal Reserve is shooting for.”
Adjusting for Lags
Why is Trustage forecasting slower growth in 2025 versus 2024?
According to Rick, first and foremost, the long and variable lags of tight monetary policy will weigh on job gains, which in turn slows economic growth.
“Other factors slowing the economy include less immigration and labor force growth, a rise in the personal savings rate, and the rise in the value of the dollar reducing exports,” Rick wrote. “Even though a recession is always a possibility, we are putting its probability at 20% for 2025. Factors that could push us into negative growth would be a combination of significantly higher energy prices, a sharp drop in stock or house prices, higher long-term interest rates, and a sharp drop in commercial real estate prices (especially lower-quality office properties and high-end multifamily buildings) leading to a banking crisis.
The Bottom Line
“So, the bottom line is that we do not expect an endogenously induced recession in the next two years, but an exogenous shock could always tip us into one,” Rick added.