Recession in 2025? Top economists make their bets.

By Jeffry Bartash

Weaker jobs market, rising credit delinquencies pose threats

Risks of a U.S. recession seem low as the Federal Reserve begins a cycle of interest-rate cuts, the nation's top economists say, but a weakening jobs market and rising credit delinquencies could pose dual threats.

Top economists at the American Bankers Association predict just a 30% chance of a recession in 2025 in their semi-annual forecast.

More than likely, they say, the Fed will pull off a hard-to-achieve "soft landing in which a period of high interest rates brings down inflation without causing a recession.

The Fed has only achieved a soft landing once or twice since World War II. Most times a recession ensues when the central bank jacks up rates to cool what it views as an overheated economy.

The central bank sharply raised interest rates in 2022 and 2023 to combat the worst outbreak of inflation in 40 years.

After peaking at 7.3% in mid-2022, the Fed's preferred PCE price index has slowed to a 2.2% yearly rate. The Fed is aiming to reduce the annual rate of inflation to 2%.

Yet a prolonged period of high inflation and high borrowing costs have left wounds on the economy that are far from healed.

The housing market has been in a deep slump because of high mortgage rates, for instance, and the manufacturing sector has been depressed for more than a year.

More recently, businesses have sharply reduced job openings and new hires. The unemployment rate has also risen to a more than three-year high of 4.2% from a cycle low of only 3.4%.

Tilley said the rise in unemployment so far has mostly stemmed from more people entering the labor force, many of them for the first time in light of a big surge in immigration.

The rate of layoffs, on the other hand, is still near a record low.

"You can take some solace in that ... it's not coming from layoffs," said Luke Tilley, chairman of the ABA's economic advisory panel. He is also chief economist at MT Bank/Wilmington Trust.

Yet if companies began to resort to broader layoffs, he said, the economy could take a clear turn for the worse. Still, the ABA predicts the jobless rate will peak at 4.4% next year and then begin to decline again.

"We don't really see too much commentary from companies that they're drastically cutting," Tilley said.

Another worry is greater financial stress on lower-income U.S. households after a few years of high inflation. Delinquency rates on credit-card payments, auto loans and other forms of consumer debt have been on the rise lately.

Consumer spending accounts for more than two-thirds of the U.S. economy and lower-income families tend to spend most of what they earn.

Delinquencies are still below historical levels, however, and they would have to get a lot worse to intensify the stress on the economy, Tilley said.

A pending strike along East Coast ports was not viewed as an especially big worry. Economists see a temporary disruption but probably not any major long-term effects.

-Jeffry Bartash

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10-01-24 0532ET

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