ABA Predicts “Soft Landing” for the US Economy, But Risks Remain

Macroeconomic forecasting unofficially got its start in ancient Egypt, when prognosticators predicted the size of annual harvests by the level of the Nile River during flood season. Later, the Oracles of Delphi and Nostradamus became known for their future-telling, including how fortunes would fare. Centuries later, the foundation for systematic economic forecasts was formed after English economist Sir William Petty developed the concept of a seven-year business cycle in the 1600s. The “Keynesian revolution” forever changed macroeconomic forecasting, with Scandinavia producing the first official forecasts after World War II and most other advanced economies following suit by the 1960s.The latest forecast by the American Bankers Association’s (ABA) Economic Advisory Committee calls for the US economy to have a “soft landing,” though risks remain.The committee, composed of 15 chief economists from ABA member banks, said in its September report that personal consumption expenditures, the Fed’s preferred inflation indicator, will likely meet the Fed’s long-term goal of 2% by the second quarter of 2025. They also expect the country’s real GDP to grow 2.1% in 2024 and then slow slightly to 1.8% growth in 2025 — lower than the 3% growth reported for the second quarter this year.Luke Tilley, EAC Chair and chief economist at M&T Bank subsidiary Wilmington Trust, notes that consumer spending, government spending, and capital expenditure are a little slower, but there is a slight pickup in home-building investment. “When you bring all those things together…you get that soft landing projected slowdown,” Tilley says. “Encouragingly, we continue to see the slowdown in inflation.”However, the risk of a recession in 2025 is still at 30%, unchanged from the economists’ March consensus estimate. One likely headwind is possible labor market deterioration, with the unemployment rate likely peaking at 4.4% in the first half of 2025, but then likely falling to 4.3% in the latter half.Tilley also expresses concern regarding consumers in lower credit tiers that are becoming delinquent on their credit cards. “Whether that is signaling a real problem or sort of a normalization back to pre-COVID trends because delinquency rates had been very low for a while post-stimulus — is the other open question.”The economists also predicted that the Federal Reserve will likely cut its federal funds rate an additional 150bp between now and the end of 2025. As a result, credit availability for both consumers and businesses should expand and bank credit quality should remain stable, citing the following rate changes:

Data source: American Bankers Association Economic Advisory Committee September ReportOn another note, residential mortgage activity should pick up as the appreciation of home prices moderates from 6.8% in this year’s second quarter to 3.1% by the fourth quarter of 2025. Moreover, new home construction should also pick up now that mortgage rates have declined over the past few months. Economists are expecting quarterly housing starts to increase from 1.34MM in the second quarter of 2024 to 1.45MM by the fourth quarter of 2025.All of this suggests a cautiously optimistic outlook with growth opportunities and manageable risks. Plan for a soft landing but remain vigilant about potential credit quality issues among borrowers. With luck, the Fed’s continued interest rate cuts will spur economic growth and mitigate such concerns.