Will the US economy decline in 2025? Top economists are placing their bets!

Top American economists say that as the Fed begins its rate-cutting cycle, the risk of a recession in the United States seems low, but a weak job market and rising credit default rates could pose a double threat.

Top economists at the American Bankers Association predict in their semi-annual forecast that the likelihood of a recession in the United States in 2025 is only 30%.

They believe that a more likely scenario is that the Fed will achieve a difficult "soft landing," where a period of high interest rates will lower inflation without triggering an economic downturn.

Since World War II, the Fed has only successfully achieved a soft landing once or twice. In most cases, when the Fed raises rates to cool what it sees as an overheated economy, an economic recession often follows.

To combat the most serious inflation outbreak in 40 years, the Fed raised rates significantly in 2022 and 2023.

After peaking at 7.3% in mid-2022, the Fed's preferred personal consumption expenditure price index has slowed to 2.2%. The Fed's target is to bring the inflation rate down to 2% annually.

However, the long-term high inflation and high borrowing costs have left unresolved scars on the economy.

For example, due to high mortgage rates, the housing market has been in a deep slump, and the manufacturing sector has been in a downturn for over a year.

Recently, companies have significantly reduced job vacancies and new hires. The unemployment rate has also risen from the cycle's low of 3.4% to a three-year high of 4.2%.

Tilley, chairman of the American Bankers Association's Economic Advisory Group and chief economist at MT Bank/Wilmington Trust, said that so far, the rise in the unemployment rate is mainly due to more people entering the labor market, many of whom are entering for the first time due to a surge in immigration.

On the other hand, the layoff rate remains near historic lows.

Tilley explained, "You can take some comfort in the fact that it's not coming from layoffs."

But he added that if companies start widespread layoffs, the economy could deteriorate significantly. However, the American Bankers Association expects the unemployment rate to peak at 4.4% next year and then begin to decline again.

Tilley said, "We really haven't heard much about significant layoffs from companies."

Another concerning issue is that after years of high inflation, American households are facing increased financial pressure. Default rates on credit card payments, auto loans, and other forms of consumer debt have been rising recently.

Consumer spending accounts for over two-thirds of the U.S. economy, and low-income families often spend most of their income.

However, Tilley stated that default rates are still below historical levels, and unless they deteriorate significantly, they will not exacerbate economic pressure.

The upcoming East Coast port strike is not seen as a major concern. Economists believe it may cause temporary disruptions but may not have significant long-term effects.