Last week at the inaugural Strategic Summit, Catalyst’s Vice President of Advisory Services Steven Houle delivered an insightful analysis of the current economic landscape and its potential trajectory for 2025. Always well-received, his presentation
focused on critical economic factors such as unemployment, GDP, inflation and the Federal Reserve. Houle’s analysis also offered a comprehensive look at economic trends and how they could impact credit unions, as well as the broader financial sector, in years to come.
Caution in the labor market
A key point Houle raised was the volatility in the labor market. “The unemployment rate has been creeping up, and while we saw a strong job report for September with 254,000 new jobs, the long-term trend still points toward a slowdown in the employment sector,” said Houle.
He noted that the unemployment rate had fallen slightly to 4.1%, but broader indicators suggest a softening in the job market. According to Houle, the Sahm Rule, which signals a potential recession when unemployment rises by 50 basis points over its 12-month low, may warrant watching as we move into 2025.
Inflation and the GDP landscape
Houle’s economic projections also addressed inflation. He discussed the Federal Reserve’s ongoing battle to bring inflation down to its target of 2%, noting that progress has been slow but steady.
“Inflation has been incredibly stubborn, and the Fed’s target of 2% is proving to be elusive,” he stated. However, Houle pointed out that inflation metrics, including the core personal consumption expenditure index, are moving in the right direction, with inflation reaching 2.7% as of August 2024.
GDP growth was also on Houle’s agenda. Despite the challenges posed by inflation and a slowing job market, consumer spending – which constitutes 70% of GDP – remains strong.
“We’re seeing relatively solid GDP numbers, with third-quarter estimates suggesting growth between 2.5% and 3%. This is largely driven by consumer behavior, which is keeping the economy afloat despite other pressures,” explained Houle.
He cautioned, however, that rising debt levels and a tightening lending environment might curb consumer spending in the future.
Navigating economic headwinds
Houle also addressed challenges credit unions might face in 2025. He discussed how deposit growth projections vary widely, with some credit unions budgeting for 3% growth while others anticipate as much as 8%.
“If you’re forecasting higher deposit growth, it suggests you’re planning to buy market share through competitive rates. Credit unions will need to be careful in balancing higher CD rates while maintaining profitability,” Houle advised.
Looking ahead, he predicted that auto lending and mortgage markets would continue to face headwinds, further noting that credit unions had tightened their lending standards in recent months. Auto loans, a significant portion of credit union portfolios, are expected to plateau or see only slight growth, depending on how interest rates evolve.
“We’re seeing a flattening in auto sales and tightening credit availability, particularly for credit unions,” said Houle.
He emphasized the importance of monitoring credit quality and consumer leverage as key factors that could influence loan portfolios.
Remaining agile
Houle’s analysis painted a complex picture of the U.S. economy, marked by both resilience and emerging risks. He advised credit unions to prepare for a potential slowdown while remaining agile to capitalize on growth opportunities.
“The road ahead will require careful navigation, but with the right strategies, credit unions can continue to thrive in this dynamic environment,” Houle concluded.
If you missed Catalyst’s 2024 Strategic Summit, we hope to see you next year in the Hill Country of Austin, Texas. Planning is underway with more exciting details to come – sign up for advanced notifications to stay in-the-know!