NEWARK — As inflation remains sticky and uncertainty clouds the nation’s economy, forecasters are divided between optimism and apprehension of the reality that a recession may come in 2025.
While Moody’s Analytics Deputy Chief Economist Cristian deRitis and wealth manager Michael Farr warned of a trade war and inflation driving prices even higher during the 2025 Economic Forecast forum sponsored by Lyons Companies, Federal Reserve Bank of Philadelphia President and CEO Patrick Harker took a more positive view of the future.
Harker, who will be ending his tenure at the Philadelphia Fed in June, said that he thought the economy entered 2025 in a position of “relative health and strength” even though inflation was above target. The U.S. ended 2024 in a strong position by growing the economy by 2.3% in gross domestic product with the labor market adding an average of 200,000 jobs per month.
Still, inflation remains to be the top concern for the American consumer. Inflation held at the range of 4.25% to 4.5% after the last rate cut the Federal Open Market Committee made in December.
Harker believes that the decision to hold the rate is the right call.
“The policy rate remains restrictive enough to continue putting downward pressure on inflation over the longer term, as we need it to, while not negatively impacting the rest of the economy,” he said during the Feb. 27 economic forecast. “The caution I am taking is to look at all the data and not be moved to act, in either direction, based on one report covering one month.”
For example, Harker pointed to the Personal Consumption Expenditures price index, which rose 2.5% in January from the year before. It also slowed down from December’s 2.6% annual rate, according to the U.S. Commerce Department report.
But he added that the January CPI inflation has appeared in nine of the past 10 Januarys. Instead of having a knee-jerk reaction to one report, Harker said it was better to err on the side of caution.
The Philadelphia Fed CEO compared the wait-and-see approach much like the success of the Philadelphia Eagles’ season which led them to win the Super Bowl 59 weeks earlier after a bumpy road.
“The team didn’t panic and stuck to its game plan and let that play out over the entire season. And I’d say that ended rather successfully, even if it gave us fans some moments of stress,” Harker said.
That said, there are some signs that Harker and the rest of the panel at the summit hosted by the University of Delaware are watching. Top of that list is the changing winds from Washington D.C. as well as international relations.
The job gains have relatively returned to the same pace as it had in the time before the COVID-19 pandemic and Harker reminded the audience that the return to work back then was at full sprint rather than a ramp up.
What did concern Harker was the consumer spending which matched against the credit card balances. Data from the Philadelphia Fed shows that more than one in 20 credit card accounts are currently maintained by making the minimum monthly payment. Credit card debt hit $1.2 trillion at the end of last year.
“That is not necessarily a flashing red light to me, but a yellow one,” he said. “The data clearly tell us that many consumers are under stress in managing their finances in the midst of higher-than-target inflation. So, this is a space worth keeping an eye on, and I will. Closely.”
Farr, who had warned in the past about high chances for recession in the last four years, said that the news about tariffs has sent a chill in the market. He was also uncertain that President Donald Trump’s policies would quell the threat of a recession – something the president himself indicated last week.
“President Trump said the American people understand we have to fight back on China, and we have to do these tariffs and they are ready to have a certain period of pain to deal with these unfair policies that have gone on for a while,” Farr said. “Ladies and gentlemen, I’m not sure at all that the Americans are actually ready to deal with the pain in the wallet. It’s a great notion until you have to pay another $100 at the grocery store.”
Right now, there’s a sharp disparity between household incomes, risking accelerating concerns for a recession. Moody’s, a top financial services company, has found that shelter costs have proven to be one of the more persistent drivers with inflation – their models show that if rent and mortgage costs were removed from the picture, inflation would be at the 2% target the Fed seeks.
Surveys among households, businesses and small businesses all report a greater feeling of uncertainty with the labor market and federal policy which deRitis warned could cause a sharp consumer pullback.
“The uncertainty itself can become a risk factor when it comes to the economy, and understanding that businesses take a wait-and-see approach on investment can already lead to slower growth and potentially that recession if the spending pullback is that dramatic,” he said.
