What Should Commercial Lenders Know For 2025?

There’s no question the economy in the United States is facing an uncertain 2025. Many people are wondering what will happen with inflation and rising costs. Despite this, we still recognized solid GDP growth of 2.3% in Q4 2024. Consumer anxiety about their finances is potentially the biggest factor as to whether 2025 is a positive year. Even though the economy is stable overall, a shift in consumer confidence can drastically impact spending habits, ultimately affecting small businesses.

The information below is taken from February’s Main Street Lending Report. Detailed information, charts, and an executive summary are provided there. 

Consumer Anxiety and Spending

One of the most significant issues right now is how consumer spending is outpacing income. This means people are spending more than they’re earning, relying on savings or credit to make up the difference. At some point, this type of spending will have to slow down, but it’s unclear when that will happen. It’s not an unusual pattern in the economy – people have gone through similar cycles before – but what makes this moment unique is how quickly consumer behavior can change.

Even over the past year, we've seen a dramatic shift. Since 2007, there’s only been one other time when 10 out of 11 months saw a similar trend in consumer behavior. Two years ago, stimulus payments helped boost consumer spending, and while we’re not suggesting consumer spending will come to a sudden halt, there is still a risk to decreased spending as the lower 50% of earners are fueling much of the current spending boom.

Impact on Small Businesses

One of the effects of rising consumer demand is the expansion of small businesses and the demand for small business capital and loans. Small businesses continue to face challenges in meeting these demands, which has created a strain in the lending market. If this trend doesn’t shift and access to capital continues to be a concern, we could see greater delinquency or defaults of smaller companies in 2025.

The Inflation Worry

Consumers are also worried about inflation. When prices go up, so does the overall cost of living, causing greater stress. The uncertainty about inflation’s future is making many people uneasy and could cause a shift in spending. 

The Fed has signaled an openness to dropping interest rates, helping out consumers and small businesses, but for now they are comfortable keeping rates at current levels while they carefully watch potential changes with inflation.

Default Rates and Consumer Expectations

When it comes to debt, the default index is still slightly higher than what would be ideal, but it's trending in the right direction. Over the past three months, the default rate has been declining, a positive sign. 

Another area to keep an eye on is consumer inflation expectations. While this is just an indicator, not a direct prediction, it’s an important factor. If consumers start expecting prices to continue rising, it could cause wage demands to go up, which, in turn, could actually lead to higher inflation. 

Conclusion

Overall, the economy is holding strong but there are still factors that could cause concern down the road. Consumer anxiety is high, spending patterns are shifting quickly, and everyone is keeping a close eye on inflation. As always, predicting inflation is complicated, and for many, watching consumer expectations and economic trends will help provide a clearer picture of what’s to come.

For a more in-depth look, see the full Main Street Lending Report. 
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