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Midwest poised for cautious 2025 as growth softens, CSG Midwest says
Summary
Laura Tamaka of the Council of State Governments’ Midwest office told attendees that the U.S. economy shows signs of a 'soft landing' but that states should expect slower revenue growth and more constrained 2025 budgets despite healthy rainy day funds.
Laura Tamaka, director of the Midwest office of the Council of State Governments, told a Johnson County audience that recent national indicators suggest a possible economic 'soft landing' but warned states should budget more cautiously for 2025.
"At this time, the economy does seem to be exhibiting signs that are consistent with that soft landing," Tamaka said, citing five straight quarters of growth through the third quarter of 2024 and a Q3 annualized GDP gain of 2.8 percent. She noted inflation had moderated to about 2.6 percent and the Federal Reserve had begun cutting interest rates after holding them above 5 percent for more than a year.
Tamaka said labor markets remain relatively strong — the national unemployment rate stood near 4.1 percent in September — but regional variation persists, with Midwestern state rates ranging from about 2 percent in South Dakota to roughly 3.5 percent in Illinois. She also cautioned that official unemployment figures may undercount underemployment and discouraged workers.
On state finances, Tamaka said revenue growth slowed in fiscal years 2023–24 after two years of unusually large general‑fund increases and that FY 2025 looks like a return to "normalcy" with smaller surpluses. She highlighted rising rainy day fund balances as a strength: "In 2023 balances were 2.3 percent of expenditures and in 2024 those fund balances grew to 13.2 percent," Tamaka said, calling the funds an important buffer against downturns.
Why it matters: Slower revenue growth and the winding down of pandemic‑era federal stimulus will force states to prioritize spending and make tradeoffs among education, health and infrastructure programs. Tamaka recommended that policymakers plan for constrained budgets even as they use rainy day funds strategically.
The presentation drew questions about cross‑border policy lessons — Tamaka said permitting timelines in Canadian provinces may offer models for U.S. critical‑minerals permitting — and she directed attendees to slides made available after the meeting for deeper data and state‑by‑state figures.
Next steps: Tamaka invited attendees to the CSG Midwestern legislative conference in July; she said the CSG slides contain state‑level revenue and spending tables for those who want to examine the numbers in detail.
