2025: Rhyme vs Repeat

By: Eric Lohmeier, CFA and Zach Eubank

As we enter 2025, the usual suspects are likely to be the key drivers of the business environment in Iowa: interest rates, inflation, and the policy decisions that drive them. We look at much of the rest as noise.

Firstly, interest rates. While on one hand there is general consensus amongst the financial and business communities that the Fed funds rate will likely see cuts of between 25 and 50 basis points, on the other it is increasingly likely that the five- and 10-year treasury rates are rather “stuck” in the 4% to 5% range. While a rate cut may signal more accommodative monetary policy, the everyday borrower, both households and businesses, can expect to see reference rates remain above 4-5% (loan spreads are generally 2%-4% higher than the reference rates) for long-term borrowing like mortgages, capital expenditures, and the like. This is really bad news for real estate development; commercial development, except for projects and companies focused on “AI” driven demand (utilities, data centers and the like) are verging on a Great Recession type environment, while a reduced supply of single-family homes vs long-term historical levels will mitigate the rate picture somewhat.

Secondly, inflation remains a critical concern for the economy, with several looming policy and demographic factors signaling the potential for renewed price pressures. Trade barriers and a significant reduction in net immigration, exacerbated by both policy changes and deportation efforts, are likely to contribute to supply-side constraints that could fuel inflationary pressures; however, the long-term productivity improvements from technologies like artificial intelligence (AI) are expected to take years to fully materialize. The ultimate effect being the immediate net impact on recent lower inflation trends are likely muted by the ongoing constraints in the supply chain and labor markets.

Lastly, our regional economy is particularly sensitive to both trade dynamics and immigration trends. Iowa boasts a robust trade surplus, with exports outpacing imports by approximately $5 billion annually1. This makes the state highly dependent on the stability of global trade relationships. Any disruptions to international trade, particularly those linked to tariff barriers or political tensions, could significantly sway Iowa’s economy. To boot, foreign-born workers account for a conservative estimate of 30% of crop production, animal processing, and construction workforces in Iowa2 and nationally. A further tightening of immigration policies could exacerbate labor shortages in these critical sectors, leading to higher wage pressures (or worse – automation in animal processing or roofing for example don’t meaningfully exist) and potentially hindering growth.

The impending changes to the Tax Cuts and Jobs Act (“TCJA”) in 2026 should also be considered by business owners in Iowa and the Midwest due to the substantial reduction in the estate tax exemption amounts. The coming changes to the estate and gift tax exemption amounts in particular may significantly alter the landscape of estate planning if the provisions sunset. For the year 2025, the exemption amount is approximately $14 million per individual, an increase from $13.61 million in 2024. However, this increase is temporary, as the exemption is projected to decrease to approximately $7 million in 2026, adjusted for inflation, if the current legislation is not extended. Quite often, a business owner’s net worth is directly tied to an operating business, so understanding tax saving strategies available for intra-family wealth transfer is key. One opportunity to take advantage of the current high exemption amounts is a Spousal Lifetime Access Trust (“SLAT”), which is an irrevocable trust designed to allow one spouse (the donor spouse) to gift assets into a trust for the benefit of the other spouse. This tool is particularly useful for transferring wealth to future generations while ensuring the financial security of the beneficiary spouse. There are many other estate planning strategies that may be utilized when considering the value of a business and gifting privately held stock and/or membership units. Please note, the information provided is based on current laws and projections. The actual impact of the TCJA’s expiration and subsequent changes to estate planning strategies may vary. For personalized advice, it is recommended to consult with a tax professional.

To end on a more positive note, buyers and sellers who are well positioned to weather the above headwinds are not likely to see any downturn in the M&A market. The outlook for M&A activity remains strong, with favorable conditions for deal-making – most specifically for sellers and strategic acquirers with excellent balance sheets and access to the broad capital markets driven private lending. Business leverage is more accessible than ever, with capital markets showing tight spreads compared to historical averages. Additionally, the long reset of capital markets to a 4%-plus five-year Treasury tenor is now firmly established, providing a stable backdrop for transactions, which could spur further consolidation and strategic growth in key (less cyclical) industries.

  1. U.S. Census Bureau, “U.S. International Trade in Goods and Services December and Annual 2023”, CB 24-18 ↩︎
  2. Immigrants serve the common good, including in Iowa: Those are the facts. Des Moines Register. https://www.desmoinesregister.com/story/opinion/columnists/iowa-view/2024/03/08/immigrants-serve-common-good-iowa/72872192007/ ↩︎

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