OMAHA, Neb. — Creighton University Professor Ernie Goss, PhD, said rising interest rates, trade tensions and rising inflation are warning signs of a possible economic downturn. While Goss emphasizes that the U.S. economy is strong, he expects the economy may be headed toward a downturn as early as the latter part of 2019 or in 2020. “As the last recession showed us, it’s very hard to predict the timing, but the U.S. economy is definitely headed toward higher risk,” Goss said.
Goss, director of Creighton University's Economic Forecasting Group and the Jack A. MacAllister Chair in Regional Economics in the Heider College of Business, said there are signs of trouble as the gap, or yield curve, between short-term and long-term interest rate decreases. The yield curve is currently at 0.30 percent, the lowest it’s been since the last U.S. recession, which was from 2007 to 2009.
“Since 1980, every U.S. recession has been preceded by a period in which short term rates climbed above long-term rates, or the gap between the two rates approached zero,” Goss said.
Another sign of a coming slowdown or recession concerns trade tensions between the U.S. and other global economies as well as current global trade restrictions. “The current trade tensions are a clear and present danger to the overall U.S. economy, particularly for those areas in the nation that spend heavily on exports and depend heavily on trade,” Goss said. “The Chinese are raising tariffs on soy beans and pork. Those are two agriculture commodities where we’ve seen some significant declines in prices tied to trade tensions or tariffs.”
Goss also identified a rising inflation rate as a signifier of higher interest rates which lead to slower growth. The Federal Open Market Committee (FOMC) set 2 percent as an inflation target. However, recent inflation rates have exceeded that target. If the inflation rate continues on this upward, Goss expects short-term interest rates will begin to rise more aggressively, leading to a negative yield, or short-term rates exceeding long-term rates.
Debt also will play a major role in an upcoming recession or economic slowdown, Goss said, both at the consumer level and federal level.
On the consumer level, Goss said housing prices have continued to increase. “The housing price increases are different this time versus last time in 2006 and 2007. It’s supply-driven now rather than demand-driven,” Goss said. “The cost of materials is increasing. Individuals are seeing prices increase because of limited supply.”
Goss said he expects home price growth to come down, or “some of the air to come out of the bubble” as the U.S. economy slows down in the latter part of 2019 or 2020.
Another sign of a downturn could be the federal deficit, which is approximately 16 percent higher currently than last year at this time, according to Goss, resulting in higher interest rates as the government continues to ratchet up borrowing to support rapidly expanding spending.
Goss said the economy often moves through periods of economic expansion and recession. He recommends taking action to prepare for the periods of recession by bracing for higher interest rates and inflation by investing in notes and bonds that are inflation-proof, such as Treasury and Inflation Protected Securities (TIPS). Also, individuals should reduce their exposure to stock holdings of industrial stocks that are much more recession sensitive.