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A recession in 2019 is looking more likely, Duke CFO survey says

North Carolina has had stronger growth in housing than the rest of the nation because of population growth, but isn’t overbuilt. That should shield the state from the worst of any recession, says John Graham, a finance professor at the Fuqua School of Business,
North Carolina has had stronger growth in housing than the rest of the nation because of population growth, but isn’t overbuilt. That should shield the state from the worst of any recession, says John Graham, a finance professor at the Fuqua School of Business,

An economic downturn is looking more likely in 2019, according to a global survey of chief financial officers.

Nearly half of the U.S. executives surveyed in the Duke University Fuqua School of Business quarterly survey now believe that the U.S. will enter a recession by the end of next year.

Even more — 82 percent — think that a recession will happen by the end of 2020.

The negative sentiment comes off the back of nearly a decade of growth in the U.S. and generational lows in unemployment. But there have been some warning signs on the horizon, said John Graham, a finance professor at the Fuqua School of Business, in a phone interview.

“There have certainly been (negative) things happening,” said Graham, noting the trade war between the U.S. and China as well as slowdowns in European economies, “but somehow the U.S. economy has been going like a steam engine.

“I think we have been trending (down), but I was still interested and surprised that chief financial officers would think by this time next year there would be a recession.”

The survey was of 500 CFOs, including 226 in the United States.

One of the biggest concerns beyond economic uncertainty, according to surveyed CFOs, is how difficult it has become to hire new employees with the U.S. unemployment rate at 3.7 percent — its lowest level since 1969.

“Right now it has become hard to hire people with skills and you can’t keep expanding without the employees there,” Graham said. “We have reached full employment, and that is great thing for many people that didn’t have a job two years ago and now have jobs.”

But, when you reach the limits of full employment it puts a ceiling on growth, Graham said.

CFOs aren’t predicting layoffs, however, just hiring at a slower pace, he added, noting that if there is a recession it shouldn’t be a severe one.

Mark Vitner, a senior economist at Wells Fargo in Charlotte, said in a phone interview that the chances of a recession have indeed crept up, though the CFO survey wasn’t too worrisome in his eyes.

He is still predicting growth next year between 2 percent and 2.5 percent — and if a trade resolution is made with China, for example, the negative narrative could change.

“I would put (the odds of a recession) closer to 30 percent, and I would widen the window to 18 months,” Vitner said. “The risks have increased and it doesn’t surprise me that CFOs, who tend to be more cautious than the population at large, are becoming a little more concerned.”

Vitner isn’t the only economist with concerns. At a roundtable of chief executive officers in Charlotte earlier this week, Diane Swonk, chief economist at the consulting firm Grant Thornton, predicted a downturn next year, citing an aging labor market, The Charlotte Observer reported.

“If immigration continues to slow,” Swonk said, according to the Observer, “we will have a contraction in the labor force by 2020 because retiring Baby Boomers (are) not being replaced by enough incoming workers.”

But both Vitner and Graham said that if a recession occurs, North Carolina’s economy is likely to fare better than most, because of its population growth and diverse population.

“In the U.S. things are slowing after two very strong quarters, and what concerns me the most going into 2019 is cyclical things like housing, motor vehicle sales, capital spending for equipment and commercial construction are slowing down,” Vitner said.

But, those are areas where North Carolina is strong, he added.

“In North Carolina, which has a very diverse economy, we have had a little bit stronger growth in housing than the rest of the nation because of population growth,” Vitner said. “But, you really can’t say we are over built by any stretch of the imagination. We don’t really have a lot of raw land in the pipeline.

“That has typically been the Achilles’ heel for North Carolina,” he said. “When a recession has unexpectedly popped up (in the past), the banks were left holding a lot of real estate that lost value and then they’ve had to curtail lending in other parts of the economy.”

Graham said North Carolina’s diverse economy could also shield it from the worst of a recession.

“We could have a situation where some places in the country do well and others do not,” Graham said. “Right now North Carolina’s doing well and I don’t think it will get bad in the short run. .... It is still a more attractive place to do business than places like Connecticut and Illinois.”

It could even vary from place to place in North Carolina, especially between the state’s thriving urban centers and its rural areas.

“The unfortunate part of it is if we’re going into a recession, the rural and smaller metro areas (in North Carolina) have only recently felt gains” in employment and manufacturing, Vitner said. “There would be frustration that they were late to the party.”

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Zachery Eanes covers real estate, technology and other business-related news for The News & Observer and The Herald-Sun.


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