Recession: How would it affect Lincoln?

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BY MATT OLBERDING / Lincoln Journal Star

With the R word bandied about more and more these days, the Journal Star wanted to know what effects a nationwide recession, if it occurs, might have on Lincoln and Nebraska.

We talked to two of the most well-known economists in the state: Creighton University Professor Ernie Goss and Eric Thompson, director of the Bureau of Business Research at the University of Nebraska-Lincoln.

Both keep a keen eye on the economy. Goss produces a monthly business conditions index for the nine-state Mid-American region and the three-state Mountain region, while Thompson does extensive research on the state, regional and national economy as part of his job at UNL.

Both also serve on the Nebraska Business Forecast Council, which produces the newsletter Business in Nebraska four times a year.

Here are the questions we asked them and their answers: 

Q: Do you think a recession is likely?

Goss: Yes. I think the likelihood of a recession has risen above 75 percent. In October, our survey began to detect weakness in the regional economy, much like it did shortly before the 2001 recession. In fact, much of what we are seeing in our survey and national surveys mirrors that preceding the 2001 recession.

Thompson: A recession is certainly much more likely than it has been at any time since 2001. I would say that the chances of a recession are approaching 50 percent, though I still believe a recession may be avoided. What is worrisome from the last week is that stock markets worldwide are behaving as if investors believe a recession is coming.

One reason why the U.S. economy might avoid recession is that a weak dollar will allow U.S. exports to grow strongly.

Q: If we do experience a recession, what will that mean for the state and local economy?

Goss: The downturn in Nebraska will be much less significant than in the U.S.

Four factors will moderate the downturn in Nebraska:

* The downturn in housing and fallout from the subprime mortgage debacle is much less severe here. As one banker in my survey said, “we (the Nebraska banking industry) didn’t make the bad loans, and we will suffer less due to this.”

* Farm income remains very strong despite the economic softness.

* Biofuels and ethanol production have underpinned the state’s economy for industries such as transportation.

* A large insurance industry that is less susceptible to economic downturns.

Despite this, an economic downturn would have ramifications for the Nebraska economy. First, the state’s large transportation sector would take a hit with the level of shipping declining. Second, state and local tax collections will be threatened.

Thompson: There are reasons to believe the Nebraska economy will outperform the national economy over the next year. However, if there is a national recession, that will affect the Nebraska economy as well. If there is a national recession, there will be declining employment in Nebraska as well, although the recession in Nebraska would probably not be as deep as the recession nationally.

Q: What local industries would be hardest hit by a recession? And are there any that are “recession-proof”?

Goss: The hardest hit will include restaurants and hotels with strong ties to business travelers, and transportation firms that ship nonfarm-related products.

Less affected: manufacturing tied to agriculture and biofuels; manufacturing tied to export markets (cheap dollar helps them); health care and insurance; education (graduate programs actually see an upturn in enrollments).

Thompson: Manufacturing would be hard hit — especially manufacturing not related to food processing or agriculture.

Retail would be hard hit.

Professional services (businesses that provide services to other businesses) — computer programmers, accountants, consultants, etc. — would be hard hit.

Q: Are Lincoln, Omaha and the state likely to be any better or worse off than the rest of the country?

Goss: Better off due to factors listed in above. However, the metropolitan areas of Nebraska will be less well-off than non-urban areas of the state. Farmland prices continue to grow at a double-digit pace.

Thompson: I think Nebraska would do better than the nation due to the strong farm sector, due to the fact the manufacturing sector is a smaller part of the economy than in many states, and because much of our manufacturing is tied to the agricultural sector or to food processing, both of which should hold up relatively well. Nebraska also will be better off than the nation overall since the decline in home prices should not be as severe here as in other parts of the country.

Statewide and especially in nonmetropolitan areas, the economy may be better off than the rest of the country. This would be less true in metropolitan areas such as Lincoln, however.

Q: Are any of the moves by the federal government — the proposed economic stimulus package, interest rate cuts, etc. — likely to keep us out of recession or soften the blow?

Goss: They would soften the blow but not eliminate it. But I am especially skeptical of fiscal policy. Mixing federal taxing and spending policy with politics is a bad concoction.

Thompson: Interest rate cuts and economic stimulus packages could help somewhat. These measures are worth a try, but there is no guarantee these will help us avoid a recession.

I think what might also help is if the government takes some steps to ensure that tax and spending policy will improve in the future — in particular, if the federal government started taking steps to assure financial markets that the rate of growth in spending will decline in the future — so that people will have confidence that tax rates will be lower.

Q: Who is most likely to benefit from these measures?

Goss: Borrowers of short-term money will benefit. This includes those who carry balances on their credit cards.

Thompson: The benefits from these measures — if they are effective — would be broad-based, aiding most types of households and businesses.

Reach Matt Olberding at 473-2647 or molberding@journalstar.com.