Peter Nigro is the Sarkisian chair in financial services at Bryant University. He spoke to PBN about the economic outlook for 2020 and the possibility of an economic downturn.
PBN: Fears of an economic recession seem to have abated with the latest Federal Reserve predictions. What is your take on Fed’s outlook?
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NIGRO: The Fed is cautiously optimistic. Many of the issues that existed three months ago, when we were more fearful of a recession, remain: mixed tariff signals – still no real clarity; manufacturing down; and the European slump. Geopolitical risk remains out there as well – increasing in North Korea and the Middle East. An oil price spike or a North Korean “present” could lead to increasing consumer worries precipitating a recession. Spending habits of consumer are critical to economic growth and they can be very fickle.
Business investment remains a concern as well – since the tax cuts really have not led to increases. Furthermore, businesses are known to avoid making key decisions in an election year – this wait and watch could have a negative impact on [gross domestic product].
Finally, I remain concerned about potential problems in the shadow banking area – financial activity that has moved outside the more regulated banking system. For example, nonbanks account for more than half of new mortgages. How susceptible are these unregulated lenders to a potential decline? Fintech firms, in general, pose similar concerns.
PBN: What signs, if any, point to a recession in our local economy?
NIGRO: Not a lot of tea leaves there. The only negative is that we are as a state running a $180-200 million deficit that needs to be closed, so its spending cuts or increasing taxes – neither a good option.
PBN: What should businesses and consumers know when planning their finances for the upcoming year?
NIGRO: Continue to build a financial cushion and be ready for a downturn. It’s always better to be safe than sorry. On the investing front, don’t try to time the market; maybe be a little more risk averse in 2020. Finally, adjust your 401(k) portfolio … after a big year in equity markets, it’s probably time to reallocate.
PBN: If we do hit a recession, how will it compare with its 2008 predecessor? Is the local economy any better prepared to weather it than it was in 2008?
NIGRO: The 2008 recession was an outlier; it is highly unlikely that we will experience a recession of that magnitude. This is good news since the tools we have to pull out of it, however, are not as strong.
The Fed’s balance sheet remains over $4 trillion, limiting the potential impact of further [quantitative easing] and there is not a lot of room to cut rates further. The Fed’s three cuts last year are leaving less room to adjust going forward.
Rhode Island was one of the worst-hit states in the great recession due to a more pronounced boom and bust housing cycle and a manufacturing sector that experienced high job losses. Today, R.I. is much less reliant on manufacturing while health care and tech are becoming increasingly important, which bodes well in a downturn.
PBN: How can national politics, including the December impeachment hearings and 2020 elections, affect the state economy?
NIGRO: Consumption constitutes over two-thirds of GDP. National politics, including impeachment, can impact consumer confidence and spending. Further, it could impact corporate investment and spending. The Trump tax cuts have led to a booming stock market but an increasing budget deficit. Political changes will likely lead to a reassessment of tax and spending policy.
Markets also don’t like unpredictable outcomes. … The impeachment proceedings [and] the 2020 election are causes of uncertainty and could influence both the local and national economy.
Nancy Lavin is a staff writer for the PBN. Contact her at lavin@pbn.com.
