Navigating the changing economy with Ernie Goss

Tom Houghton:

You’re listening to “The Building Code,” your guide to a better way to run your business. I’m Tom Houghton.

Paul Wurth:

I’m Paul Wurth.

Tom Houghton:

And once again, we’re recording at home during this time of coronavirus COVID-19. And joining us on this podcast, we’re honored to welcome Ernie Goss. He’s the Jack McAllister Chair of regional economics at Creighton University. Welcome to the podcast, Ernie.

Ernie Goss:

Hey Tom, good to be with you and Paul.

Tom Houghton:

Thanks for being here.

Ernie Goss:

Yeah, it’s a tough time, but we economists seem to be in high demand during these tough times, like a weather forecaster in a tornado. I don’t know if our value goes up, but people tend to listen to us a little more.

Tom Houghton:

Sure, absolutely, and that’s what we’re here to do today. We would love to get some insight from you with all the data points that you’re seeing and your background and experience, which is very impressive. And I would encourage our listeners to go on to our show notes which is at buildertrend.com/podcast just to see all of your great history, great work. You’ve got quite the rap sheet there for you.

Ernie Goss:

When you get to be my age, you’re going to have a rap sheet. It just goes with the territory. But you have to understand, we academics, if we go to the restroom, we put it on our resume.

Tom Houghton:

That’s great. All right, Ernie. Well, we’re obviously talking about how our current situation and the entire world, how it’s all being affected by this COVID-19, the coronavirus. And of course, our listeners being in the construction industry, they definitely want to know what the forecast might look like. And we know you don’t have a crystal ball there, but we also know that you’ve got access to some numbers and some data that could definitely help give us a better picture of what it might look like.

Ernie Goss:

Sure and we’ve done, since the coronavirus became sort of a headline news in the US, we’ve conducted two surveys. We do two monthly surveys here at Creighton University, and we’ve done one of manufacturers. Now that came about between the third and fourth week of February, so it was a bit early. And then we did the other one was the third Thursday in March, and it was a survey of bank CEOs in rural areas in 10 States. These are in both cases, we’re talking about states in the mid-section of the country. And this latest survey was a much tougher read because it came more recently. So in other words, the numbers are not getting better, they’re getting worse. And the bankers were a bit more pessimistic than the manufacturers.

Tom Houghton:

Interesting. Why do you think that is?

Ernie Goss:

Well, in the rural areas, we’re talking about agriculture and energy. In North Dakota, for example, that’s one of our surveys states. Obviously your listeners know that energy’s being hammered. We’re talking about a blood bath out there. We’ve got the supply situation with Russia and Saudi Arabia trying to force out some of the shale producers in the US and they’re doing a good job of it. And we’re seeing that. And so the rural areas that depend on energy are taking a real hit. And then also the rural areas that depend on agriculture are taking a hit. Until the last day or two, agricultural commodity prices, I won’t say they’ve gotten hammered, not like oil, but they weren’t doing well. And ag income, Tom and Paul, we had, as you know, the Trump administration had negotiated a phase one deal with China in January and also the USMCA, that’s the trade agreement with Canada and Mexico. And those are really, those are good news. And all of a sudden we’re seeing 2020 look a little bit better, a good bit better, but then we didn’t envision, none of us I don’t think, well I don’t know anyone that saw the coronavirus at least these impacts coming, and now it’s really hitting.

Ernie Goss:

But I have to say that said, the rural areas are going to fare better than urban areas, but still get hit. There’s no doubt about it. There will be a hit. We’re in the first quarter of 2020, of course, the final month of that. And it’s probably, it’s so bad for March that we’re probably in the first quarter of a recession. The second quarter of the recession will be next quarter, of course, beginning in April. And we’re going to have data releases that just are not going to be good there. I’ll use a good old economic term, scary. They’re going to be scary. And the best part about it is we’ve come through some of these and people compare it to 9/11. No, not like 9/11. This is much more dire, much more significant. We’ve heard it compared to the 2008, 2009 recession. Nope. This is going to be much deeper. Now the duration is going to be shorter, at least I think it will be. But that will depend on whether we get a vaccine and whether we get some sort of cure for those who are infected. I know that’s outside my area of expertise, of course.

Ernie Goss:

And we don’t know that right now, but I would argue that at least from my vantage point, right now as an economist, it’s going to be a more of a V-shape recovery. Once the recovery begins, it’s going to be up more than what we saw in 2008 and 9, which was more of a U shaped recovery. In other words, the recession then was, of course, about 18 months in length. I think this one’s going to be two or three months in length, again, depending on, and those we just have to wait and see the medical issues. And I have no idea how this is going to proceed in terms of infection rates and death rates.

Tom Houghton:

Sure. Well, I guess the good news is it sounds like recovery could come pretty quickly. I am curious. So, you’ve published more than a hundred studies and you focus primarily on the economic forecasting. So maybe you could share with our listeners some of the early indicators that you see that show the future strength or weakness in our economy. What specifically are you looking for? We’re not looking for the trade secrets here, because obviously we’re probably not going to understand it either, but if you could give us just a few pointers of stuff that you’re seeing that kind of shows that, that’d be helpful.

Ernie Goss:

Well, Tom, and this’ll put me out of work right here. The best thing in my judgment that’s consistent, pretty good indicator, is the yield on the 10-year US Treasury bond. And it dipped to half a percent, a half a percent, this month. And why did that happen and why is it a good indicator? There was so much fear out there, so much uncertainty, that investors turned to the most trustworthy investment instrument around, that’s the 10 year US treasury bond, that was globally. So that pushed up the price and pushed down the yield again, to a half a percent. Now and people say, “Well, I don’t know what a half percent is. I don’t know what that means.” Well if your inflation rate was running at one and a half to 2%, well, you don’t need an economist to tell you to subtract one from the other and you get a negative return of about 1%. In other words, your rate of return holding the safest instrument is negative. So that’s how bad it was.

Ernie Goss:

Also, we do a survey of bank CEOs, our Rural Main Street Survey took its biggest one-month dip since we began the survey in 2006. That’s how bad it was. It was well below growth mutual. And these are numbers that range between zero and a hundred, with 50 being growth neutral. This was in the thirties, low thirties, so that was not good. We survey manufacturers, most of your listeners are probably familiar with that. The PMIs, purchasing management indices, and those are global. You see those for the US, you see them for our region, you see them for China, you see them for Europe and so on. Those numbers for all the regions, our number will be below growth neutral. Our number will come out next, the 1st of April, that’s the next number. It will be below growth neutral. Now, maybe I’m going to be shocked. If it is above growth neutral, I will be shocked. So those are just some indicators.

Ernie Goss:

But the best number to keep an eye on are those yields. Now, of course, the stock market looking ahead. And as we’ve seen now two days of pretty good readings on the stock market, but as some is sometimes said, “Buy the rumor, sell the news.” And I think with the Congress debating the bill to subsidize or support initiatives, some people call it a bailout bill. When that’s passed, and I think that’s what investors are looking for, a passage, so they’re buying the rumor that it will pass. And then when we see actual passage, which is likely to come today as we speak, we’re buying the rumor and selling the news tomorrow. I still think, if you’re talking about the stock market, I think dollar cost averaging is what you need to do here. In other words, don’t put all your money in at any one time, because timing a bottom or a kind of pick a bottom is impossible. So buy tomorrow, maybe buy a little bit tomorrow, a little bit next week, a little bit the following week if you think the market is moving lower, and I think it will move lower.

Tom Houghton:

That’s some great advice there. I’m curious how much you think that fear is actually controlling the numbers versus actual data. Since you work with so much data, how much of this is, in your opinion, all of these numbers, the stock market widely swinging, how much of it is fear versus actual data?

Ernie Goss:

Well, as you say, Tom, it is fear. And how do I judge that? Look at the VIX. That’s Chicago Board of Exchange Volatility Index. That number reached in the eighties, which that’s the highest on record, meaning the higher the number, the more the puts. It’s a ratio puts to calls. Puts is those individuals that are betting against the market. Calls or those who are betting for the market, meaning good times. So the record of those who are betting against it against those who are betting for the market was at a record high. So that’s one measure.

Ernie Goss:

But back to your question, also Tom, I’m a fundamental, I don’t want to call me an investment person. I’m not qualified. I’m an economist, not an investment advisor. So that said, I look at PEs price earnings ratios. We know the price, the stock. We don’t know the earnings. So you’re right, you’re absolutely right, that it’s uncertainty that’s driving it. We do not know the numbers. We did not know the earnings. That’s where the uncertainty comes in. That’s where the risk comes in. And that’s what we’re seeing right now. Until we see some earnings coming out and seeing how much the earnings change, we’re working in the blind. For example, real estate investment trusts, and construction real investment trusts, some of those are doing fine. Some of them are not doing fine. And those that are not doing fine are those connected to retail, those connected to hospitality, because individuals are just not out there buying, they’re not walking around and they’re not taking cruises and they’re not going on vacations.

Paul Wurth:

Yeah, that’s a lot of great stuff there. Ernie, when you talk about a recession and then getting out of that recession with that V, am I correct that typically in the recent past, housing has really led some of that. Do you have any insight there?

Ernie Goss:

It is, Paul, and my background, not my professional background, my growing up background, I come out of the construction industry, my brothers, my father, everybody. I’m the ne’er do well that went into academics. So it is a good leading economic indicator, in some cases. It just depends. Like what happened, in my own, I don’t mean to get too personal in this, but the last downturn I bought real estate. And then in my little world, I bet heavily on real estate going forward, and it’s paid off. In other words, I bought properties, housing, and now I own those as rental properties. But now my property managers are sending me letters saying, “Hey, get ready because you’re not going to be getting your rents on time this time. And by the way,” some of the properties I own are in Georgia, telling me that the magistrates are saying no evictions, which I go along with, But what they’re preparing me for is it’s going to be tough in terms of my rents. So those individuals out there that depend on rentals, at least housing rentals.

Ernie Goss:

Now some of the package that’s coming forth from Congress is going to support some of that rentals. And so those individuals that are for example leasing properties in industrial and commercial, there’s going to be some money coming forth from the federal government, so that’s a good thing. Now for those of us like me that rents to the individual markets, not much there. I haven’t seen anything there for me, but that’s okay. That doesn’t mean it’s a bad bill.

Tom Houghton:

Ernie, just curious about your take on this bill that’s potentially passing, this $2 trillion. What kind of impact, there’s obviously the positive side of it, which seems like this influx of cash for individuals, but are there any negative long-term effects on, I mean this $2 trillion, that’s so much money.

Ernie Goss:

Oh man, it is. As you say, Tom, it’s big. And how big is it? Will our economy’s 22 trillion, so you’re talking about the 2 trillion plus of the bill plus the one and a quarter deficit we were already in. So we’re running a deficit probably in 2020 that could be as high as 3, it’ll be $3 trillion. It’s going to be probably north of $3 trillion. And the here’s the really important point for all of us, and particularly those in real estate, particularly for those in real estate and finance. We are the destination for a lot of investment funds coming from China, Japan, India, Great Britain, Europe, the rest of Europe. And what’s going to happen with this huge deficit, we’re going to have to issue a lot of bonds. We, meaning the US Treasury. That’s going to siphon off some debt and I think investors are going to be less receptive to US debt. And thus, the interest rates are going to have to rise, Tom.

Ernie Goss:

I mean, when we run these deficits as a debt, US debt, the deficit’s going to be three to $4 trillion this year, probably. That’s my estimate. And then that we already have a debt of probably 22 trillion. Well, somebody has to fund that and they’re going to be less willing to fund it because in terms of the debt, and those who are younger than me, I’m a baby boomer, those who are millennials, they’re going to have to pay it. And they’re going to pay it either with inflation, with higher interest rates or higher taxes. My guess is higher interest rates. So that’s going to be a restraint long term for real estate. And there’s really a big concern for me. And for your listeners out there, I would just advise, borrow now because the interest rates are our long term. Now I’m talking about long-term, now long-term being more than a year out, are going to have to be rising to accommodate this huge deficit, this huge debt that we, the federal government, is saddled with.

Tom Houghton:

That’s some great advice. And again, just hearing that number $2 trillion, it’s just so staggering. But let’s try to turn the page a little bit and maybe talk about any bright spots that you might see in your recent economic report that you put together. Any positive news to share?

Ernie Goss:

Oh, absolutely. I mean, there is some great and positive news. I mean, I’ve been in my office now, home office, I’ve been out of my Creighton office now for a week. And I think my productivity is up, if you can believe it, but it probably needed to rise anyway. It did need to rise anyway. But we’re going to be able to, we’re conducting classes online. Our expertise is growing daily. The technology is catching up. We’re going to be, education is going to be, for example, ever changed because of this. And when I get students back in the classroom, when I’m in person teaching, I’m going to be running hybrid classes. In other words, when a student has to miss because of illness, that student’s going to be able to go online and get that lecture to see what I’m doing. I usually use a computer in class. I’ll use Excel and so on, other technologies, and they’re going to be able to see it and they can slow it down. They can repeat it. So that’s a big plus. K through 12 education, same thing.

Ernie Goss:

Government is going to have to catch up to offering us the ability to go online and do lots of things like getting your driver’s license, all these other sorts of things. So there are some real, real positives. For example, in the construction industry, I remember years ago I was teaching a class and I said, “You know, at some point in time, individuals are going to be able to go online before they buy a house and they’re going to be able to look at the house and go through it with a video.” And people are like, “I doubt that.” Look what’s going on now, the ability to look at that house, to look at what’s going on there, to see the house, to look at all the history of the house, look at sales prices, being able to go into seeing what the property taxes are, all of those things. It’s so, so in increasingly fascinating and adds to our productivity. We’ve just got to get started up on that V that I talked about and we’re going to need, of course, the vaccine. And I’ll leave that, of course, to the physician, the scientific community, the medical community.

Tom Houghton:

Sure. Yeah, lots of great minds coming together for that, which is great. You know, I feel very optimistic about that as well. And, and of course, like you said, now this has kind of nudged us all to rely on technology so much more. And it’s been great to see all the new solutions that people are coming out with. And of course, us here at Buildertrend, we’ve got a project management platform for construction professionals that can help them wherever they’re working, whether they’re home office or out in the field. If they’re still doing the essential work that they need to do, we’re right there beside them and ready and willing and able to help get their construction projects finished. And then we’re ready for that V to takeoff, to have that quick recovery and lead the way out of this little downturn we’ve had here.

Ernie Goss:

Absolutely Tom or Paul, like for example, being able to not write checks to work with your employees, but sending it online, Venmo or whatever. There’s so many opportunities and advantages. What’s going to happen though, is that it ferrets out or divides those who embrace the technology, those who embrace the change and those who do not. And if you don’t embrace it, you’re going to lose big time. We in universities, we’re going to lose big time if we don’t stay on top of the technology. And I have to say my university, I think at least in my judgment, has stayed on top of it and we’re moving ahead. And if Baby Boomers like me, if we can’t keep up, then we’re going to be out. We’re going to be gone and that’s where we should be. It’s a challenge for guys and gals like me, but I hope I meet the challenge. I think that’s the same way with builders. It’s the same way in real estate, same way in finance, where some really great changes are coming forth. But man, it feels like you’re just going to take your head off sometimes, but all I can do is get up in the morning and just try to, go through it as best I can.

Paul Wurth:

You guys are doing a good job there at Creighton.

Ernie Goss:

Well, thank you.

Paul Wurth:

They do a good job. And now they consider Creighton University the Stanford of the Midwest. Is that right?

Ernie Goss:

I consider Stanford the Creighton of the west.

Paul Wurth:

There you go.

Tom Houghton:

I love it.

Paul Wurth:

I like that. We start a rivalry.

Tom Houghton:

Yeah, that’s right.

Paul Wurth:

Well, this has been great.

Ernie Goss:

You know, we’re a Jesuit school and I’d like to think we offer a great education and I let our results speak for themselves. That’s good.

Paul Wurth:

There you go.

Tom Houghton:

That’s great. Ernie, the information you’ve shared has been so insightful and helpful. I really appreciate you coming on the podcast and being willing to share your kind of expertise with all of our listeners. And of course we love hearing that if we all kind of buckle down here, hopefully we can have a quick recovery of two to three months. We’ll, of course, keep checking in with your reports and seeing how those numbers are lining up.

Ernie Goss:

Well thanks, Tom and Paul. Thanks for having me on. And I think one thing President Trump has said, and we economists sort of, we will agree with the sentiment, is that we’ve got to get back to work. I mean, it’s bad when the cure is worse than the disease. And this is a scary time and I’m very concerned about the economy saying, “Well, let’s shut down everything but those essential industries.” I don’t know how long we can go with that. I think we need to get back to work and I’ll leave it up to the medical people and the politicians to decide when that is.

Tom Houghton:

Sure. Yeah. We’ll obviously keep our eyes on that and we’ll be excited when they lift all the bans and we can all start diving in and getting back to life as we used to know it. Of course it won’t ever be the same, but that’s sometimes for the best. Sometimes we need a little kick in the rear end to kind of figure out, like you said Ernie earlier on, how to adopt something new and kind of change your pace a little bit, potentially. But ultimately the whole goal is just moving forward and moving there faster and better and stronger.

Ernie Goss:

That’s right. Thanks, Tom. Thanks, Paul.

Paul Wurth:

Appreciate your time. Thanks, Ernie.

Tom Houghton:

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