Short recession could be lurking around the corner.

James F. Smith is a professor of finance at UNC Chapel Hill's Kenan-Flagler Business School. In the June issue of Business Forecast, a newsletter he writes for the school, he predicted continued slow growth for the economy through May, then a short recession. Smith has worked as an economist and analyst for the Federal Reserve System, Union Carbide and Wharton Econometric Forecasting Services. He earned his doctorate in economics from Southern Methodist University in 1971.

BNC: Are you uncomfortable being one of the few economists predicting a recession?

Smith: No, and I won't be sad if I turn out to be wrong. But I'm right a lot more often than I'm wrong. I just came in fifth in The Wall Street Journal forecasting derby for the last half of last year.

Why do you foresee a recession?

We had a lot of increases in interest rates before we started getting decreases this year. We've had big increases in energy prices before we started finally started getting decreases. The federal tax rebate will do some good for the economy. But inflation keeps rising, and that's not good news.

What would trigger the recession?

By October or November, we're going to see the Consumer Price Index nationally rising at about 4% or better. At that point, the Fed will have to start raising interest rates, and when it does that, at some point we get what is called an inverted yield curve, where short-term interest rates are higher than longer-term interest rates.

So what?

Whenever you see that, and it persists for a month or longer, we have a recession. We've never had an inverted yield curve since the Fed was created in 1913 without having a recession. There's a chance inflation won't be a big enough factor to trigger an interest-rate hike, and we could avoid the inverted curve. But I would worry then that we would have the continuation of very, very slow growth, in the 1% range, that could go on for a long time.

How will North Carolina fare?

It will be hit hard. The state has a higher proportion of manufacturing jobs than any other. When manufacturing is growing, we're performing far better. When it's not, we're hurting. We've been bouncing back and forth this year with Michigan as to which one of us has had the highest increase in unemployment over the preceding 12 months.

Can manufacturing turn around?

No, nationally we've got the fewest people employed in manufacturing since 1966. It's simply the case where that decline is much slower in North Carolina than it...