Scranton: Economy solid but threats are possible

SANDPOINT — Despite whether the United States is heading into recession or not, regional expert Steve Scranton said businesses should treat it like any natural disaster.

“Most businesses, if I took a survey, probably have a disaster recovery plan for an environmental disaster — if we had an earthquake or we had a flood ... you have a game plan,” Scranton said. “A recession is a naturally recurring economic disaster. So it is the same thing, they are going to happen, we just don’t know when. While business is booming, or business is solid, now is the time to build a disaster recovery plan for the next recession.”

For Scranton, senior vice president and chief investment officer and economist for Washington Trust Bank, this was one of his final pieces of advice for those gathered at the annual D.A. Davidson Economic Forum on Thursday, hosted by the Greater Sandpoint Chamber of Commerce.

Jim Zuberbuhler, associate vice president and financial advisor with D.A. Davidson & Co., said this year marked the 14th annual forum, featuring a number of economists, as well as local and regional speakers on topics of healthcare, manufacturing, philanthropy and more throughout the years.

“We’ve really tried to give people a sense for local, regional as well as the national economic picture,” Zuberbuhler said.

With last year’s focus on philanthropy and nonprofits, this year rounded back to the economist side of things with Scranton, who focused his talk primarily on the national economy and the rumored possibility of a recession.

Scranton said if he were to give his talk a theme, it would be based around “headlines versus reality,” because of so many calling for an “imminent recession.” The yield curve has historically been an indicator for forecasting recessions, Scranton said, and is what has the media “fired up” over the possibility.

“You can’t ignore the message the yield curve gives,” Scranton said. “The yield curve basically issued a warning saying, ‘Hey, we think that what is going on with the economy, if Congress and the Federal Reserve don’t enact both fiscal policy from the congressional side and monetary policy from the Federal Reserve perspective, we could end up in a recession.’ What I try to remind people over and over again is a negative yield curve does not cause a recession — it is a symptom, saying that there is something wrong.”

It is the manufacturing and industrial side of the economy that is showing symptoms, Scranton said. Many of the business owners he has spoken with in the Pacific Northwest, however, including the Idaho, Washington and Oregon region that Washington Trust serves, their businesses are doing well, or in some cases “booming.”

The average length from when the yield curve signals a warning to when a recession historically has hit is 18 months. The yield curve inverted in May, he said, which would put the risk of recession late next year if it is accurate.

“I am not saying we are heading for a recession … I am just saying don’t ignore the warning, pay attention to it. But I think it is more important to look at the reality — what is actually going on in the economy.”

The economy is driven by the consumer, he said, so the “best” way to think about the economy is to remember that jobs create income, and income is the fuel that allows consumers to spend. The economy and job growth is slowing, Scranton said, adding that he believes the 175,000 jobs added per month in the U.S. still puts the economy on “solid footing.”

“I do think right now the economy has that core strength, but there are clearly threats that we need to think about,” Scranton said.

If there is a change in the financial situation of the consumer it can have a “cascade effect,” he said. So if a consumer feels financial stress in needing to pay their debt, they start spending less in other areas, such as restaurants or retail, which in turn slows things down for those businesses. Those businesses then start cutting with less hours and layoffs, which is the “classic cycle” of heading toward a recession.

Scranton said if there is a recession, he would make a “strong” argument that it will not be a financial crisis in likeness to the 2008-2009 recession.

“So I would just simply say, don’t base your views of the next recession to say it is going to be as horrible as the last one,” Scranton said. “I think it will be a different recession, caused by debt rather than by real estate and mortgages.”

Mary Malone can be reached by email at mmalone@bonnercountydailybee.com and follow her on Twitter @MaryDailyBee.