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Economy still good, but recession may be looming

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A recession could be looming in the next 18 months, but fortunately businesses still have time to prepare.

That’s according to Steve Scranton, chief investment officer for Washington Trust Bank, who spoke at the Treasure Valley Chief Financial Officers Forum on June 19.

The yield curve has been inverted for several weeks, Scranton said, meaning the three-month Treasury bond interest rate was higher than the 10-year rate. While it is too soon to tell, typically that presages a recession, but the average lead time is 18 months, he said.

Still, it can’t hurt to prepare, Scranton said.

photo of steve scranton

Steve Scranton

In particular, Scranton said he is concerned about workers earning large amounts of “variable” income – overtime, tips, incentives, commissions and bonuses – as opposed to their “permanent” income through wages. Some workers have gotten used to those levels of variable income and, after 10 years of an economic boom, have forgotten they aren’t permanent. Consequently, they’re making big purchases predicated on those levels of variable income rather than saving that income for the inevitable downturn, he said.

Meanwhile, the economy still looks promising, Scranton said. Companies are investing in technology to improve productivity and help deal with the lack of skilled workforce. Small businesses, especially very small businesses, have record-high confidence. Oil prices and interest rates have come down, and while some of the stimulus from the Tax Cut and Jobs Act of 2017 has worn off, there are still benefits such as the child care credit that are helping the economy, he said.

Scranton suggested that Idaho might want to pause its tax reimbursement incentive, which encourages companies to move and expand here, because growth is coming on its own as West Coast companies locate non-customer-facing roles here where it’s cheaper.

But the economy is slowing, not “not growing,” Scranton emphasized. While last month’s job growth was “only” 75,000 jobs, the overall annual average is good, and businesses should wait to see if the lower job growth is a trend before worrying too much, he said.

Scranton’s primary economic concern is the impact of trade policy, particularly when it’s used for non-economic purposes such as enforcing immigration policy, he said. If the next round of tariffs are imposed on the next $300 billion of Chinese goods, that will start affecting consumer products, as opposed to previous rounds that primarily affected businesses, he said. The result, Scranton said, could be a recession.

Other countries are also likely to impose retaliatory tariffs on the U.S., most likely in agriculture, which could hurt Idaho, Scranton said.

Another drag on the economy is student loans, which are at an all-time high, Scranton said. As a result, millennials are delaying major life decisions such as buying houses and having children, depressing the economy.

In addition, lenders are starting to develop a market in sub-prime auto loans, much like they did with mortgages in the 2000s, Scranton said.

Scranton is also concerned about the Federal Reserve System and interest rates. As the economy was improving, the Fed was starting to raise interest rates, but stopped due to the stock market reaction.

The Fed’s mandate is to have full employment and control inflation – not to protect the stock market, Scranton said. If interest rates remain low, the Fed will be limited in its ability to cut rates to stimulate the economy in the event of a recession, he warned.

About Sharon Fisher