The 2020 CEOtoCEO breakfast series kicked off to a great start with an informative presentation by Grant Forsyth, PhD, who provided attendees with his forecast for the economy of the Inland Empire region in 2020. His experience gained in academia and as Chief Economist at Avista has helped him develop a disciplined way of examining individual factors in-depth to discover what clues they might offer for the larger economic picture.
Remarking that we were in a period of growth unmatched in US economic history, Dr. Forsyth explained that the period of economic growth we are currently enjoying has lasted 125 months, which is 5 months longer than the previous record. This growth would be continuing but at a more modest rate, as much of that growth is driven by consumer spending, and not business investment.
Dr. Forsyth mentioned that in periods when economic growth is centered on consumer spending, that different forecasting models need to be used. One of the simplest models used to predict growth in the Gross Domestic Product is to view growth in GDP as a product of Labor Productivity Growth and Population Growth. But with both of those indices hovering at around 1% as it is in many regions, GDP will be stuck at under 2%. Both factors would need to improve to allow the GDP to grow beyond this rate.
Dr. Forsyth explained how the Spokane region’s growth is outpacing the rest of the country at a remarkable rate, largely due to population growth, with in-migration (in this case people moving from other western states) representing 90% of that growth. Spokane’s population growth rate is at 1.7%, while Kootenai County’s is at 2.9%. People are moving in large numbers to the Inland Empire due to the jobs in healthcare, construction, and higher education, as well as for the great schools and low housing costs.
This is where the effect of in-migration becomes clear. While the US enjoys a growth in employment of about 1.1%, the PNW has a growth rate of 1.5%.The star of the PNW, the Spokane-Kootenai region has outperformed the US in employment growth. The region has enjoyed a growth rate of over 2%, although this rate could be slowing down in the near future. Currently though, jobs in the area are created as a result of the increased needs of a growing population, and not through large business investments.
The potential decline in consumer spending could be a huge obstacle to economic growth. While responsible for about 70% of growth, the weakening of other economic factors has made consumer spending an even more important factor. The Federal Reserve Bank of New York revealed that auto loans and school debt made up the majority of debt in the country, showing that these two markets were responsible for a large portion of the growth the US has been experiencing. Unfortunately for the economy, many of those auto loans are at sub-prime rates, and the size of student loans is continually increasing, making the growth less stable.
Adding to the precariousness of growth being so heavily dependent on spending is the period of uncertainty which the US is currently experiencing. The 2020 election cycle could be one of the most contentious in US history. This could create uncertainty for consumers, causing a climate of economic caution.
Addressing the issue of Job Productivity Growth, Dr. Forsyth stated that innovations in productivity were incremental, and would have to be more monumental to make a significant impact on productivity. He gave the example that the office PC today does not increase productivity much more than it did 15 years ago. It would take a revolutionary technology to eliminate jobs wholesale, but there will be enough innovation to reduce the amount of work available. The looming threat of AI, and its potential to eliminate a broad range of jobs, is real, but is not immediate.
To illustrate a more immediate challenge to conventional business operation, Dr. Forsyth recounted that he has had several coworkers leave Avista for a new type of company that doesn’t have a traditional office—employees work remotely from all over the country, connecting electronically—so it has lower expenses and can offer great compensation and benefits. Companies like this will become more common in the future, and will have significant impact on cities as workers become free to choose where they live based on housing affordability, quality of schools, and access to nature rather than the location of a job. Their significantly lower start-up costs will also reduce the contribution that business investment makes to the economy, as they can be started without building, renovating, leasing, or managing office spaces.
Dr. Forsyth revealed that he liked to look at a broad range of forecasts to glean the consensus from the disagreement. Applying this practice to data as well as the evaluations made about it by economists has allowed Dr. Forsyth to produce forecasts that have had reliable accuracy. He forecasts that growth in Spokane and the Inland Empire region will be more modest in 2020, but will continue to be above the average for the US, which will continue to be dependent on consumer spending.