Spokane’s diversifying economy more resilient to recession

Spokane’s economy has remade itself dozens of times over its history, from logging and mining to aluminum production and now health care.

The Lilac City’s successes, those businesses that provided the living-wage jobs that sustained its longevity, rarely carried heavyweight names like Ford, General Electric or Microsoft.

As the region and nation face a possible recession, the absence of a single-industry dominated economy is seen as Spokane’s greatest strength for avoiding long-term damage that any potential financial slowdown could cause, several area economists and businesspeople say.

“While we lack some of those things, we also do have a really healthy, diverse economy made up of small and medium-sized businesses, many of which are still independently owned,” said Michael Senske, CEO of Pearson Packaging Systems of Spokane. “As a result, we weather these economic cycles better than most.”

If the national economy begins to retract, the causes will come from sources unlike either of the past two economic slowdowns, said Patrick Jones, executive director of Eastern Washington University’s Institute for Public Policy and Economic Analysis.

“The kind of recession we are looking at is not caused by a near collapse of our financial system or caused by a pandemic,” Jones said. “Both of those were sort of unique in the history of recessions.”

The national and local economies bounced back so fast from the pandemic recession that many people forgot it had occurred.

Doug Tweedy, a regional economist with the Washington state Employment Security Department, said the local economy got hit hard after state officials ordered nonessential workers home to help prevent the spread of the coronavirus.

“In one month, we lost about 25,000 jobs,” he said. “It was more like a natural disaster than a recession or an economic downturn. It hit quick and the bounce back was, too.”

In contrast, the Great Recession was more of a slow burn and even slower recovery.

The Spokane Metro Area had about 235,000 jobs in 2008 as the financial system began to falter under years of banks approving “subprime” loans without solid backing.

Area jobs “dropped to 221,000 in 2010, so there were two years of decreases in Spokane,” Tweedy said.

While the job numbers began to increase slightly in 2011, it took eight years, until 2016, to finally reach and exceed the number of jobs from 2008, he said.

That recession had devastating effects on the construction industry, which had been booming prior to the 2008 slowdown, said Joel White, executive officer for the Spokane Home Builders Association.

If the recent increase in interest rates, which has significantly slowed the local and national housing markets, contributes to another recession, White doesn’t believe area contractors will see the same effects.

“You’ll see some layoffs as the demand has slowed, but nothing like we saw in the mass exodus of the workforce and businesses going under,” White said. “We are looking at this as probably a one-year time frame before we get back to a more stable level.”

War footing

Jones, from EWU, noted that national economists remain undecided when and if the economy will enter a recession.

But Spokane has several factors working in its favor if one does occur, said Grant Forsyth, chief economist for Avista Corp.

“Spokane, in the last 100 years, has dramatically changed its employment structure,” Forsyth said. “Where people work has changed a lot. In some cases, we look a lot like the U.S. in that 70% of our jobs are in the service sector.”

Jones said Spokane’s biggest economic shift came during the last world war.

“Most economic changes are pretty slow in terms of jobs shifting from one sector to another,” he said. “World War II is what turned this town upside down. That’s when we got Fairchild (Air Force Base), and Kaiser (Aluminum) and more of our metals sector.

“That’s when we saw Farragut (Naval Training Station) take off as a huge training base. It exposed North Idaho to the world and how beautiful it was. It spurred development.”

Fairchild remains an economic powerhouse. All of the economists agreed that they don’t see that situation changing anytime soon.

“There were times, during the Cold War, when it was a major base. After the Cold War, it had some uncertainty,” Forsyth said. “Now we are back to a base that is quite large and seems to have a pretty good future because of ongoing national security needs.”

In fact, the one event that could cause a major recession for Spokane and the nation is if the war in Ukraine escalates.

“My guess is, we will see another mild recession. We can see the economy slowing, but it’s not deteriorating in a free fall sort of way,” Forsyth said. “The impacts will be noticeable, but nothing like the COVID-induced recession or the housing bubble.”

With the U.S., Germany, and other allies promising to provide tanks to Ukraine, that situation could change everything.

“The Ukraine war has created enormous problems getting inflation under control,” Forsyth said. “If it becomes more of a direct conflict between major powers, it has all kinds of implications for disrupting economic activity.”

Healthy situation

While Fairchild remains the single top area employer, most of Spokane’s jobs come from health care.

“In terms of sectors that have really risen, especially in the last 50 years, you have to throw health care in there and higher education in there,” Forsyth said. Public and private “universities are larger and they are better in what they have to offer.

“The expansion of health care and the universities is no accident. There’s been this symbiotic relationship between higher education and health care that’s allowed them to expand together.”

But the Air Force base’s position as the largest employer could be coming to an end. Providence Inland Northwest Washington, which operates Providence Sacred Heart Medical Center and Providence Holy Family Hospital, has about 500 open positions, said Susan Stacey, the organization’s chief executive.

“We are facing some of the most significant work shortages that I have seen and I’ve been in health care for 35 years,” Stacey said.

But she said the shortages are not just in health care.

“In all areas of industry, we are all competing for a relatively small number of people who are interested in working,” she said. “All roads lead to workforce at this point in time in our community.”

Washington State University, mostly based in Pullman, established its nursing college in Spokane in 1968 and its WSU Spokane campus in 1989. In 2013, it added a pharmacy college.

But the biggest change came when it designated its Spokane presence as a “Health Sciences” campus in 2015 with the founding of the Elson S. Floyd College of Medicine, making it only the second public medical school in the state of Washington.

“We are here as a result of big decisions that were made,” said Daryll DeWald, vice president for WSU Health Sciences and chancellor of WSU Spokane. “I refer to it as the collective vision of many leaders in Spokane and Eastern Washington over a couple decades.”

As a result, WSU is training students who can work at the region’s four big hospitals, clinics dispersed throughout the community, and the Mann-Grandstaff VA Medical Center.

The WSU medical programs are bringing in about $40 million a year just through research grants, DeWald said.

“Our expenditures exceed $100 million a year. Ten years ago, it was a fraction of that,” he said. “It’s providing jobs and funds that get spent by employees locally.

“Just in terms of the workforce in the education and research, that has a huge impact.”

That reach extends beyond graduation in an area that largely has always been both an economic and health care hub for the entire region.

“You are bringing these freshly graduated, trained physicians into this medical environment so they can practice long term,” DeWald said. “When you look at those partnerships, we actually have the majority of residency programs being run on the east side of the state.”

Jones said health care jobs are mostly resistant to the pressures of an economic downturn.

“I don’t see health care being hurt disproportionally this time,” Jones said. “Only to the degree that people can’t pay their bills and have more charity care would that sector be hurt by a recession.”

Stacey, of Providence, agrees. As a not-for -profit, the organization often works with patients regardless of their ability to pay.

“Last year, we had about $16 million in free and discounted care for insured and uninsured folks,” she said. “That puts a strain on the overall hospital finances, but it’s an important part of serving our community.”

The financial strain, coupled with folks delaying medical procedures during the pandemic, could cause even worse problems, Stacey said.

“The risk is where people run into situations where they don’t feel like they can pay for care,” she said. “And they delay care or preventative care and you end up being sicker when you finally do get care.

“I think that’s the greater risk. All of our organizations are working really hard to address it, but it ties back to having a workforce who can care for the people we serve.”

Other job sectors

The second-largest pool of Spokane-area workers comes from government. Excluding Fairchild, that includes more than 25,000 people drawing a paycheck from government, ranging from state agencies and local school districts, to Spokane City Hall, the Spokane County Courthouse, VA Medical Center, the U.S. Postal Service and many more.

“State government is a little more recession sensitive or vulnerable,” Jones said. “But we as a state are doing pretty well in terms of revenues. So, we should be able to weather a short-term recession.”

Forsyth said the school districts have always played a major economic role.

“In particular, in the region’s rural areas the school districts are still some of the largest and best employers,” Forsyth said. “I keep reminding people that they provide a lot of crucial services. They are also providing mental health services, health services and access to food.

“In other words, the school districts have become and important source of social and health support.”

The third-largest sector of Spokane employment falls within retail.

Consider that Walmart alone has more than 1,400 employees. Or that the two large locally owned grocery store chains, Rosauers and Yokes, have more than 2,000 employees.

Amazon, which has two large retail distribution facilities has more than 3,700 local employees, according to a survey conducted by the Spokane Journal of Business for publication in its annual Book of Lists.

“We’ve always been a retail sales center,” Jones said. “I can envision that softening. That’s always somewhat recession sensitive.”

After retail, the next-largest group of employees falls under hospitality. The entire sector, which includes hotels, restaurants and other businesses providing services to travelers, was left reeling during the pandemic.

“That is sort of the poster child for how the economy took such a nosedive during the pandemic. And, it did come back very strongly,” Jones said. “People may have stopped buying as many goods, but they are buying more services, like travel and restaurants.”

Northern Quest Resort & Casino employs some 1,500 people and is advertising to hire dozens more people.

The fifth-largest category of area workers fall under manufacturing.

“I really don’t see too much exposure in a short term, or a two-quarter recession, for local manufacturing,” Jones said.

Spokane is home to a wide variety of companies that build everything from airplane seats to grain bins.

“Our largest subsector in manufacturing is metals,” Jones said.

“And, I don’t see metals too adversely affected by a recession.”

Kaiser Aluminum Corp., with its massive Trentwood rolling mill in Spokane Valley, remains the region’s largest manufacturer with more than 900 workers.

The next-largest employment category is construction, which includes residential and public works.

“Public works construction companies have a lot of work in the pipeline. There are a lot of federal dollars being spent,” Jones said.

Residential construction has suffered from higher interest rates, which has dropped home prices and slowed sales.

White, of the Spokane Home Builders Association, said residential construction has declined. The demand for housing, however, continues to exceed the ability of contractors to meet it.

He noted that building permits for multifamily projects, which includes everything from duplexes to apartments, has skyrocketed.

“We are 25,000 to 30,000 housing units short in Spokane,” White said. “We still have a good market. There is still demand.”

When the Federal Reserve raised interest rates, however, that forced mortgage rates to climb from historic lows to about 7%. On an average $430,000 home, the higher rate costs homebuyers another $1,000 a month, he said.

“It’s not the price of the house, it’s the price of the mortgage that drives this,” White said of the housing sales slowdown. “A lot of people have been priced out of the housing market and the rental market.”

The shift to building multifamily projects eventually should ease that pressure, he said.

“That will help reduce the cost of renting, because we may have overbuilt that area,” he said. “That will provide a relief.”

Laboring for workers

Forsyth said one of the Spokane area’s greatest strengths is that it has more jobs than workers to fill them.

“When I look regionally, manufacturers have struggled with finding the right people and enough people,” Forsyth said. “It isn’t necessarily demand, it’s having enough people to do the work. This predates COVID.”

Katie MacKay is vice president of MacKay Manufacturing in Spokane Valley. It’s a business her parents bought in 1986 and makes precision steel parts for everything from the nuclear industry to medical applications.

Her success has been limited by her ability to hire qualified help.

“Right now, our orders continue to be very strong,” MacKay said. “We don’t have the capacity to get (products) out as fast as our customers want it.”

Supply chain issues have caused some issues, but they remain workable, she said.

“Finding skilled labor is difficult,” she said. “I don’t know how you do that today. We try. But the demand for employees is greater than I’ve ever seen.”

MacKay Manufacturing, she said, employs about 170 people, many of whom have worked for the company for decades.

“I have employees working here for 10 years who are not even looking for a job and recruiters are calling them at their homes all of the time,” she said. “ Some people leave. I’ve just never had that dynamic before.”

Senske, CEO of Pearson Packaging, is part of a business that was founded in Spokane in 1955 by his grandfather, who invented the first six-pack carrier erector, the first automated system for the brewing industry to put cans into a six-pack holder.

The company, which has more than 250 employees, uses mechanical engineers to design and build automated systems, including robots programmed to package items, wrap and stack products, mostly for Fortune 500 companies.

“We build it in Spokane and ship it all over the world,” Senske said. “From our perspective, our customer base is making investments in automation at all-time highs as a result of the last few years.

“They are relying on automation because they don’t have access to well-trained workforces.”

Even if companies can find workers who can complete the packaging processes, they have sought to invest in automated systems to avoid pandemic-related mandates such as social distancing and forced quarantines, he said.

“It sounds terrible, that equipment replaces people,” Senske said. “But these are mundane, repetitive tasks. They are not mind expanding. So, the jobs we are eliminating are really at the bottom of the pool.”

Unlike MacKay, Senske said his company found enough available workers to deal with retirements and turnover and handle his company’s growing demand.

He credited Spokane’s “higher education footprint” that includes the expansion of WSU’s medical school, Gonzaga, Whitworth University and others for improving the quality of the area labor force.

“Bringing those people into our city has tremendous benefits,” Senske said. “We are finding a labor pool that comes from outside the region has a more diverse set of skills and experiences. There were a lot of qualified candidates in this region that 10 years ago may not have been.”