With home sales down, retail sales flat, and credit tightening, Spokane and Inland Northwest businesses have plenty of reason to be cautious, economic observers here say.


Its a time for businesses to stick to what they do best, says Steve Scranton, chief investment officer for Spokane-based Washington Trust Bank.


Its going to be a much more competitive environment, Scranton says. Theres going to be pressure on profit margins. Raw materials prices are going up dramatically. Consumers want a bargain or a discount before theyre going to be willing to spend a lot of money. Well-run business will survive and capture market share, while businesses that arent well run face a much tougher time, he says.


Still, things look better in the Spokane County and regional economies than they do in the national economy, Scranton says.


Retail sales in Spokane County totaled $1.16 billion in the first quarter, essentially flat compared with $1.13 billion in the year-earlier quarter, Scranton says. Commercial construction has held up well, with a full pipeline of projects at the beginning of the year likely to carry that sector through to the end of 2008, but its still definitely slowing, says Scranton, who adds, Credit conditions are definitely tightening.


While the number of homes sold here fell to 868 in the first quarter from 1,327 in the year-earlier period, housing prices held up well, averaging $200,364, down only slightly from $202,272, Scranton says. He says thats a far better performance than in states such as California, Arizona, Nevada, and Florida, where housing values have plummeted. Those results have continued through May.


I think were still doing better than other parts of the country, says Grant Forsyth, an associate professor of economics at Eastern Washington University. If you look at other parts of the country, they would love to have our numbers.


Yet, Forsyth adds, its still possible the Inland Northwest is merely lagging behind the rest of the country in terms of when the worst will arrive.


There may be worse to come, he says. Thats the great unknown.


A U.S. government index says resale prices of existing homes advanced here by 4.4 percent in the first quarter compared with the year-earlier period, while in Kootenai County they fell 0.8 percent, Forsyth says. He says that new-home prices invariably follow the indexs price trends in the resale of existing homes.


Population growth, at 3 percent a year in Kootenai County and 2 percent in Spokane County, is far outpacing that of the nation, which is growing by about 1 percent per annum, Forsyth says.


Job growth in Spokane County, at 0.4 percent in April, has definitely slowed, although it was strong in Kootenai County that month, at 4.6 percent, Forsyth says.


I think 2008, at least for Spokane County, is definitely going to be slow, he says. I think we are in a mild recession right now, with the national housing and mortgage crises providing a demand-side shock, while skyrocketing energy prices administer a supply-side shock, Forsyth says. In terms of energy prices, weve taken a lot of good hits, and the economy has kept going, but just like any prizefighter, the U.S. economy can only take so many powerful hits, Forsyth says.


He believes that in 2009, youll see us go back into the expansion phase, but his concern about that is whether inflation will ignite, and the Federal Reserve will fight it by raising interest rates, which could snuff out an expansion.


The central bank may be in a position where they may have to slow the expansion, Forsyth says. Once you let inflation get out of control, its hard to bring it back under control again.


The Feds interest rate manipulations so far, including seven rate cuts since last September to bolster the slowing U.S. economy, have hit banks hard by reducing their net interest margins, says Randall L. Fewel, president and CEO of Spokane-based Northwest Bancorporation Inc., which owns Inland Northwest Bank.


Banks prime rates, which they charge their best business customers and to which many of their commercial loans are tied, fall instantly when the Fed cuts rates, but it takes three to six months for banks to lower the interest rates they pay customers for their deposits, and the delay cuts into the spread they earn, Fewel says.


I embarked on a branch expansion and upgrade a couple of years ago, says Fewel, who on June 2 attended both a grand opening at Inland Northwest Banks new branch on Francis Avenue and a groundbreaking for a new branch in Airway Heights. This environment isnt the best when your expenses are increasing. When the net interest margin shrinks, that hurts.


Fewel sees the Spokane and Inland Northwest economies as a mixed bag.


A lot of companies are doing well; a lot of companies are not doing well. Our customers are reflective of the same thing, says Fewel. If they primarily make their sales outside of the area, theyre feeling it. If theyre in housing, residential construction, or home improvement, theyre all feeling it.


One home builder that Inland Northwest Bank served has filed for liquidation in U.S. Bankruptcy Court, and the bank had to hire a new builder to finish a home and took a loss of $100,000 on the dwelling, he says.


On the other hand, we had gone years without having anything like that happen, Fewel adds. We bank 30 builders. For one of them to go bankrupt is not that bad.


All of the regions banks are having some deterioration in credit quality, and its unclear when the national mortgage market and the regional housing market will stabilize, although he believes the housing market here will even out by the end of the year, Fewel says.


Meanwhile, banks have changed their underwriting standards, he says.


If the borrower wants a loan to buy land, for land development, or for residential construction, I would say its more difficult to get that, he says. From what were hearing in the market, some banks have stopped doing those loans altogether.


He adds, It used to be if you had a 660 credit score, we could get you a mortgage at really the best pricing options. Its got to be more like 720 now.


Nonetheless, he says, We still at Inland Northwest Bank are anticipating good growth this year and in 2009, with 09 better than 08, and 2010 better than 09.


That banks would tighten credit seemed predictable when they reported a worsening lending environment earlier this year as they released their first-quarter earnings.


Were in the midst of one of the most difficult periods the banking sector has experienced over the past several decades, and its not likely to improve in 2008, Intermountain Community Bancorp CEO Curt Hecker said when that Sandpoint, Idaho, bank-holding company released its first-quarter results.


Intermountain, which owns Intermountain Community Bank, Panhandle State Bank, and a bank in southern Idaho, said its earnings fell to $1.7 million in the quarter, from $2.1 millionand its nonperforming loans shot up to $7.1 million, from $1.8 million a year earlier.


Sterling Financial Corp., of Spokane, which owns Sterling Savings Bank, set aside a hefty $37.1 million in the first quarter for potential credit losses, an almost 800 percent increase from the year-earlier period. Its net income plunged to $2.9 million, or 6 cents a share, compared with $22.9 million, or 50 cents a share.


Regarding bankers dour comments, Avista Corp. economist Randy Barcus says, It could be what theyre saying is their underwriters or their management is raising credit standards. Theyre not going to lend to people that they would have lent to a few months before. Thats pervasive in our community right now.


Barcus says banks are adding a point to a point and a half to the interest rate for so-called jumbo mortgages, or those above $417,000, and are keeping the loans in their portfolios because the secondary market for them has dried up. The loans also are harder to get, and when such home mortgages become more difficult to obtain and more costly, that can hurt recruitment of higher-earning newcomers, such as doctors, which in turn can hamper economic growth.


Were growing jobs faster than were growing population, and in-migrants have made up the difference, Barcus says.


Im concerned that gas prices are going to affect tourism, although they also likely will keep some local residents home during their vacations, Barcus says. He hopes that the strong Canadian dollar will continue to attract Canadian residents here despite the high gas prices.


High fuel prices for the airlines may lead to cancellations or delays in aircraft orders; a large portion of our manufacturing in Spokane serves aircraft manufacturing, Barcus adds. Cancellations or delays in orders for aircraft manufactured by Boeing Co. could hurt Washington states economy, which would be felt here, he adds. Barcus says hes concerned whether the relatively few cancellations and delays thus far might be the tip of the iceberg.


Im concerned about construction costs being quite high, which adds to businesses costs, he says. The myriad of worries have caused him to temper by 20 percent his estimates of population and employment growth in the region for 2008 and 2009, although he isnt releasing those estimates, Barcus says. He believes the regional economy will bounce back in 2010, 2011, and 2012.


Its this credit crunch, Barcus says of his near-term trimming of his estimates. It just puts the brakes on a well-functioning, well-lubricated, mobile economy here.


Contact Richard Ripley at (509) 344-1261 or via e-mail at editor@spokanejournal.com.