Montana economic outlook: recovery still stuck in the starting gate.[ILLUSTRATION OMITTED]
In the Information Age, it is impossible to avoid learning of every surprise and disappointment in the national economy. Yet if we could somehow forget about the episodes of turbulence in stock markets, the downgrades in both national forecasts and government debt, and the fall in consumer and business confidence expressed in national surveys, we might feel much better about the economy around us. In fact, there are positive signals in the Montana economy.
Perhaps the most heartening has been the improvement in state tax revenues. After experiencing the deepest two-year decline in revenue in postwar history, Montana general fund revenues enjoyed growth of just over 10 percent in fiscal year 2011. These were led by increased collections for both the personal and corporate income taxes. There also was an encouraging uptick in payroll employment.
While the 2011 data show some gains, statewide growth in real nonfarm earnings has fallen considerably short of the 2.6 percent increase we foresaw happening a year ago (Figure 1). As judged by this comprehensive measure, the Montana economic recovery thus far remains stuck in the starting gate--actually slowing down from the 1.5 percent growth rate of 2010 to register a disappointing 0.7 percent growth in inflation-corrected nonfarm earnings.
There are at least three factors that led to this less than expected rate of overall growth:
Inflation. After being largely dormant since 2008, spikes in food and energy prices propelled prices ahead at a much faster than anticipated rate in 2011. If price growth had been as originally forecasted, actual growth in 2011 would have been almost a percentage point higher.
Weak Individual Sector Performances. Several sectors of the state economy performed much more weakly than we anticipated in 2011. There were larger than anticipated declines in earnings of federal government workers due to the wind down of the Census and the less active fire season. Health care earnings growth also has been much more sluggish than expected, as health providers deal with higher regulatory compliance costs and lower demand for elective procedures.
U.S. Economic Growth. Growth in the national economy was revised down sharply for the first half of the year, with overall economic growth just fractionally above zero. Although job growth has continued, discretionary consumer spending remains weak, and with it, the prospects for spending by nonresident visitors to Montana remain cloudy as well.
The exceptions to these developments have been agriculture and, especially, natural resources and energy. Because of oil-related fabrication, repair, engineering, and other development activity, rural eastern Montana's growth has been much stronger than elsewhere in the state. And reasonably strong prices for wheat and calves have helped farmers and ranchers realize another good season for their gross receipts.
In preparing this outlook, we have attempted to strike a balance between the recent performance of the state economy, which outside of housing has been reasonably good, and the climate for future growth, which has become increasingly cloudy. While as of this writing the U.S. economic expansion looks a bit more secure, the prospects for Asia and especially Europe have worsened considerably. A recession in Europe appears more and more certain, with the only question being how severe and whether it will be accompanied by a banking crisis.
In this environment, especially with housing and construction still ailing, the prospects of a swift return to faster growth are small. Our baseline forecast calls for growth of between 2.0 percent and 2.5 percent in nonfarm earnings over the next four years, substantially less than the growth that prevailed before the recession. This outlook assumes that:
* The U.S. economy will avoid recession but continue to operate well below its potential for at least the next two years, as spending and savings adjustments in the wake of the 2009 financial crisis continue to be worked out;
* The housing price declines end in 2012, with a modest recovery in construction under way by 2013;
* Global prices for commodities, energy, and food will remain high by historical standards;
* Spending growth will remain severely restrained by revenue shortfalls due to the recession, especially at the state and local levels; and
* Energy and natural resource developments will tilt faster growth toward the eastern part of the state.
The main risk to the forecast is of a new global recession that causes prices of energy and natural resource commodities to fall sharply, as occurred in 2008-09. Such an event is possible, especially if political leaders in Europe allow problems there to snowball to produce an unmanageable situation. On the other side, if construction comes back more quickly than predicted, or business and consumer confidence bounces back sharply, our forecast of near-term growth could be too low.
Patrick M. Barkey is the director of The University of Montana Bureau of Business and Economic Research.
Montana Profile Total Population, 2010 989,415 Percent Change in Population, 2000-2010 9.7% Median Age, 2010 39.8 Percent 65 or Older, 2010 14.8% Percent of Population with Bachelor's Degree or Higher, 28.2% 2010 Median Household Income, 2010 $43,335 Percent of Population without Health Insurance Coverage, 17% 2010 Unemployment Rate, February 2012 6.9% Sources: American Community Survey, U.S. Census Bureau; Research and Analysis Bureau, Montana Department of Labor and Industry. Table 1 Population, Montana and Regions, 1990-2010 Percent Change Thousands of Persons 2000-2010 1990 2000 2010 1990-2000 2000-2010 Montana 800 902 989 12.9% 9.7% West 287 329 367 14.6% 11.6% Missoula 79 96 109 21.8% 14.1% Flathead 60 74 91 25.8% 22.2% Silver Bow 34 35 34 2.0% -1.2% Ravalli 25 36 40 44.2% 11.5% Rest of West 89 88 93 -1.1% 5.7% North Central 229 259 266 13.1% 2.7% Cascade 78 80 81 3.4% 1.2% Lewis & Clark 48 56 63 17.3% 13.8% Hill 18 17 16 -5.6% -3.5% Fergus 12 12 12 0.0% 0.0% Rest of North 73 94 94 28.8% 0.0% Central Southeast 284 314 356 10.6% 13.4% Yellowstone 114 129 148 14.0% 14.4% Gallatin 51 68 90 34.4% 32.0% Richland 11 10 10 -9.8% 0.0% Custer 12 12 12 0.0% 0.0% Rest of Southeast 96 95 96 -1.0% 1.1% Source: U.S. Census Bureau. Figure 1 Actual and Projected Change in Nonfarm Earnings, Montana, 2002-2011 Actual Projected '02 2.1 1.2 '03 3.1 1.4 '04 4.5 3.0 '05 3.6 2.6 '06 4.9 4.9 '07 1.6 4.2 '08 -0.6 4.1 '09 -3.3 0.5 '10 1.5 1.3 '11 0.7 2.6 Sources: Bureau of Business and Economic Research, The University of Montana; Bureau of Economic Analysis, U.S. Department of Commerce. Note: Table made from bar graph. Figure 2 Earnings in Basic Industries, Montana, 2009-2011 (Percent of Total) Transportation, 12% Federal Military, 10% Nonresident Travel, 9% Wood Products, 4% Federal Civilian 23% Selected Manufacturing 16% Mining 14% Ag. and Related, 12% Sources: Bureau of Business and Economic Research, The University of Montana; Bureau of Economic Analysis, U.S. Department of Commerce. Note: Table made from pie chart. Figure 3 Actual and Projected Change in Nonfarm Earnings, Montana, 2008-2015 Actual Projected '08 -0.6 '09 -3.3 '10 1.5 '11 0.7 '12 2.0 '13 2.4 '14 2.4 '15 2.4 Sources: Bureau of Business and Economic Research, The University of Montana; Bureau of Economic Analysis, U.S. Department of Commerce. Note: Table made from bar graph.