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The economic impacts of Montana's timber shortage.

Timber shortages loom throughout the Pacific Northwest due to an array of issues including protection of the spotted owl and other threatened or endangered species, appeals of timber sales, limited availability of timber on certain ownerships, and shifts in public values. Here in Montana, an interagency team of foresters involving the Montana Department of State Lands, the U.S. Forest Service, and The University of Montana recently completed an analysis which concluded that substantial declines in the size of Montana's forest products industry will occur due to limited timber availability (Flowers et al., 1993). We build on these findings here, and examine the economywide implications of the cutbacks.

The study team tried to establish what, in coming years, would be Montana's most likely harvest levels from all timber sources. The team developed three harvest scenarios defined as having a "reasonable or realistic" chance of happening. All scenarios use as a baseline the period of 1986-1991.

In Scenario A, harvest levels throughout the 1990s decline least from late 1980s levels, and actually exceed those levels after the year 2000. Scenario C projects the most precipitous decline in Montana timber harvests. Falling between these, and judged the most likely, is Scenario B.

All three scenarios assume declines in timber available from national forests and industrial private lands. The study team projects increasing harvest from nonindustrial private land, but, except in Scenario A, these increases won't entirely offset declines from other ownership sources.

Wood Products and Montana's Economy

The wood products industry is one of Montana's basic industries. Generally, basic industries depend on out-of-state markets or are otherwise influenced by factors beyond state borders. Labor income earned by workers in basic industries represents new funds injected into the economy. New funds create additional income as they are spent and respent in the local economy.

Historically in Montana, a very close relationship has existed between changes in the basic industries and overall economic trends. That is, even though basic industries are only one cause of overall trends, significant increases or decreases in basic industries have measurable impacts on the overall economy.

We analyze economic impacts of timber supply reductions in several steps. First we present statewide and substate wood products employment and labor income changes associated with the various scenarios. Next, we convert the wood products impacts into economywide impacts using standard multipliers. Then we compare projected economywide impacts to several measures of the economy. Finally, we discuss several key variables in the timber industry, including log prices, timber ownerships, and labor intensity.

To minimize controversy, we used employment and income multipliers published by the U.S. Department of Commerce, Bureau of Economic Analysis (BEA). BEA's employment multiplier for the Montana wood products industry is 3.1, which means that total Montana employment will change approximately 3.1 for every change of 1.0 in that industry. Similarly, the Montana wood products labor income multiplier of 2.65 results in total labor income changes of about $2.65 for every $1 change in the wood products industry. As with most economic calculations, these computations should be interpreted as rough estimates.

We also used these same BEA multipliers to calculate impacts for Montana's multicounty regions. Since substate multipliers are not available from the federal government, the multicounty estimates should be viewed with more caution than the statewide totals.

We have derived statewide and regional estimates of employment and labor income impacts for each harvest scenario, and presented them in the upper portions of tables 1 and 2. We discuss in detail only the employment impacts; labor income calculations are summarized later, and yield roughly the same conclusions.

Employment Impacts

Table 1 shows projected annual employment changes for the 1990s for each multicounty region. The wood products employment change is taken directly from the timber supply study.

Under the 1990s' most likely scenario, our analysis projects a statewide decline of about 2,500 industry workers--almost a quarter (22.7 percent) of the state's total wood products industry work force. Employment decreases will occur in northwestern Montana, as well as the western and southwestern regions. Scenario B projects no industry employment change in west central Montana, and a small increase in the eastern region, where nonindustrial private timber supplies are predominant.

Scenario A, projecting the smallest likely decline in harvest levels, leads to a net statewide loss of about 400 industry workers. Broken down by region, northwestern Montana loses about 900 jobs in this scenario, while west central and eastern Montana each gain about 200 jobs.

Scenario C projects the largest likely decline in harvest levels. Nearly 4,600 industry jobs (41.6 percent of the statewide total) would be lost if this scenario proves accurate. Northwestern Montana would suffer the largest employment losses. Industry employment would also decline in the western and southwestern regions, while employment levels would hold steady in west central Montana and increase slightly in the eastern region.

When we take into account the BEA multiplier effect, declines in timber harvests have even more impact. For instance, in Scenario B, which depicts the most likely harvest levels, we estimate a statewide total employment decrease of 7,771 workers. This represents 2,500 direct forest industry workers plus 5,271 associated workers. Corresponding figures for Scenarios A and C are declines of 1,243 and 14,235, respectively.

By region, Scenario B employment changes represent a loss of 4,750 wood products industry and associated jobs in the northwestern region, a decline of 2,504 in the west, a drop of 622 in the southwest, no change in the west central, and an increase of 155 in the eastern region.

These projected employment and labor income changes become more meaningful when put into perspective. First, to get a sense of how important the wood products industry is within each substate region, we compare figures for total statewide and total regional employment.

The Montana Department of Labor and Industry reports that total statewide 1992 employment was 384,000 persons. Therefore, projected statewide employment losses from the most likely timber harvest levels (Scenario B, 7,771 jobs) represent about 2.0 percent of the total. For Scenario A, the corresponding figure is a 0.3 percent loss of the total statewide 1992 base; Scenario C represents a 3.7 percent decline.

The above employment projections assume a static job base. And the economy, even in slow-growing Montana, is never truly static. Our second comparison relates projected employment impacts to Montana's statewide and regional average annual job growth (or decline) during the last five years. This provides a rough indicator of the time needed to recoup employment losses--given that the economy continues to perform at historic rates, and that employment is structured as in the past. (Most of our analysis deals with employment changes, but the same method is applied to the labor income changes detailed in table 2.).

Proportionally, northwestern Montana stands to lose the most from declining timber harvests. The most likely harvest level (Scenario B) projects a loss of 9.7 percent of northwestern Montana's total 1992 employment base; Scenarios A and C project a 5.7 percent and 17.8 percent loss, respectively. The second largest impacts will be in the western region, where the projected employment losses associated with Scenario B (the most likely harvest level) are about 4.6 percent of the total; Scenario A suggests no loss for the western, and Scenario C projects an 8.6 percent decline. Eastern Montana is the only region projected to increase employment under all scenarios, but the proportions are relatively small, ranging from 0.1 to 0.5 percent of total area employment.


Total Montana employment increased an average of 2,000 workers per year between 1987 and 1992, the latest data available. The most likely harvest, Scenario B, projects a total loss of 7,771 workers. Therefore, if Montana's statewide economy continued to grow at the 1987-1992 rate, it would take about 3.9 years (7,771 divided by 2,000 = 3.9) to regain the jobs lost. Using the same methodology, Scenario A would require 0.6 years, and Scenario C 7.1 years of average employment growth to recoup losses.

Northwestern Montana, the hardest hit region, would need 13.9 years of average growth to offset declines associated with the most likely harvest (Scenario B). In the western and southwestern regions, the most likely harvest declines would require 3.5 and 1.0 years, respectively.

Labor Income Impacts

Labor income includes wages and salaries, proprietors' income, and other labor income (mostly fringe benefits) of all working persons. Labor income may be a more sensitive local economic indicator than employment because it TABULAR DATA OMITTED incorporates differences in wage levels, hours worked, and other job characteristics. As with employment, we first calculated the forest products industry changes (using 1991 labor income per worker for the industry), and then converted these changes into economywide impacts using the income multiplier. Table 2 presents these computations.

Major conclusions for the most likely harvest (Scenario B) are as follows:

* Forest products labor income loss would be $71.3 million (1991 dollars) and total labor income decline would be approximately $189.6 million (1991 dollars).

* Total labor income loss represents about 2.3 percent of the statewide total.

* Based on the average for 1986-1991, recouping the lost labor income would take about 3.6 years.

* The northwestern region's declines would be about 12.1 percent of total labor income and require about 17.5 years to be recouped.

Probable Forecasts

We've developed our own forecasts for Montana's timber industry, and estimated the probability of each occurring. Our forecasts build on the analyses described earlier in this article, and take into account three important variables affecting the wood products industry--timber ownerships, log prices, and labor intensity. We'll briefly discuss these variables, and then offer our forecasts.

Sources of Timber: Timber from three ownerships--National Forest lands (NFS), industrial private lands (IND) and nonindustrial private forest lands (NIPF) are the key to future harvest levels. Each type of ownership is subject to a variety of market and other pressures.

The NFS timber sale program in 1991 and 1992 averaged 340 MMBF. This is between the projected largest (365 MMBF) and most likely (280 MMBF) annual harvest scenario for the 1990s. However, the sale program will almost certainly decline in the near future. The National Forest funded sale program for fiscal 1993 (October 1, 1992 - September 30, 1993) is 340 MMBF, with the initial fiscal 1994 proposed target at about 300 MMBF (USDA, Forest Service, 1993).

On average for fiscal years 1990 and 1991, the U.S. Forest Service in Montana has sold approximately 70 percent of its funded targets. Preliminary estimates are that timber sales for fiscal 1993 will be about 200 MMBF (60 percent of target). Looking to the remainder of the 1990s, U.S. Forest Service officials expect the targets to decline to about 250 MMBF. Even with a lower target, it will be very difficult to achieve assigned sale programs and it would be realistic to assume accomplishments of about two-thirds of targeted volume (Spores, 1993). For example, a new set of guidelines have been issued by the U.S. Fish and Wildlife Service to manage the grizzly bear. Also, the bull trout may soon be listed as a threatened or endangered species. On balance then, it appears the National Forest harvest in the 1990s will be substantially below the most likely harvest level projected by the timber supply team.

Private forest lands in the state may be subject to fewer political constraints, but they are profoundly affected by market forces. Recent (1991 and 1992) total private land harvests were fairly consistent with the study team's projection in Scenario B, although the mix included more timber than expected from NIPF sources and less from IND sources.

Log Prices: In our opinion, nonindustrial private forests could supply more timber in the 1990s than projected in the timber supply analysis. This ownership contains substantial volumes of timber and has consistently grown more than has been harvested.

Historically, Montana's NIPF owners have been very responsive to higher prices and timber prices have increased more rapidly than projected by the study team. The 1992 NIPF harvest was 310 MMBF, 30 percent higher than projected under the most likely scenario for the first half of the 1990s and about equal the level projected for the late 1990s. With continuing high log prices, NIPF harvest in the 1990s certainly could be higher than the study team expected.

High log prices could affect harvest levels on industrial private lands, too, though in general IND levels will decline because these lands do not have sufficient timber to sustain the high 1980s harvest levels. The study team assumed IND owners would decrease harvest to a more sustainable level through the 1990s.

However, if dramatically higher prices continue and NFS timber offerings fall below expectations, industrial owners may harvest their remaining timber volume at a pace more rapid than projected. This trend could mitigate harvest declines statewide in the next five to seven years but would exacerbate subsequent declines.

Labor Intensity: Harvest declines may be somewhat offset by changes in the labor intensity of timber processing. That is, the industry in the 1990s may employ more people per unit volume of timber harvested and processed than in the last half of the 1980s.

Our estimates of the employment impacts associated with various timber supply scenarios are based on labor intensity ratios that existed from 1986 to 1991. However, the wood products industry has become somewhat more labor intensive in the last two years; harvests have declined by 10 percent statewide but employment has declined by about 2 percent. In the short term especially, there has been a low correlation between timber harvest and employment. For example, mills may process less timber and still try to maintain a full work force.

A sharp employment decline is expected in late 1993 with the sale and down-sizing of Champion International Corporation's mills and announced layoffs at other mills. These actions may bring employment declines more in line with harvest declines. However, with continuing high log prices, employment per unit volume of timber processed could remain above 1986-91 levels. This would mean higher employment per unit volume of timber processed, but also probably larger losses if timber harvest declines further. (See also Keegan article, Montana Business Quarterly, Summer 1993, for more on this trend.)

Forecasts: We believe two factors will primarily determine harvest size and timber available to Montana's forest products industry: 1) the future price of wood products; and 2) National Forest harvest levels. Price will influence harvest from all ownerships, but we expect nonindustrial private harvest levels will be especially sensitive to log prices. National Forest harvest levels are and will be much more sensitive to policy issues. (See Flowers, et al., 1993, for detailed discussion of policy variables.)

At this writing we are two-and-a-half years into the supply study's projection period. Although any of the three likely scenarios appear possible, we believe Scenario B is still the best estimate of timber availability and associated employment impacts. Scenario C is next most likely, and Scenario A least likely, in our opinion.

With the important variable of log prices factored in, we arrive at three combinations of price and harvest which capture a range of probable outcomes. These are listed below, beginning with our assessment of the most likely industry conditions.

* High prices/low National Forest harvest; 25 to 50 percent probability: National Forest harvest levels could decline to well under half late 1980s levels, due to threatened and endangered species, cumulative harvest impacts, legal and administrative appeals, budget and below cost issues, etc. We expect NIPF owners to respond to higher prices with increased timber harvest. This should lead to employment impacts at Scenario B levels.

* High prices/moderate National Forest harvest; 5 to 10 percent probability: This combination assumes high prices and a National Forest timber program at about 75 percent of late 1980s levels. Given that higher prices lead to higher harvests by NIPF owners, we would expect only small declines in industry size and related employment.

* Declining prices/low National Forest harvest; 5 to 10 percent probability: Without sustained substantial real price increases over 1980s levels, NIPF harvests would certainly be lower, and Montana National Forests would have great difficulty implementing "above cost" timber management programs. Low future prices for wood products would result in a statewide harvest of approximately one half late 1980s levels. Worker losses then would be on a par with those described in Scenario C.


The timber harvest reductions will have a significant impact on Montana's economy, and continuation of historic slow growth means that the associated employment and labor income losses will not be soon recouped. The most likely scenario suggests statewide decreases equivalent to about 2.0 percent of total employment and 2.3 percent of labor income. Using trends for the last five years, Montana's economy would take about 3.6 and 3.9 years, respectively, to recoup these employment and labor income losses.

Negative impacts will be concentrated in western Montana. The most likely scenario suggests 9.7 and 12.1 percent reductions in employment and income in the northwestern region, while the corresponding figures for the western region are 4.6 and 5.6 percent reductions. These decreases are equivalent to 13.9 and 17.5 years of growth in the northwestern and 3.5 and 6.1 years of increases in the western regions.


Flowers, P.J., Conner, R.C., Jackson, D.H., Keegan, C.E., Long B., Schuster, E.G., Wood, W.L. 1993. An Assessment of Montana's Timber Situation, 1991-2010, Miscellaneous Publication No. 53, Montana Forest and Conservation Experiment Station, The University of Montana, Missoula, Montana.

Spores, D.M. 1993. Personal Communication, Director of Timber, Cooperative Forestry, and Pest Management, USDA, Forest Service, Northern Region, Missoula, Montana.

USDA, Forest Service, 1993. FY 1994 Program Budget Management Information, Initial Budget Advice. USDA, Forest Service, Northern Region, Missoula, Montana.

U.S. Department of Commerce, Economics and Statistics Administration, Bureau of Economic Analysis, 1992. Regional Multipliers: A User Handbook for the Regional Input-Output Modeling System (RIMS II).

Charles E. Keegan III is director of forest industry research at the Bureau of Business and Economic Research, The University of Montana. Paul Polzin is BBER director.
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Title Annotation:The New Energy Economics in Montana & the Region
Author:Keegan, Charles E., III; Polzin, Paul E.
Publication:Montana Business Quarterly
Date:Sep 22, 1993
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