1989: Montana's state and local area outlook.
To assess Montana's economic outlook for 1989, we will systematically analyze the statewide economy, Montana's multicounty regions, and the major urban areas. In each case, we will first look at general economic indicators to determine past trends. Then, we will examine the factors that caused these trends. Finally, we will look at forecasts for the future.
We use population, per capita income, personal income, and nonfarm labor income to examine the overall trends in Montana's economy. Each of these indicators measures a different part of the economy, and they may not have identical trends. But, taken together they provide good overviews of the general condition of the state's economy.
Population. The population data for Montana from 1970 to 1987 is presented in figure 1. The state's population grew rapidly during the 1970s. These increases continued in the early 1980s, and the population reached a peak of 824,000 in 1985. Since then the population declined, and the latest estimate is that Montana had 804,000 residents in 1987.
Population is a lagging economic indicator. That is, changes in population trends usually lag behind other general economic indicators. For example, as we will see later, a population usually peaks several years after other economic measures have turned downward. Therefore, Montana's recent population declines are the result of past events, rather than a harbinger of future declines.
Per capita income. Our second general economic indicator is per capita income, equal to total persona income divided by population. Per capita income is a measure of economic well-being--that is, how well off people are. It measures money income, and certainly Montanans enjoy many benefits that cannot be converted into dollars and cents. Per capita income has been converted into 1987 dollars in order to eliminate the effects of inflation.
Figure 2 presents per capita income for Montana and the United States for 1970 to 1987. During the 1970s, per capita income in Montana grew faster than in the United States, from 87 percent of the national average in 1970 to about 90 percent in 1980. The 1980s, however, were a different story. Per capita income continued upward in the United States while it stagnated in Montana. Consequently, the state's per capita income dropped to about 80 percent of the national average by 1987.
Nonfarm labor income and personal income. Nonfarm labor income is the wages and salaries, proprietors' income, and other labor income of all employed persons--except those working on farms and ranches. Agriculture is excluded because of its volatility. As we will see later, the significant year-to-year changes in agricultural income may mask important trends elsewhere in the economy.
Nonfarm labor income is a proxy for Gross National Product (GNP), which is not available for states or local areas. It is a measure of overall economic activity.
Figure 3 presents nonfarm labor income data from the first quarter of 1979 to the second quarter of 1988. These data clearly show three distinct periods in Montana's economy during the 1980s:
(1) Sharp declines from late 1979 to late 1982. This corresponds to a downturn in the national business cycle; the infamous "double dipper," the most severe recession period since World War II. Montana's nonfarm labor income declined by 9.9 percent from the third quarter of 1979 to the second quarter of 1982.
(2) Modest recovery during 1983 and 1984. Nonfarm labor income grew 3.5 percent from its trough in late 1982 to mid-1984.
(3) Slow downward trend since 1985. By mid-1985, nonfarm labor income was about 12 percent less than its peak in 1979.
Personal income includes income from all sources, and is closely related to the purchasing power in an area. Personal income is one of the few measures of consumer activity in Montana, because of the lack of reliable statistics for retail sales.
As shown in figure 3, personal income has remained relatively constant in Montana during the 1980s. Increases in transfer payments and dividends, interests, and rents have made up the difference between nonfarm labor income and personal income.
From mid-1987 to mid-1988, Montana's nonfarm labor income declined about 1 percent. These figures are important because later we will see that both of the indicators increased in the state's six major urban areas during the same period. This suggests that the declines were concentrated in the rural areas, and were much larger than the statewide average.
Basic or export industries are the major determinant of growth (or the lack of it) in Montana's economy. These industries depend heavily on markets outside the state, or are otherwise influenced by factors originating beyond the state's borders. The major examples are the natural resource industries--agriculture, mining, wood, and paper products. Other basic industries include nonresident travel (tourism), the federal government, railroads, and certain types of manufacturing. The labor income of workers in export industries is an injection of new funds into Montana's economy, which creates additional income as these dollars are spent and respent in the state.
Basic or export industries are analyzed in terms of labor income rather than employment, output, or production. It is the amount of basic labor income that affects the local economy, not necessarily the number of basic workers, the board feet of timber, or the ounces of gold that is produced. In addition, it makes little difference whether $30,000 of basic labor income represents the salary of one worker, or the income of two workers each earning $15,000.
Our estimates of labor income in the basic industries are not accurate to the last cent. Complete information was not available, and we had to make some "ballpark" estimates. Even so, our estimates are based on the best data available.
Changes in the economic base or in the export industries are largely responsible for the recent trends in Montana's economy. They do not provide a complete explanation, however, and we cannot identify the cause of each blip and squiggle in every general economic indicator. The relationship between the basic industries and the rest of Montana's economy is subtle and complex. There may be time lags, for example, that could the relationship between basic and derivative sectors. Also, the data may have different reporting periods--personal income and nonfarm labor income are reported quarterly, while labor income in basic industries is available on an annual basis.
Labor income in Montana's basic industries from 1979 to 1987 is presented in figure 4. As with most of our data, it has been converted to constant 1987 dollars to eliminate inflation. Total labor income for all basic industries along with figures for each industry have been presented for 1987.
It takes only a quick glance at figure 4 to see the extreme volatility of labor income in agriculture. The two-year drought of 1984 and 1985 is easily seen, along with the recovery in 1986 and 1987. No doubt the 1988 figures will show a sharp decline, reflecting last year's drought.
Nonfarm basic labor income displays the same trends we saw earlier in nonfarm labor income. Those are the sharp cyclic declines from 1979 to 1982, the recovery in 1983 and 1984, and the slow but persistent declines thereafter.
A closer look reveals that these overall trends were really the net effects of different events in specific basic industries. The 1979-1982 period was one of widespread decreases in basic industries. There were permanent shutdowns--such as the Milwaukee Railroad and the smelters at Anaconda and Great Falls (these are classified in "other manufacturing"). There were also cyclic declines--the greatest were in wood and paper products, but they also occurred in other basic industries. On the other hand, these decreases were moderated by the 1981 peak in oil and gas exploration.
During 1983 and 1984 there were recoveries in a number of industries--especially wood and paper products. But, they were counterbalanced by declines in oil and gas exploration and railroads.
In 1985 and thereafter, the slow downward trend is attributable to continued decreases in oil and gas exploration and railroads. Labor income in the other basic industries remained relatively stable.
The decreases in labor income do not imply that these industries are reducing their production or output. Many of Montana's basic industries are in the midst of structural and technical change, or are reacting to new market or regulatory conditions. New capital investments and other innovations have increased the productivity of workers. Larry Swanson and Charles Keegan will discuss conditions in several of the natural resource industries elsewhere in this issue.
We do not have the time nor the resources to analyze each of Montana's fifty-six counties, or even all of the major urban areas. Instead, we have divided the state into the multicounty regions shown on the map. Analysis of these regions provides a rough idea of the general trends in broad areas of the state during the 1980s.
The regional population data presented in figure 5 show that the statewide trends in figure 1 are composed of very different regional components. In the West, population remained roughly stable from 1979 to 1982, grew slowly in 1983 and 1984, and then stabilized in 1985 and 1986. In the Northeast, the number of residents increased slowly in 1981 and 1982, followed by stability in 1983 and 1984, and then the sizable declines in 1985 and 1986. The population in the Southeast continued to grow until 1984, and then declined sharply in 1985 and 1986.
Nonfarm labor income also has different regional patterns. Both the West and the Northeast experienced declines from 1979 to 1982. The West then had a modest recovery in 1983 and 1984 and followed by stability, while the Northeast was stable in 1983 and 1984 and decreased slowly in 1985 and 1986. The Southeast was growing slowly in the early 1980s, but turned downward in mid-1984.
The regional data are consistent with the trends for Montana's basic industries, and give a better understanding of the statewide averages. The sharp declines in nonfarm labor income early in the decade were concentrated in the West and Northeast. This is explained by the concentration in the West and Northeast of the wood products industry or other affected basic industries, such as the smelter at Great Falls.
The recent slow downward trend in nonfarm labor income and the population declines, on the other hand, are concentrated in the Southeast and to a lesser extent in the Northeast. This may be explained by the oil and gas industry, which is primarily located in these two regions.
Due to the lack of time, we will not discuss each of Montana's major urban areas in detail. We will, however, present data for the general economic indicators and the basic industries along with a brief summery of the important features in each urban area.
Based on the data presented in table 1, the population trends in Montana's six major urban areas may be placed into three categories:
(1) Declines. The population of the Butte-Anaconda area (Butte-Silver Bow and Anaconda-Deer Lodge counties) decreased from 50,600 in 1980 to 43,700 in 1987.
(2) Approximate stability. The populations of Missoula and Cascade counties were relatively unchanged. Missoula county grew by about 2,400 persons between 1980 and 1987, while Cascade county declined by about 2,000 persons during the same period.
(3) Decelerating growth. Flathead, Yellowstone, and Lewis and Clark counties all experienced population growth during the 1980s. In each community, however, the rates of increase have moderated. Flathead and Yellowstone have experienced population declines.
The relationship between population growth and migration is often misunderstood; a relatively modest "blip" in population trends may be associated with significant differences in the underlying economic conditions. We have presented conditions. We have presented in table 1 the data for the major determinants of population change in each community.
First of all, it is crucial to remember that population change has three components; births, deaths, and net migration. They are related by the following formula:
population change = births - deaths + net migration.
Looking at the Missoula County figures in table 1, for example, we see that the population increase of about 400 persons between 1980 and 1981 was composed of the following:
Births outnumber deaths in each community. This means that net outmigration may occur at the same time there is an increase in population. For example, in Missoula County, population rose from 77,700 in 1986 to 78,400 in 1987 despite the net outmigration of about 100 persons. In other words, the natural increase (births minus deaths) more than balanced net outmigration.
Missoula and Cascade counties and the Butte-Anaconda area experienced overall net outmigration during the 1980s. In Yellowstone and Lewis and Clark counties, there was net inmigration early in the decade. But this changed to net outmigration as the population growth rate decelerated in the last few years. Flathead County experienced net outmigration during 1981 and 1982, net inmigration from 1983 to 1986, and then net outmigration again during 1987.
Other General Economic
Quarterly data for personal income and nonfarm labor income are presented for each community, along with annual figures for labor income in basic industries. In addition to the traditional basic industries--such as mining and wood products--we have also presented estimates of the labor income associated with trade center activities. These figures represent the labor income attributable to persons from the surrounding rural areas who come to the cities to shop, see a doctor or dentist, obtain financial services or advice, or conduct other business. It also incorporates wholesale and other business activities that serve adjacent areas. Labor income for trade center activities should be interpreted cautiously because they are only "ballpark" estimates derived using indirect methods.
No figures for trade center activities are shown for Flathead County and the Butte-Anaconda area. This does not mean that firms in these communities do not serve nonresidents. Rather, taken as a whole, the nonresidents shopping in these communities are outnumbered by locals going elsewhere.
As we mentioned earlier in the statewide analysis, the relationship between basic industries and the general economic indicators are not always precise and easy to see. This is especially true in individual communities where the data may be subject to greater error. In addition, the annual basic industry data terminate in 1986, while the quarterly figures for personal income and nonfarm labor income are available to mid-1988.
Butte-Anaconda area. The long decline of the Anaconda Company, culminating in the shutdown in 1983 of the Berkeley Pit, had an obvious impact on the local economy. From late 1979 to early 1985, nonfarm labor income declined by almost one-third and personal income decreased about 15 percent.
The traumatic events in mining and smelting have left the Butte-Anaconda area with a diverse economic base built on stable and noncyclic industries. The largest basic industries are now the Montana Power Company and its subsidiaries ( 30.2 percent of the economic base in 1986), Montana College of Mineral Sciences and Technology and Warm Springs State Hospital ( 18.0 percent in 1986), and the federal government (13.9 percent in 1986). The labor income associated with the federal government represents the employees of the U.S. Forest Service, U.S. Department of Justice, and other federal agencies located in the Butte-Anaconda area.
The latest data show a 3.0 percent growth in personal income and a 3.4 percent increase in nonfarm labor income from mid-1987 to mid-1988.
Yellowstone County. Unlike most of Montana, economic growth in the Billings economy continued until 1984. Glancing over the data for the basic industries, however, reveals no corresponding peak. This may be due to the figures for trade center activities. This is the largest basic industry in Yellowstone County (38.1 percent of the economic base in 1986), and also the most difficult to measure precisely. We know that the energy-related industries declined in 1985 and 1986. These impacts would be transmitted from the rural areas to Billings via the trade center activities. Better information might provide more insights into this process.
Earlier in the decade, there were declines in food processing (primarily meat packing) and manufacturing (modular home construction). The stability of labor income in transportati on is the net effect of declines in railroads and an increase in motor carriers.
The latest data show a 2.8 percent increase in personal income and a 3.3 percent increase in nonfarm labor income from mid-1987 to mid-1988.
Cascade County. The Great Falls economy experienced significant declines early in the 1980s. The data for the basic industries clearly identify the cause, the closure of the Anaconda smelter and decreases in national defense associated with the departure of several units from Malmstrom Air Force Base.
Since 1982, there has been a slow but persistent decline in labor income associated with trade center activities. These decreases were in wholesale trade. Widespread throughout wholesale trade, these decreases were not due to the closure of a certain firm or business. They may reflect a growing tendency for retailers to deal directly with manufacturers. In any case, Great Fall's role as a retail, financial, and medical center appears unaffected.
Great Falls residents have been anxiously awaiting the 310st Air Refueling Wing, which has been assigned to Malstrom AFB. When fully staffed, this unit will add about 700 military and civilian jobs to Cascade County. The arrival of part of this unit may be the cause of the personal income and nonfarm labor income increases in late 1987.
The latest data show a 5.9 percent increase in personal income and a 5.0 increase in nonfarm labor income from mid-1987 to mid-1988.
Lewis and Clark County. The Helena area has a stable, noncylic economy, and this is easily attributable to the basic industries. Neither nonfarm labor income nor the labor income in the basic industries displayed ups and downs corresponding to the national recessions in the early 1980s.
The two largest components of Helena's economic base are state and federal government. Taken together, they accounted for about 60 percent of labor income in basic industries during 1986. Both are traditionally noncyclic industries.
During 1986, there was a decrease in labor income of state government employees. This was before the state government pay freeze was implemented. Consequently, we expect that there will be even further declines in 1987 and 1988, reflecting the impact of the pay freeze .
Helena's trade center activities are primarily in finance and services, rather than retail or wholesale trade. The large increase in trade center labor income during 1986 was mostly in health care. As in the other communities experiencing similar increases, there is reason to be concerned that this industry will not grow as rapidly in the future.
The latest data show Lewis and Clark County with the fastest growth among Montana's major urban areas; nonfarm labor income increased 9.3 percent and personal income grew 6.0 percent. We do not yet know the cause of this growth, but we think it is associated with the new gold mine which just opened outside Helena.
We have prepared forecasts for Montana, the multicounty regions, and each of the major urban areas. These forecasts were prepared as part of the Economics Montana Program, which is cosponsored by the Bureau and US West.
The outlook for the U.S. economy provides some of the underlying assumptions for the Montana forecasts. Table 2 presents the latest projections of the Wharton Econometric Forecasting Associates (The WEFA Group), a national forecasting service to which the State of Montana subscribes. The WEFA Group does not forecast a recession during the next few years, but they do anticipate slower growth. This is best illustrated by the growth in Gross National Product (GNP). GNP has been growing at more than 3 percent per year, except for 1986. The forecasts for 1989 to 1991, however, are all less than 3 percent per year. The WEFA Group also projects slightly accelerating inflation and stable or declining unemployment.
Our forecasts for 1988 are presented in table 3. Based on the preliminary data for the first three quarters, we may have been slightly pessimistic about last year. Our forecast for total personal income was about $9.9 billion, while the preliminary figures are $10.5 billion. Subtracting agriculture yields a forecast of $9.7 billion contrasted with a preliminary estimate of $9.9 billion, which was about 3.0 percent too low. The forecast for nonfarm labor income is also about 3 percent below the preliminary estimate. The full extent of last year's drought and its impact on the economy may not be reflected in the data for the first three quarters.
The forecasts for 1989 are presented in figure 19. Montana's personal income is projected to rise 4.5 percent in 1989. This is greater than the U.S. figure of 2.8 percent, but the Montana projection incorporates the recovery of agriculture from the disastrous drought of 1988. Nonfarm labor income presents a less distorted picture; it is expected to rise 1.3 percent in Montana as compared to 2.4 percent nationwide. In other words, growth in Montana is expected to even a lag behind the lethargic performance of the U.S. economy.
A longer term perspective is presented in figure 20. Between 1989 and 1991, Montana personal income and nonfarm labor income are projected to grow 1.7 and 1.5 percent per year, respectively. Both are less than the corresponding U.S. averages.
In summary, the overall forecast for the Montana economy is for slow growth, but growth nevertheless. This is in contrast to the declines in nonfarm labor income and the stability in personal income that have occurred since 1985.
Substate forecasts should be interpreted with even more caution than most economic projections. Substate forecasting is still a new development in regional economics. We are becoming more and more confident in our procedures, but we are still learning.
Since the same set of assumptions concerning the U.S. economy and most other factors underlie all substate forecasts, the projected trends are expected to be similar in the regions and urban areas. For example, projected growth rates may fluctuate in the same direction in all the regions and urban areas. Therefore, the interpretation of the substate forecasts emphasizes comparisons between and among areas rather than trends over time. For example, we will be more interested in identifying the area(s) expected to grow the fastest or the slowest, rather than the change in growth rates from one year to the next.
Multicounty Regions. As shown in figure 21, the Southeast is expected to be the fastest growing, but not by much; personal income is projected to rise 1.9 percent per year and nonfarm labor income will increase 1.8 percent per year. There are no clear differences between the Southeast and the West. Personal income is projected to increase faster in the West, while nonfarm labor income is expected to grow more rapidly in the Northeast.
Urban Areas. The forecasts for the urban areas are shown in figures 22 and 23. In terms of both personal income and nonfarm labor income, Missoula, Yellowstone, and Lewis and Clark counties are all projected to grow faster than Flathead and Cascade counties and the Butte-Anaconda area.
Why are we forecasting growth for Montana when we have been experiencing stability or declines? Looking back at the data for basic industries presented in figure 4, we see oil and gas exploration and railroads were the major cause of the decreases since 1985. Our forecasts assume that the declines cease in these two industries. If this occurs, increases in mining, combined with expansions in several other sectors, will lead to the increases in nonfarm labor income and personal income.
On the other hand, what if oil and gas exploration and railroads continue to decline? Obviously, if nothing else happens, our forecasts would then be too high. These are two of the assumptions that underlie our forecasts. Other factors which could change and affect our forecasts are listed on the next page:
Agriculture: The drought is not completely eliminated; moisture is still short in certain areas of eastern portions of the state. Long-run cattle prices appear to be heading downward. Montana cattlemen reduced their herds in response to the drought.
National recession: Economists predict a one-third chance of recession in 1989, with increasing risk thereafter. Most likely scenario involves a free fall of the dollar in international money markets, leading to increased interest rates in the United States. A recession would primarily affect wood products and other cyclic industries.
Further plant closures and employee layoffs: The future remains uncertain for some of Montana's major industrial sites. Many are old, some operate in volatile resource markets, and others may face increased international competition. Most basic industries will continue to become less labor intensive because of technological and structural changes.
Continued decline in world oil prices: The United States is a high cost producer and domestic production will continue to suffer from price declines.
Deceleration in Montana's service industry growth: Rapid growth in health care and certain other services may not continue.
Agriculture: World wheat stocks are down and the outlook for prices is encouraging.
Increase in building: Construction activity in Montana has been minimal, even taking account of the depressed economy, net outmigration, and the completion of several major projects. Just a return to "normal" levels would significantly increase labor income.
Rising world oil prices: The recent agreement among OPEC members may result in rising crude oil prices, which would quickly lead to increased exploration in Montana.
Continued payment of wage bonuses: A number of firms have announced sizable bonuses for their employees. This innovative form of compensation represents an increase in basic labor income.
Faster growth mining: The forecasts do not include many projects which have been announced, but are still in the planning stages. As these mines approach operational status, they will be incorporated into the forecasts.
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|Title Annotation:||economic outlook|
|Author:||Polzin, Paul E.|
|Publication:||Montana Business Quarterly|
|Date:||Mar 22, 1989|
|Next Article:||The oil and gas industry in Montana.|