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Economic trends in Ravalli County.

Economic Trends in Revalli County

This study examines the economy of Ravalli County to identify recent economic trends and their underlying causes. Particular emphasis will be placed on transfer payments - Social Security benefits, certain government pensions, unemployment and welfare payments, and food stamps - because their role in the economy has been the topic of considerable discussion.

Ravalli County has been growing relatively quickly. Its increases exceeded the statewide averages and those experienced by other western Montana counties. However, Montana, western Montana, and Ravalli County all saw sharp decelerations in growth rates in the 1980s relative to the 1970s.

Nonlabor income (transfer payments, income of commuters, and dividends, interest and rents) is proportionately more important in Ravalli County than elsewhere in Montana. In particular, transfer payments are almost one-third larger in Ravalli County than statewide, when expressed as a proportion of total personal income. Conversely, labor income - the income earned from the production of goods and services - is relatively less important in Ravalli County than throughout Montana.

All components of personal income experienced decelerated growth in the 1980s. Even so, Ravalli County continued to outpace the rest of Montana in terms of increases in almost all categories. Transfer payments were the most rapidly growing component of personal income statewide and in Ravalli County.

There are proportionately more persons of retirement age in Ravalli County, but the excess is not great. These persons may account for the relative importance of transfer payments and dividends, interest, and rents. The rapid growth of retirement payments in Ravalli County during the 1980s was due in about equal amounts to increases in the number of retirees and rising payment schedules for Social Security and Medicare.

The forest resources account for most of the economic base in Ravalli County. Taken together, the wood products industry and the Bitterroot National Forest represents more than one-half of the economic base, as measured by labor income. During the 1980s, nonfarm basic labor income in Ravalli County outperformed its statewide counterpart.

Neither transfer payments nor the basic industries provided a satisfactory explanation of the 1980 trends in derivative labor income in Ravalli County. These findings are consistent with other research and suggest that caution be used in dealing with transfer payments because they may not be equivalent to the income earned in the basic industries.

General Economic

Indicators

The economic performance of Ravalli County will be analyzed using data for population, per capita income, nonfarm labor income, and total personal income. Each of these indicators measures a different aspect of a region's economy and, taken together, they provide a good overview of local economic performance. In order to put Ravalli County into perspective, comparable figures are also provided for Montana and the six other counties in western Montana (Flathead, Lake, Lincoln, Mineral, Missoula, and Sanders). Data for all four indicators are provided in table 1. [Tabular Data Omitted]

Population

An economy consists of people. The number of residents provides a measure of the overall size of a region; population change is an indicator of general economic health.

The population of Ravalli County was about 25,200 in 1987, up from 22,493 in 1980 and 14,409 in 1970. Between 1970 and 1980, the number of Ravalli County residents increased an average of 4.6 percent per year. From 1980 to 1987, the average growth rate declined to 1.7 percent per year.

Montana's population grew about 1.3 percent per year during the 1970s, and then decelerated to 0.4 percent per year in the 1980s. The population of western Montana increased 2.4 percent per year from 1970 to 1980, and then rose 0.9 percent per year between 1980 and 1987.

Per Capita Income

Per capita income is total personal income divided by population. It is an indicator of average economic well-being. Per capita income determines the amount of goods and services demanded by the "typical" resident of a region. In order to correct for inflation, the income figures have been converted to constant 1987 dollars.

Per capita income in Ravalli County was $10,143 (1987 dollars) in 1987. This figure was about 82.5 percent of the statewide average of $12,292 (1987 dollars) and roughly 88.8 percent of per capita income in western Montana. Per capita income rose about 5.4 to 5.8 percent per year in all three areas during the 1970s, but was roughly stable in the 1980s.

Nonfarm Labor Income

Nonfarm labor income is equal to the wages and salaries, proprietors' income and other labor income (including certain fringe benefits) of all persons working at nonfarm jobs. The changes in nonfarm labor income, after correcting for inflation, are a good measure of the changes in the production of goods and services in a region. Agriculture has been excluded because the volatility of farm income may mask important trends elsewhere in the economy.

Nonfarm labor income in Ravalli County grew about 8.0 percent per year during the 1970s, and then barely inched upward at about 1.0 percent per year in the 1980s. In Montana, nonfarm labor income rose about 7.2 percent per year from 1970 to 1980, but then declined an average of about 1.2 percent between 1980 and 1987. Nonfarm labor income in western Montana rose 7.5 percent per year during the 1970s, but then decreased an average of 0.4 percent per year in the 1980s.

Total Personal Income

Personal income is the income from all sources, including labor income, transfer payments (i.e. Social Security and Medicare payments), dividends, interest, and rents. Personal income measures the ability of consumers to purchase goods and services.

Total personal income in Ravalli County, after correcting for inflation, increased an average of 10.2 percent per year in the 1970s and then decelerated to 1.6 percent per year in the 1980s. Repeating the trend of the other economic indicators, personal income growth also diminished in the other areas. Statewide, it declined from 6.9 percent per year between 1970 and 1980 to 0.3 percent per year from 1980 to 1987. In western Montana, personal income rose 8.3 percent in the 1970s and 0.6 percent per year in the 1980s.

Summary of the General

Economic Indicators

The general economic indicators suggest several general trends concerning the Ravalli County economy.

* Ravalli County experienced growth throughout the 1970s and the 1980s.

* There was a sharp deceleration in Ravalli County's growth in the 1980s.

* Montana and western Montana also experienced declining growth rates in the 1980s.

* Despite the declines in growth rates, Ravalli County equaled or outperformed both Montana and western Montana in the 1970s and the 1980s.

The Structure of

Personal Income in

Ravalli County

Distinguishing features of a regional economy may be identified and analyzed by looking at the components of personal income. Table 2 percents 1987 personal income by major component for Ravalli County and Montana. To facilitate comparisons, the figures have also been expressed as percentages of total personal income.

Labor income accounts for a much smaller portion of personal income in Ravalli County than in Montana. Approximately 44 percent of personal income in Ravalli County was earned as wages and salaries, proprietors' income, or other labor income. The corresponding figure for Montana was almost 66 percent. The lower percentage for Ravalli County suggests that a much smaller share of its personal income was derived from the local production of goods and services. In other words, labor force participation income was relatively smaller in Ravalli County than in Montana.

Correspondingly, nonlabor income is relatively much more important in Ravalli County. Transfer payments, the residence adjustment, and dividends, interest, and rents, taken together, accounted for 59.5 percent of personal income in Ravalli County, as compared to 38.6 percent statewide. Each of these sources of income will be examined in detail.

Transfer payments represented about 24.2 percent of personal income in Ravalli County, as compared to 18.6 percent for Montana. Transfer payments are income payments to persons for which they do not render current services. For the most part, they are government retirement payments, such as Social Security and Medicare. In Ravalli County, these retirement payments accounted for roughly 90 percent of all transfer payments in 1987.

Dividends, interest, and rents represent about 26.3 percent of personal income in Ravalli County, and 19.9 percent statewide. They include both dollar amounts received, plus estimates of imputed interest and rents. Imputed rents include estimates of owner-occupied farm and nonfarm dwellings. Imputed interest includes the excess of income received by financial intermediaries over income disbursed by these intermediaries to persons. There are no details for Ravalli County, but nationwide the imputed components accounted for about 25 percent of total dividends, interest, and rents.

Residence adjustment takes into account persons who live in one jurisdiction but work in another. For Ravalli County, the figure of $22.9 million primarily represents persons working in nearby Missoula County. The $11.3 million residence adjustment for Montana represents the net adjustment for those who live in the state but work elsewhere, or vice versa. The statewide figure is much smaller than the number for Ravalli County because the intercounty commuting is netted out.

Social Security contributions are the payments by individuals to the various federal social insurance programs. They are subtracted from the other components to arrive at total personal income.

In summary, the important characteristics of the Ravalli County economy as revealed by personal income are that:

* Nonlabor labor income is much more important in Ravalli County than elsewhere in Montana. Transfer payments and dividends, interest, and rents may be relatively more important because of the disproportionate number of retirees in the county. This possibility will be examined later.

* There are significant number of commuters who live in Ravalli County but work elsewhere, primarily Missoula.

Personal Income

Growth in Ravalli

County

A more detailed picture of trends during the past few decades and how they compare to statewide averages is revealed by taking a closer look at the growth in personal income and its components. Table 3 presents the relevant data for Ravalli County and Montana.

Transfer payments grew rapidly. In fact, they were the most rapidly growing source of personal income in both Montana and Ravalli County with the one exception - the 1970s in Ravalli County. Transfer Payments increased about 12.0 percent per year in Ravalli County during the 1970s in Ravalli per year in the 1980s. In Montana, the increases were 10.1 percent between 1970 and 1980 and 3.6 percent per year from 1980 to 1987.

Ravalli County dividends, interest, and rents rose about 12.5 percent per year from 1970 to 1980, and then 2.5 percent per year in the 1980s. The corresponding statewide figures were 9.0 percent per year in the 1970s and 2.7 percent per year between 1980 and 1987.

The trends in labor income are very similar to those for nonfarm labor income, which was examined earlier. That is, the healthy increases in both Ravalli County and Montana during the 1970s were replaced by slow growth or even decline in the 1980s.

In summary, the trends in the major components of personal income were as follows:

* There were sharp decelerations during the 1980s in all components of personal income for both Ravalli County and Montana.

* In the 1980s, transfer payments were the most rapidly growing component of personal income in both Ravalli County and Montana.

* Despite the decelerations, Ravalli County outperformed Montana in terms of growth in all the components of personal income, with the exception of the residence adjustment, in both the 1970s and the 1980s.

Retirees in Ravalli

County

This section takes a closer look at retirees in Ravalli County. Unfortunately, there are no accurate figures for those who are "retired." Therefore, data for the age structure of the population and the components of transfer payments will be used to identify and analyze this group. In the process, further light will be shed on the reasons for the rapid growth in transfer payments noted earlier.

The number of persons of retirement age in Ravalli County and Montana are presented in table 4. The traditional definition includes those sixty-five years old and older. But, the trend toward early retirement and "semi-retirement" suggests that younger age categories also be examined. Consequently, data are also presented in table 4 for the number of persons fifty to sixty-four years of age.

There were about 3,500 persons who were sixty-five years or older in Ravalli County in 1987, accounting for 13.9 percent of the population. Statewide, this group represented about 12.2 percent of the population. There were about 3,300 persons fifty to sixty-four years old in Ravalli County, representing about 13.1 percent of the total. The corresponding figure for Montana was 12.7 percent. Nationwide, about 12.2 percent of the population was sixty-five or older and 13.5 percent was fifty to sixty-four years old.

Ravalli County has long been a home for retirees. Persons fifty to sixty-four years old and sixty-five and older represented a larger share of the population in Ravalli County than in population in Ravalli County than in Montana during both 1970 and 1980. In terms of growth, Ravalli County exceeded the statewide averages for both age groups during the 1970s, but increased at about the same rate as Montana in the 1980s.

What do these numbers mean? Simply, there are proportionately more persons of retirement age in Ravalli County, but the differences are not all that great. If Ravalli County in 1987 were at the statewide average, there would have been roughly 3,100 persons sixty-five years and older (0.122 x 25,300 = 3,087). This is only 400 less than the actual number of 3,500. Similarly, using the statewide average, there would have been about 3,200 persons fifty to sixty-four years old in Ravalli County (0.127 x 25,300 = 3,213), which is only 100 less than the actual figure. The most rapid growth in retirement age persons in Ravalli County occurred in the 1970s. Between 1980 and 1987, the increases were at about the statewide average.

Turning next to the income received by retirees, the data presented in table 5 subtract income maintenance and unemployment-related items included in transfer payments. The amount remaining provides a rough measure of government retirement-related payments. To put these figures into perspective, they have been divided by the number of persons sixty-five years of age and older. Transfer payments do not include payments from private pensions and the dividends, interest, and rents that may be received by retirees.

The retirement and other payments represent the majority of transfer payments. These components accounted for 90.4 percent of total transfer payments in both Ravalli County and Montana. Following the pattern seen repeatedly in the other data, retirement and related payments in Ravalli County grew faster than the statewide average throughout the period, but experienced a sharp deceleration in the 1980s.

The underlying causes of the growth in retirement payments may be identified by combining the per person payments with the number of persons sixty-five and older, reported in table 4. Specifically, the 11.9 percent annual rate of growth in retirement and related payments in Ravalli County in the 1970s was the result of a 3.1 percent increase in the number of persons combined with an 8.4 percent rise in the average payment. Similarly, the 4.8 percent annual growth in the 1980s was due to a 2.5 percent growth in payments and a 2.2 percent growth in the number of persons.

These figures suggest that the rapid growth in retirement payments was not due simply to the growth in the number of retirees. It was also caused by increases in the level of payments. In fact, during the 1970s, increases in the payments per person were much more important than growth in the number of retirees. In the 1980s, these two sources were about equal in importance.

The growth in the per person payments were mostly due to changes in Social Security and Medicare. These and other federal programs were liberalized and the payment schedules were significantly raised in the late 1970s. The increases were far more modest in the 1980s. Given the current federal budget concerns, future changes will probably be more similar to those of the 1980s than the 1970s.

In summary, we can say the following about Ravalli County as a retirement community:

* There are proportionately more retirees in Ravalli County but their numbers are relatively small.

* Retirement payments have been a rapidly growing source of income.

* The growth in retirement payments in the 1980s was due in about equal proportions to increases in the number of retirees and rising payment schedules associated with Social Security and Medicare.

Labor Income and

the Basic

Industries

The Structure of the

Local Economy

Examination of labor income provides insights into the types of goods and services produced in a region, because it is closely related to output and production. In addition, the role of basic industries as a source of local economic growth is best analyzed using labor income.

Table 6 presents 1987 labor income for major industries in Ravalli County and Montana. Once again, comparisons have been facilitated by converting the income figures to percentages of total labor income. [Tabular Data Omitted]

When compared to the statewide economy, the relatively most important industries in Ravalli County include contract construction manufacturing (wood products), and the federal government. Labor income in contract construction accounted for about 8.3 percent of the total in Ravalli County, as compared to 6.0 percent in Montana. The relative importance of this industry in Ravalli County does not appear to be due to an abundance of construction activity, but may instead reflect the unusually depressed conditions in Montana, primarily the eastern part of the state.

Manufacturing labor income represented about 14.1 percent of total labor income in Ravalli County, well above the statewide figure of 8.4 percent. The wood products industry is the dominant manufacturing activity in Ravalli County. As a proportion of total labor income, the wood products industry was roughly three times more important to Ravalli County than to Montana.

The federal government is the other disproportionately large industry in Ravalli County. The labor income of federal employees represented about 10.4 percent of the total in Ravalli County, almost double the statewide figure of 5.3 percent. The relative importance of the federal government can be attributed to the employees of the Bitterroot National Forest and the Rocky Mountain Laboratory.

Ravalli County does not contain a major city or trade center. Consequently, the trade and service industries serve mostly local residents. These categories are equal to or smaller than their statewide counterparts in terms of their contribution to labor income.

The Basic Industries

When analyzing a small region, such as Ravalli County, economists divide the economy into basic and derivative industries. The basic industries consist of firms or establishments, which are located in the region but sell their products elsewhere or are otherwise influenced by factors originating outside the area. Examples in Ravalli County are the wood products industry and the federal government. Basic industries are responsible for injecting new funds into a local economy. These dollars create additional incomes as they are spent and respent in the derivative industries.

The derivative industries are those that serve the local population. Examples include wholesale and retail trade, most services, and local government.

Labor income for the basic and derivative industries in Ravalli County is presented in table 7. The analysis is best conducted using labor income rather than employment because there are significant differences between industries in the wage rates and income of the workers. In addition, labor income is a direct measure of the amounts injected into the local economy by workers in the basic industries.

The largest single basic industry in Ravalli County during 1987 was the federal government. The $12.5 million (1987 dollars) earned by federal workers represented about 35 percent of the total for all basic industries. The partial data that are available suggest that about two-thirds of this total represents the Bitterroot National Forest. The remainder may be attributed to the Rocky Mountain Laboratory and other federal agencies.

Workers in the wood products industry earned about $11.3 million (1987 dollars) and accounted for about 31.8 percent of the total. If the labor income earned by employees of the Bitterroot National Forest is combined with that of the wood products industry, then the forest resources account for roughly 55 percent of the basic labor income in Ravalli County.

The other basic industries include agriculture (12.7 percent), agricultural and forestry services (4.5 percent), mining and railroads (1.4 percent), other manufacturing (10.7 percent), and lodging and other (3.7 percent). The last category includes hotels and motels, which are a major component of the travel and recreation industry, and scientific and research organizations, which includes Ribi Immunochem.

The trends in basic and derivative labor income display the same patterns seen in the other components of personal income, namely significant growth in the 1970s followed by a sharp deceleration in the 1980s. For example, derivative labor income increased at an average of 9.0 percent per year in the 1970s, followed by average growth of only 1.5 percent per year in the 1980s. Similarly, nonfarm basic labor income rose 6.1 percent per year between 1970 and 1980, and it was stable between 1980 and 1987. Agriculture is usually analyzed separately from the nonfarm basic industries because farm labor income is volatile and often influenced by one-year conditions, such as a drought, and these fluctuations conceal important trends elsewhere.

Looking at the specific industries reveals that the greatest percentage of growth in the 1980s among basic industries was in other manufacturing (13.5 percent), which includes a variety of small firms such as a recreation equipment producer. The wood products industry increased an average of 0.4 percent per year. Among the derivative industries, the fastest growth was in services. Further analysis revealed that the largest increases were in medical services, but almost all service categories such as legal and business services posted significant gains during the 1980s.

Even though nonfarm basic income in Ravalli County was stable and did not grow from 1980 to 1987, its performance was well above average for Montana. Statewide, nonfarm labor income declined an average of 3.7 percent per year during the same period. Similarly, the 1.5 percent per year increase in Ravalli County derivative labor income exceeded the 0.1 percent annual decline for Montana derivative labor income.

In summary, the largest industries in Ravalli County are associated with the forest resources; they include the wood products industry and the Bitterroot National Forest. Also significant are the Rocky Mountain Laboratory and a private scientific and research organization. Labor income in the basic and derivative industries increased rapidly in the 1970s and then decelerated in the 1980s. The fastest growing derivative industry between 1980 and 1987 was services.

The Causes of

Growth in Ravalli

County

The various data have now been assembled and they can be used to directly address the questions concerning the causes of growth in Ravalli County. Specifically, we now turn to the derivative industries and attempt to analyze and explain the trends in labor income.

A dominant feature of all the data series was rapid growth in the 1970s followed by very slow growth in the 1980s. We will use this change to evaluate various potential causes of economic growth. We will first identify the relationship that existed in the 1970s between derivative labor income and various causal factors. Then, we will see how well these relationships explained the deceleration of the 1980s.

We will investigate the ability of the basic industries and transfer payments to explain the trends in derivative labor income. Conceptually, transfer payments, the income of commuters (the residence adjustment), and dividends, interest, and rents are similar to the basic industries in that they also represent new dollars which may be spent in the local economy.

Dividends, interest, and rents are a combination of monetary and imputed values from local and nonlocal sources. They were not included in the analysis because the findings would be very difficult to interpret.

Preliminary investigations found the residence adjustment to be unrelated to Ravalli County derivative labor income and it was not included in subsequent analyses. These dollars are probably spent mostly in Missoula; these commuters live mostly in the northern portion of Ravalli County and are in Missoula each working day.

The three alternatives to be examined are that 1980 trends in derivative labor income are caused by:

1. Nonfarm basic labor income.

2. Transfer payments.

3. Both nonfarm basic labor income

and transfer payments.

The findings of the statistical analysis are summarized in figure 1. The line labeled actual is derivative labor income in Ravalli County. Nonfarm basic is the predicted derivative labor income using only nonfarm basic labor income as a casual factor; Trans is the predicted derivative labor income using only transfer payments; and Trans and basic is predicted derivative labor income using both nonfarm basic and transfer payments.

It does not require a Ph.D. in Economics to see that none of the factors provide a good explanation of derivative labor income in Ravalli County during the 1980s. The predictions using only nonfarm basic are persistently too low, while those using transfer payments either alone or with nonfarm basic are too high. Technically, the predictions using just nonfarm basic are more accurate. As shown below, their average error is smallest:
 Causal Factor Mean Error
 Nonfarm Basic 6,430


Nonfarm and
 Transfer 12,656
 Transfer Payments 19,754


The predictions derived using just nonfarm basic also score slightly better using other diagnostic statistics.

These findings do not answer all the questions concerning the respective roles of the basic industries and other factors in determining local economic trends. They are consistent with research findings for other geographic areas, however. This research concluded that caution should be used when using transfer payments because they do not appear to be equivalent to the basic industries. The reason for the differences is the subject of current research.

Paul E. Polzin is director of the Bureau of Business and Economic Research, and professor of management, School of Business Administration, University of Montana.

PHOTO : Bitterroot National Forest
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Author:Polzin, Paul E.
Publication:Montana Business Quarterly
Date:Dec 22, 1989
Words:4423
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