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Economics Montana: regional models and forecasts.

Begun in 1983, the Bureau's Economics Montana program projects income and employment figures for the state. But statewide trends don't always apply at the local level. So in addition to short-term statewide and industry-specific projections, the program also includes forecasts for three multi-county trade areas and Montana's seven major urban centers.

Some Economics Montana projections are derived by starting with local and regional data, a "bottom-up" approach. Others begin with statewide figures and allocate portions for substate forecasts, a "top-down" methodology. We'll first briefly describe which is used where, and why, then look closely at the latest substate forecasts.

Montana's Regional Economies

As with its other research, the Bureau groups Montana's fifty-six counties into three multi-county regions - West, Northeast, and Southeast. The three regions are comparable in terms of total nonfarm labor income and population (see figures 1 and 2). But the resource base for each is quite distinct.

Montana's regional economies are profoundly influenced by the geographic distribution of natural resources. The concentration of timberland in western Montana, for example, means that industries processing wood and paper products locate in the western part of the state. These manufacturing industries in turn attract nonmanufacturing activities such as wholesale and retail trade, health services, and education. Here as elsewhere, the nonmanufacturing, or derivative industries tend to locate in the region's major urban centers.

Agriculture dominates Northeast Montana's economy. But government activities also contribute significantly to the region's economy. State government, for instance, provides a relatively stable base for Helena's economy. And the federal government associated with Malmstrom Air Base makes a sizable contribution to the Great Falls area economy. Southeast Montana's economy is fueled by coal mining, oil and gas exploration, as well as by agriculture.

Urban Centers and Economic Flow

Generally, we think of an urban center as a large city or metropolitan area. But given Montana's sparse population, we use the term urban center to refer to a county with a relatively diverse economy serving residents and businesses in the surrounding area. By this definition, then, Missoula County is a Montana urban center; so are Cascade County (Great Falls) and Yellowstone County (Billings).

At every level - urban center, region, statewide - Montana's economic vitality depends on agricultural and other natural resource exports. Exports (cattle, grain, minerals, timber) inject new funds into the economy. Then other kinds of economic activity (retail trade, health services) respond. Thus the flow of influence in Montana's economy goes from the export sector to the derivative sector. In some instances, trends in derivative industries are influenced by other factors as well; the health care industry, for example, is influenced by the same factors as its nationwide counterpart.

Most of Montana's export or basic industries are resource-related and each industry is dominated by a few large firms. According to data compiled by the Bureau, for instance, Montana's top ten wood product companies account for about 70 percent of that industry's total output. High concentration ratios also occur in Montana's metal mining and energy industries.

If a major mill or mine operation shuts down, the impact may be drastic for a particular region. Yet when averaged for a statewide industry total, the impact may seem minimal. The statewide forecast and regional forecast in this case look quite different.

Methodology

Because Montana's basic industries tend to be region-specific and volatile, the Bureau uses a "bottom-up" approach to forecasting their activity. Data about employment and other economic activity in mining, manufacturing, government, railroads, and agriculture are collected first for each region and estimates are made about future performance. The Bureau revises these estimates as necessary by taking into account overall industry and economic trends. Statewide forecasts evolve from this essentially regional analysis.

Unlike basic industries, Montana's derivative industries are similar across regions. Number and size of, say, health care facilities or retail outlets differ from region to region. But the mix doesn't. The Bureau uses a "top down" approach for these industries.

The first step in the "top down" approach is to calculate statewide activity for each derivative sector industry. Then a percent share of statewide activity is determined for each region for each year in the forecast. This "allocator" in turn determines the regional projections for each derivative industry. One caveat before we proceed: Economic forecasting is a statistical technique that identifies and measures persistent trends in data, and uses this information to project future economic activity. Sometimes, the underlying cause of a trend seems obvious. For example, it's easy to determine the major trendsetter in Butte's mining industry during the 1970s and early 1980s - the Anaconda Company.

However, sometimes it isn't clear at all what underlying cause or causes activate an economic trend. Yet we can't ignore such trends or fail to include them in our analysis. Our goal in the following sections then, is to clearly identify and illustrate the stable trends in Montana industries, even if we cannot identify their causes.

The Industry Forecasts

This section discusses labor income trends in most of Montana's basic industries, including forecasts for statewide and substate activity levels. Agriculture, you'll notice, is missing from the lineup, primarily because the volatility of weather and crop prices make forecasting farm labor income an extremely dicey project. In a future issue we'll discuss regional employment trends for the basic industries.

Basic Industries: A "Bottoms Up" Approach

The Mining Industry

Traditionally crucial to Montana's economy, the mining industry has changed significantly over the last few decades. It used to be dominated by the Anaconda Company and was primarily located in the Butte-Anaconda area. Since Anaconda's closing in 1983, the mining industry has become increasingly concentrated in energy production - oil and gas production and coal mining. Several new precious metals mines opened in the second half of the 1980s and sparked a turnaround in this sector of the industry.

New coal mines opened in the 1970s and continue to operate, providing a relatively stable base for that sector of the mining industry. However, oil and gas exploration, responsible for the real "boom and bust" cycles in this industry, fluctuates with the international price of oil. Oil activity was robust during the 1970s and early 1980s, but has since declined.

Forecast highlights for the mining industry include:

* The Bureau forecasts accelerating growth for the non-urban West as metal mines now in the planning stages begin production.

* Only small increases in metal mining are expected for the non-urban Northeast and Southeast regions.

* Non-urban Southeast growth rates should pick up again after 1991 as oil and gas (primarily gas) exploration resumes at a modest level.

* Administrative activities and company offices will continue to account for most mine industry earnings in Montana's major urban areas.

* From its trough in 1984, mine labor income in the Butte-Anaconda area is expected to increase modestly through 1993.

* Overall, labor income from metals and coal mining and from oil and gas exploration is expected to grow slowly through 1993, with Montana's Southeast region (urban and non-urban areas combined) experiencing the sharpest rise.

The Manufacturing industries

Located primarily in the West region, wood and paper products, and metal processing dominate Montana's manufacturing sector. Food products and oil refining dominate manufacturing in the Southeast and Northeast regions.

Sustained growth in real manufacturing earnings occurred statewide until 1979. Three factors - a recession in 1981-1982, the closing of Anaconda Smelters, and technological change in wood processing - caused a sharp drop in manufacturing earnings between 1980 and 1984. Manufacturing has remained relatively stable since then.

Forecast highlights for the manufacturing sector include:

* Although Missoula County's wood products sector earnings will sag for the period 1988-1993, we expect these declines to be offset by increased earnings in other manufacturing.

* Cascade County will suffer further declines in manufacturing labor income for the same period.

* Yellowstone County earnings in this sector will stagnate.

* Flathead County manufacturing will resume slow growth after 1991, but gains will be in industries other than wood products.

* Manufacturing will decline in other second tier areas through 1993.

* Manufacturing labor income in Montana's non-urban areas will remain stagnant through the 1990s.

The Construction Industry

Construction activity increased rapidly in Montana during the 1970s, peaking in 1978. Increases during this period were driven by Montana's overall population growth and by special projects, especially those related to electric power production. By the mid-1980s when these power projects were completed, the state's construction industry experienced a rapid decline. Since about 1987, statewide construction earnings have stabilized at just over $400 million.

A closer look at substate construction earnings for the 1970s reveals substantial differences among the regions and between the various urban and non-urban areas. Including both the urban and non-urban areas, Montana's West and Southeast regions experienced annual growth rates near or above the state average of 4.7 percent during the 1970s. Yet growth rates in the Northeast's urban areas were well below the state rate during the same period. The non-urban West also experienced a drop in the 1970s, chiefly due to the completion of Libby Dam. Colstrip power plant construction resulted in high growth rates for the non-urban Southeast through the 1970s.

Montana's substate construction earnings were more uniform for most of the 1980s - and more depressing. Negative changes occurred in all areas between 1980 and 1988. The largest decreases occurred in the Southeast as Colstrip construction concluded. Construction earnings also declined in the Northeast during the same period, but not as steeply as the overall state rate. Mixed declines occurred in the urban West: Missoula and Butte-Anaconda suffered the steepest declines, Flathead the mildest.

Final figures for the period 1988-1991 will show mixed results again. Of the major urban areas, Missoula and Yellowstone Counties can expect earnings to remain flat, while Cascade County will decline about 5 percent per year. Second tier urban areas can expect increased growth with the exception of Lewis and Clark County. Slow growth will occur in non-urban areas, with the non-urban West faring best.

Forecast highlights for the construction industry include:

* Construction earnings statewide will decline slightly in 1993, to about $390 million.

* Between 1991 and 1993, only the non-urban Southeast will experience an increase in construction earnings.

* Overall, Cascade County will experience the steepest decline (7.8 percent) during the forecast period.

* The non-urban West's declines will be the smallest (0.7 percent).

The Transportation, Communications, and Public Utility (TCU) industries

TCU activities peaked in 1979 after rapid growth in the early 1970s. Only Cascade County and Butte-Anaconda did not experience TCU activity growth during the 1970s. During the 1980s, Montana's major urban areas and non-urban areas all experienced declines.

Growth rates in the second tier urban centers for the 1980s were mixed. Flathead and Lewis and Clark Counties did not grow, while Gallatin County and Butte-Anaconda experienced growth of over 5 percent per year. Gallatin County's growth occurred in transportation services and Butte-Anaconda's growth was the result of Montana Power Company consolidating its corporate headquarters in Butte.

Highlights from the TCU industry forecasts include:

* Transportation, including railroads and trucking, will decline, although labor income for transportation services, (i.e., travel agents) should increase.

* Public utilities are expected to remain stable.

* TCU sector forecasts for the 1988-1993 period predict higher growth in the West than any other region; Missoula will experience a slight decline through 1991, then increase TCU earnings through 1993.

* Flathead County and the non-urban West region will experience slow growth through 1993.

* Butte-Anaconda can expect declines through the same period.

* Overall, the Southeast region can expect declines in TCU activity through 1993; Gallatin County, however, will buck the regional trend with growth of 3 percent per year.

* Northeast Montana TCU activity will decline between 1988 and 1991, then stabilize at no growth through 1993.

From the "Top Down": Montana's Derivative Industries

The Finance, insurance, and Real Estate (FIRE) industry

Almost all activity in this sector occurs in urban centers. Two downturns occurred during the 1980s. The first began in 1982 and corresponded to the national recession. The second started in 1988 and is projected to continue until 1991; it may be associated with the cost-cutting and downsizing present throughout financial services industries.

During the 1970s all substate areas experienced growth except Butte-Anaconda. However, Butte-Anaconda picked up in the 1980s. Most other substate regions fared worse during the 1980s than in the 1970s. Montana's non-urban FIRE activity decreased during the 1980s, and major urban centers grew little or not at all. Among second-tier urban centers, Flathead County led the pack with a solid increase in FIRE activity - 12 percent per year during the 1980s. Overall, the West region grew fastest while Northeast FIRE activity during the 1980s declined slightly.

Highlights of FIRE forecasts include:

* Once final figures for 1988-1991 are in, we expect FIRE activity will have grown slightly in the major urban areas.

* Forecasts for the second tier urban areas are more erratic; Flathead County and Butte-Anaconda will decline sharply while other second tier urban areas should grow slightly.

* Slow growth is expected for non-urban areas as well.

* FIRE earnings forecasts for 1991-1993 suggest continued but slower growth rates, about 3 percent annually.

The Wholesale Trade industry

Wholesale trade is typically centered in cities. That's true for Montana as well with over 80 percent of the state's overall wholesale trade earnings concentrated in major and second tier urban areas. The 1970s were good years for the state's wholesale trade, as all substate areas except Butte-Anaconda grew faster than 5 percent per year.

After peaking in 1980, Montana's overall wholesale trade activity began declining. The Northeast region fared worst in the period 1980 - 1988; it suffered a 5.8 percent drop in wholesale trade activity. The West suffered a 3.4 percent drop for the same period. Least affected was the Southeast region with a 2.5 percent decline. Butte-Anaconda's decline accelerated to over 7 percent per year as the Anaconda Copper Company closed operations.

Wholesale trade forecasts for 1988-1991 predict slow growth in Missoula and Flathead Counties. We expect a slight decline in the non-urban West, and another large decline for Butte-Anaconda. Wholesale trade activity is likely to decline in all areas of the Northeast region except Lewis and Clark County, where we expect a 6 percent increase. In the Southeast region, only Gallatin County can expect a near term increase in wholesale trade earnings. Though Gallatin County's growth rate won't be quite as high as Lewis and Clark's, it still should reach a respectable 5.8 percent.

Other near-term forecasts for wholesale trade include:

* Between 1991 and 1993 the West should fare reasonably well, with increases in the 3 and 4 percent range for Missoula and Flathead Counties.

* The Southeast region will have more mixed reviews, with Yellowstone County expected to increase wholesale trade earnings by a meager 1.4 percent while Gallatin County's earnings should rise by a substantial 6.4 percent.

* Butte-Anaconda will continue its decline (8.3 percent), and the nonurban Southeast will decline as well.

* Declines can be expected in all areas of the Northeast region through 1993, except for a relatively flat activity level (0.7 percent increase) in Lewis and Clark County.

The Retail Trade Industry

As with wholesale trade, retail trade earnings tend to concentrate in urban areas. We project substantial growth in this sector for Montana's West region.

Forecast highlights for this sector include:

* By 1993, retail trade earnings in the West will almost equal that of the Southeast region.

* Once again, Butte-Anaconda is the exception to the West's otherwise relatively bright picture.

* The non-urban Northeast region can expect to decline 1 percent per year through 1993.

* Cascade and Lewis and Clark Counties will grow (1.9 and 4.4 percent respectively), but their share of overall retail trade earnings will hold constant.

* In the Southeast region, growth will be concentrated in Yellowstone and Gallatin Counties while the non-urban parts will suffer.

The Health Care Industry

Overall, Montana's health care activity has grown unabated since 1970. Growth is most rapid in the West region; by 1993 total health care earnings in the West will equal the Southeast's earnings. The West region's growth in share of total health care earnings is occurring at all levels of the regional hierarchy. Only the non-urban Northeast shows any decline in health care earnings through 1993.

Service Industries Except Health Care

Growth is also rapid in other portions of the service sector; earnings doubled between 1970 and 1988. Growth occurred in all trade areas with the West region leading the charge here too. Growth slowed between 1980 and 1988 but is expected to return to 1970 levels by 1993. Most of the growth occurs in major urban centers and second tier towns. The only non-urban region expecting growth in this sector is the West.

Total Nonfarm Labor Income

The Bureau uses nonfarm labor income figures to identify overall economic conditions in Montana. Nonfarm labor income measures the income derived from participation in the labor force; wages and salaries are the largest component. Individual industry forecasts of nonfarm labor income in each city and multicounty region are summed to arrive at Montana's total nonfarm labor income.

Statewide, nonfarm labor income grew through the 1970s, peaking in 1979. Nonfarm labor income declined in the 1980s and reached a trough in 1987; forecasts through 1993 suggest slow growth.

Using total nonfarm labor income as a measure, considerable variance existed in Montana's subregions during the 1970s. Missoula, Yellowstone, Flathead, Gallatin, and Lewis and Clark Counties grew at rates near 5 percent per year. Cascade County experienced growth of 1.5 percent per year. Butte-Anaconda showed no growth in nonfarm labor income between 1970 and 1980. Growth rates for Montana's non-urban areas ranged from 2 percent in the West to over 6 percent in the Southeast.

Between 1980 and 1988, the major urban areas showed no growth in nonfarm labor income. Second tier urban centers' growth slowed to below 3 percent per year except for Butte-Anaconda, where declines accelerated. The non-urban West remained stable through most of the 1980s, while the non-urban Northeast and Southeast declined 2 to 3 percent.

Forecast highlights for Montana's nonfarm labor income include:

* We expect continued slow growth in nonfarm labor income through 1993, with the largest increases in Missoula, Flathead, Gallatin, and Lewis and Clark Counties; Yellowstone County will also climb slightly - over 2 percent per year by 1993.

* Growth in Cascade County will lag (figure 40).

* Declines in the Butte-Anaconda region will finally halt after 1991.

* The non-urban West will also grow about 2.5 percent per year through 1993.

* The Southeast non-urban counties are expected to remain stable through 1991, then growth will resume in 1992.

* The non-urban Northeast is not expected to grow measurably between 1988 and 1993.

Nonlabor Income

Transfer Payments consist of government retirement payments such as Social Security, and income maintenance payments such as food stamps and unemployment insurance. This sector experienced growth of about 6.6 percent annually between 1970 and 1980, and the rates were similar across Montana. During the 1980s growth declined to just under 4 percent, due mostly to smaller increases in Social Security. The rate is expected to slow even further - to about 2 percent per year - through 1993. Growth rates are similar among the regions with the exception of Butte-Anaconda area.

Dividends, Interest and Rent grew throughout the 1970s and 1980s until 1987. Slow sustained grow has occurred since then and is expected to continue into the 1990s.

Total Personal Income is the sum of nonfarm labor income, farm income and nonlabor income. It represents income of persons from all sources. The 1970s saw significant sustained growth in Montana's personal income; increases averaged 3.6 percent per year. Between 1980 and 1988, growth in real total personal income decelerated to less than 2 percent per year.

Concluding Comments

Montana is a large state with low population densities. Various region-specific factors drive the economy. The closure of any industrial facility will produce impacts on the local area as well as the surrounding region. Likewise, the opening of a new facility will improve a region's economic vitality.

Natural resources are the driving force in the Montana economy, whether they are extracted, used or viewed. Future economic performance depends on using them in a way that long-term growth can be sustained.

The aging of Montana's population will also produce long-range effects. Sources of nonlabor income may become more important to a region's economy. Derivative sectors such as health care will become even more important. Figuration Omitted.
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Author:Sylvester, Jim
Publication:Montana Business Quarterly
Date:Jun 22, 1991
Words:3394
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