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Good news at last for Montana's economy?

The news media have reported a number of positive stories concerning the Montana economy. First, there have been reports of buoyant real estate markets and increased construction activity. Secondly, news releases from U.S. government agencies and others claimed to show that Montana's economy outperformed the national average. In a few cases, Montana's economic growth was identified as the fastest among all states.

Rebound in Construction

First let's look at real estate and construction. We do not have reliable data for housing starts or new business construction. The best information we do have describes labor income earned in the construction industry--that is, it reflects the number of persons employed and the hours worked in construction.

As shown in Figure 1, construction labor income increased sharply in late 1991, and continued at the higher level through most of 1992. The growth was significant--construction labor income in the second quarter of 1992 was about 32 percent higher than the corresponding figure a year earlier.

We don't yet have all the details, but it appears that the uptick in construction activity has been concentrated in urban areas. The largest increases were in Yellowstone, Flathead, Missoula, and Gallatin counties, with smaller growth in Cascade, Lewis and Clark, and Silver Bow-Deer Lodge counties. Taken together, these seven urban areas accounted for roughly 75 percent of the rise in statewide construction labor income.

The real question concerns the future trend in construction activity. Will it remain at its current level, continue even higher, or will it turn downward? To put recent events into perspective, Figure 1 presents Montana construction labor income beginning in 1969. Notice that in the late 1980s construction was at an all-time low. Some of the peaks in the 1970s and 1980s were due to major construction projects--Libby Dam in Lincoln County and Colstrip electric generating plants in Rosebud County, for example. Nevertheless, the data suggest that the recent past was a trough, and that current levels may persist because they are a return to a "sustainable" amount of construction activity. On the other hand, interest rates are now at cyclic lows. Increased borrowing costs, which are almost certain to occur as the U.S. economic recovery gathers steam, may curtail some construction plans.


Our Economics Montana forecasts incorporate the relatively optimistic outlook that current levels of construction labor income will be maintained, but future growth will be modest.

Montana's Economy Outperforms Nation

The other good news concerns Montana's economic performance relative to the national average. Typical was a September 1992 news release from the U.S. Bureau of Economic Analysis which reported that the 1990-91 percentage increases for per capita and total personal income in Montana were the largest of any state.

Figure 2 presents data for the change in nonfarm labor income, which is a good indicator of overall economic performance, both in Montana and the United States. Notice that national economic growth decelerated from 1988 to 1989, and that 1990 and 1991 were recession years. In Montana, recessions are typically milder than the national average, and the 1990-91 downturn was even milder than most. Therefore, the reason that Montana outperformed the U.S. as a whole was not due to improved conditions in the state's economy, but to the abysmal performance of the national economy.

The Economics Montana forecasts predict a return to a more "normal" situation, where economic growth in Montana lags behind that of the nation. The state's economy should continue to increase at about 2 percent per year until 1995. The U.S. economy is projected to recover from the recession in 1993 and experience growth rates in the 3 to 4 percent range during the same period.

Long-term Trends in Montana's Economy

The revival of construction and the mildness of the recession in Montana are certainly welcome news. But they do not reflect the long-term trends that have dogged the state's economy for decades. We will systematically analyze these factors in several steps. First, we examine general economic indicators to identify trends. Second, we identify the causes of these trends by looking at basic industries. Finally, we present our forecasts for the future.

Three general economic indicators are used to gauge the long-term trends in Montana's economy. They are:

* Population;

* Per capita income;

* Nonfarm labor income.

Each general economic indicator measures a different part of the economy. In the short run, one indicator's movement may not coincide with trends in other indicators. Taken together though, the three should provide a good view of Montana's general economic condition.


Population is a good place to start the analysis because, underneath it all, an economy consists of people. The underlying trends we identify in the population data are likely to be repeated in the other general economic indicators.

Population data for Montana and the United States during 1970, 1980, and 1990 are presented in Table 1. The critical numbers are the annual growth rates located in the right-hand portion of the table. Between 1970 and 1980, Montana's population increased an average of 1.3 percent per year. The nation's population rose 1.1 percent per year during the same period. In other words, during the 1970s, Montana's population growth outpaced that of the nation.

Things were different in the 1980s. Montana's population barely inched upward between 1980 and 1990, with an average growth rate of only 0.2 percent per year. The U.S. population, however, continued to grow at about 1.0 percent per year. In this decade, Montana's growth rate was less than the national average.

The pattern that we observe in population--and will see reflected in the other general economic indicators--is that, no matter how we measure it, Montana's economy was relatively prosperous in the 1970s, with growth rates exceeding the national average. In the 1980s, those growth rates decline--and some even become negative--while Montana's economic performance drops below that of the nation.

A more precise picture of Montana's population trends in the last two decades is portrayed by annual population, graphed in Figure 3. The continuous increases of the 1970s are easily seen. Notice that population growth did not come to a screeching halt in the early 1980s. In fact, Montana's peak population occurred about 1985, and there were declines from 1985 to 1990. The latest estimates show increases in 1991 and 1992. (These preliminary figures should be taken with a grain of salt; they do not coincide with similar increases in other economic indicators and may be revised.)

Per Capita Income

Per capita income is equal to total personal income divided by population. Per capita income is a measure of economic well-being; it shows how well-off the average person is. To eliminate the effects of inflation, per capita income has been converted to constant 1991 dollars.

Per capita income displays the same overall trends as population: rapid growth in the 1970s, with sharp deceleration in the 1980s. Even though it is a little hard to see in Figure 4 (because of the scale and year-to-year vacillations), Montana's per capita income grew at about the national rate during the 1970s. We were 87 percent of the U.S. average in 1970, and 88 percent in 1980.

In the early 1980s, Montana's per capita income was stable, or slightly declining. It started to inch upward at mid-decade as population dropped; fewer people now divvied up the income pie. From 88 percent of the national average in 1980, Montana per capita income dropped to a low of 77 percent in 1988, and then rebounded slightly to 82 percent in 1991. As a result, in the 1980s Montanans were less able to increase their purchases of public and private goods and services--candy bars, cars, health care, and environmental cleanup--than were typical Americans in other states.

Nonfarm Labor Income

Nonfarm labor income represents the wages and salaries, proprietors' income, and other labor income of all employed persons except those working on farms and ranches. In this analysis, nonfarm labor income is used as an indicator instead of Gross Domestic Product (GDP), which is available only for the national economy. Changes in nonfarm labor income measure changes in overall economic activity in a state or smaller area.

Montana's nonfarm labor income from 1969 to 1995 is shown on the top line in Figure 5. As with per capita income, inflation effects have been eliminated by converting nonfarm labor income to constant 1991 dollars.

Montana experienced almost continual growth in nonfarm labor income during the 1970s. Two brief decelerations--1969-70 and 1974-75--coincided with national recessions. The 1980s, however, were a different story. Beginning from a peak in 1979, four distinct periods can be identified:

* 1979 to 1982, significant decline; nonfarm labor income dropped by 10 percent.

* 1983 and 1984, decline ended; nonfarm labor income stabilized, or even increased slightly.

* 1985 to 1987, smaller declines; nonfarm labor income turned downward again, but not as sharply as in 1979-82.

* 1988 to 1991, very slow growth; Montana's so-called "fragile recovery."

Montana's Basic Industries

Montana's economic growth is largely determined by the activity of basic industries. Generally, basic industries depend on out-of-state markets or are otherwise influenced by factors originating beyond state borders. Montana's basic sector primarily depends on natural resource industries (agriculture, mining, wood and paper products). But other industries also satisfy the basic definition--including nonresident travel (tourism), the federal government, railroads, and certain types of manufacturing. Labor income from workers in the basic industries represents new funds injected into the economy. New funds create additional income as they are spent and respent in the state.

Derivative industries, by contrast, primarily serve local populations; examples include retail trade, services, and local government.

Basic industries are best analyzed in terms of labor income rather than employment, output, or production because the amount of basic industry labor income earned and spent in a local area more profoundly affects that economy than the number of basic workers, the board feet of timber, or the ounces of gold produced. Moreover, because aggregate new dollars are what count here, it makes little difference whether $30,000 of basic labor income represents the salary of one worker, or the incomes of two workers each earning $15,000.

Changes in basic industries may have driven recent trends in Montana's economy. But these changes don't provide a complete explanation for each blip and squiggle in the state's growth rate, nor are they the only cause of changes in the derivative industries. For instance, Montana's health care industry appears to be growing independently of basic industry trends in local economies.

Figure 5 shows the extreme volatility of agriculture, Montana's largest basic industry. Easily identifiable are Montana agriculture's very good years in the early 1970s, and the back-to-back drought years of the mid-1980s. Also, labor income for the nonfarm basic industries clearly mirrors the trends in total nonfarm labor income identified earlier (compare the top line in Figure 5 with the third line).

Specifically, the important periods in the basic industries were:

* the 1970s--Montanans first heard of the energy crisis and braced for runaway growth built on coal resources. In reality, the more traditional basic industries increased. Due to wheat exports and high cattle prices, for example, agriculture had several years of unprecedented profitability early in the decade. (The impact of peak agricultural labor income on the derivative industries tends to be spread over several years, and may not be identified easily in the graph.) Also, the wood products industry expanded late in the decade; new processing plants were built and mills increased their output as national demand rose.

* 1979 to 1982--these were the disaster years for the Montana economy. Widespread declines among many basic industries drove nonfarm labor income down by 10 percent. Two factors were at work: the nation's worst postwar recession and permanent shutdowns. Cyclic declines in the wood products industry and elsewhere were exacerbated by the closures of smelters in Anaconda and Great Fails, the shutdown of the Milwaukee Railroad, and other events. The long-awaited energy boom happened--but in oil and gas, not coal mining; this helped moderate declines in other basic industries.

* 1983 and 1984--the U.S. economy recovered from the recession and began a period of sustained growth which ended only with the 1990-91 recession. In Montana, declines ended and basic industries stabilized; wood and paper products experienced sizable increases. But oil and gas turned downward as the energy boom waned.

* 1985 to 1987--basic industries turned downward again, but the declines were small compared to those early in the decade. Only two Montana nonfarm basic industries declined: railroads and oil and gas. Most remained stable.

* 1988 to 1991--initially, a fragile recovery was driven by increases in nonfuel minerals mining (primarily precious metals) and nonresident travel (tourism). Growth in precious metal mining cooled in 1990 due to world conditions, but nonresident travel continued upward, bucking national trends. Certain types of manufacturing and the military (a new tanker wing at Malmstrom Air Force Base) also enjoyed modest increases.

Statewide Forecasts

An overview of our general outlook for Montana was presented earlier and summarized in Figure 2. Specifically, we project 1 to 2 percent growth in Montana's economy between 1992 and 1995, while the U.S. economy accelerates to 3 to 4 percent growth as it recovers from the recession.

We could translate this forecast into "good news" and "bad news." The bad news first: we are predicting only very slow growth for the Montana economy. The good news is that we are forecasting growth at all--during much of the 1980s, Montana's economy was shrinking.

Our forecast calls for rough stability in basic labor income. Nonresident travel is projected to grow. These increases will be counterbalanced by small or modest declines in several basic industries--wood products, railroads and the federal government, for example. Most of the growth will occur in health care and business services. Although these industries are normally classified as derivative, they have been growing independently of the basic industries during the last few years.

The forecasts incorporate a number of assumptions concerning specific industries or activities. Among them are:

* no closures among Montana's major manufacturing facilities, some of which are aging (for example, the sugar beet factory in Billings).

* a 25 to 30 percent decline in wood and paper products, with about one-half of this decrease occurring before 1995.

* no major declines at Malmstrom AFB. Overall trends in the American military are currently uncertain, but Malmstrom has not been listed on any of the base-dosing lists.

Montana's Major Urban Areas

We will use the same approach to analyze the major urban areas as we did to examine the statewide economy. Specifically, we will first identify the overall trends, then look at the basic industries, and finally make our forecasts for the future.

Missoula. During the 1970s and 1980s, Missoula evolved from a community where the wood products industry was the primary determinant of short-run trends, to a regional trade center. Nonfarm labor income increased rapidly during the 1970s, with only a slight pause during the 1974-75 recession. From a peak in 1979, nonfarm labor income then declined about 17 percent in three years to a trough in 1982. Missoula's economy turned upward starting in 1983, and there were steady increases in nonfarm labor income throughout the remainder of the 1980s. Despite three-quarters of a decade of growth, however, nonfarm labor income in 1990 had just regained its 1979 level.

Until the early 1980s, the wood products industry was the obvious cause of Missoula's economic trends. The industry grew in the 1970s as plywood and particle-board plants were built and the kraft paper mill expanded capacity. The wood products industry is cyclic, and the downturns in 1969-70, 1974-75, and 1979-82 corresponded to national recessions.

The 1979-82 period was not just an ordinary recession. In addition to the cyclic decline, Missoula's wood products industry experienced a permanent shutdown when the Evans plant closed. The industry began to recover in 1983 and 1984, but labor income then turned downward as structural changes enabled the same amount of output and production with fewer workers.

Reflecting the trend in wood products, Missoula's nonfarm labor income also turned upward in 1983 and 1984. But then an unusual thing happened--nonfarm basic labor income continued to grow while the wood products industry experienced a decline in labor income. The explanation for these diverging trends is growth in trade center activities, which consist of those portions of retail trade, wholesale trade, and professional services that primarily attract nonresidents to the urban area.

In the late 1980s, Missoula began to emerge as one of the major regional trade centers in the state. This emergence fueled the continued increases in nonfarm basic labor income. The largest increase among the trade center activities was in health care, reflecting growth in the number of nonresidents coming to Missoula for treatment.

The transformation of Missoula into a regional trade center does not mean that the wood products industry is unimportant. Remember that trade center activities depend on persons living throughout western Montana, and the wood products industry continues to dominate the economic base in many of those rural areas.

Turning to the future, the forecasts presented in Figure 13 predict that nonfarm labor income in Missoula will grow about 2.8 percent per year between 1992 and 1995, the fastest growth among the state's major urban areas. Our forecast incorporates continued increases in trade center activity--primarily health care--and no major shutdowns or closures in wood products.

Yellowstone County. The Billings economy expanded throughout the 1970s, but then remained relatively stable in the 1980s. Yellowstone County is the most populous urban area in the state and trade center activities are the largest component of its economic base. Consequently, events in the surrounding rural areas provide most of the explanations for trends in the Yellowstone County economy.

The continuous expansion of Billings' trade center industries in the 1970s can be attributed to the record agricultural years at mid-decade, combined with the energy boom in coal and oil and gas. Growth in the trucking industry (classified as transportation), also contributed to prosperity in the basic industries.

Throughout the 1980s, Billings' trade center activities continued to expand. In this decade, however, growth was not due to prosperity in the hinterlands. Rather, there was an increasing concentration of economic activity in the urban area --in other words, the gains in Billings were offset by declines in rural areas. Among trade center activities, the largest increases were in health care.

Despite the continued trade center growth in the 1980s, Billings' overall economic base did not expand as other basic industries experienced counterbalancing decreases. In the early years of the decade, there were shutdowns in food products (meat packing) and manufacturing combined with decreases in railroad employment. More recently, the collapse of the oil and gas industry led to decreases in basic labor income beginning in 1985.

Since 1988, there have been no major shutdowns or closures, and the continued growth in trade center activities (again, mostly health care) has led to a modest rise in basic labor income.

Our forecasts presented in Figure 13 predict continued increases of about 2.2 percent from 1992 to 1995, primarily due to trade center activities.

Lewis and Clark County. The Helena economy grew rapidly in the 1970s, but remained nearly stable in the 1980s. Nonfarm labor income increased rapidly between 1970 and 1980, with only a slight deceleration during the 1974-75 recession. The 1979-82 recession is only barely visible in the data, and the ensuing recovery is also almost negligible.

The basic industries explain the trends in nonfarm labor income. Basic labor income increased almost continuously from 1970 to 1980, and then hardly at all during the 1980s. Also, the impacts of the recessions on basic industries were small.

Helena is a government town. State and federal governments account for more than one-half of the economic base as measured by labor income. Since both are noncyclic, this explains the mildness of the recessions.

Expansion in state government accounted for most of the basic industry growth in the 1970s. In addition, there were significant increases in the number of workers at the state headquarters of Mountain Bell (now US West), classified in the transportation and communication category.

Things were different in the 1980s. State government was essentially stable. At mid-decade, the impact of the wage freeze is visible--a decline in constant-dollar labor income. In addition, US West state headquarters employment declined as functions were consolidated elsewhere.

Things could have been even worse in Helena without the rapid growth in trade center activities late in the 1980s. In Lewis and Clark County, trade center activities consist primarily of health care and financial services (historically developed to serve state government), not retail or wholesale trade. Expansion in health care services to nonresidents led to the growth in trade center labor income from 1985 to 1990.

The local area forecasts predict relatively slow growth for Lewis and Clark County during the next few years. As shown in Figure 13, nonfarm labor income is projected to increase an average of 1.3 percent per year between 1992 and 1995. Lewis and Clark County is projected to have the slowest growth of all the major urban areas, reflecting the view that state government will, at best, remain stable. In fact, our forecasts may be revised downward if the currently discussed wage freeze for state employees becomes a reality, or if there are declines in state government employment.

Flathead County. Nonfarm labor income increased rapidly during the early 1970s and then again late in the decade. The 1980s began on a sour note as nonfarm labor income declined almost 20 percent between 1979 and 1982. Since 1983, however, there has been continual growth in nonfarm labor income. Despite these increases, nonfarm labor income in 1990 has barely regained its 1979 level. The Flathead County economy is procyclic; the major slowdowns in 1974-75 and 1979-82 both corresponded to national recessions.

The wood products industry and metal refining (the Columbia Falls Aluminum Company) are the two largest components of the economic base in Flathead County. Together, they were primarily responsible for growth in the 1970s and the sharp decline between 1979 and 1982.

Beginning from the trough in 1982, the wood products industry expanded smartly as the U.S. economy recovered in 1983. The relative stability of wood products labor income during the mid- and late-1980s hides the fact that Flathead County has become the largest timber-processing center in the state, much like Missoula was in the 1970s. Since 1979, there has been a greater than one-third increase in the timber processed in Flathead County. In contrast, structural changes and increased productivity decreased wood products employment and labor income in most other parts of the state.

The Columbia Falls Aluminum Company is the second largest component of the economic base in Flathead County. This plant was sold by the Anaconda Company in the mid-1980s to private investors, who instituted management changes and a profit-sharing plan for workers. Short-term fluctuations in the aluminum market may have less impact on this facility now because it refines alumina for a fixed price (i.e., it's a tolling plant) and does not experience the ups and downs associated with changes in the price of aluminum. On the other hand, labor income of smelter workers may still be volatile because it is dependent on profitability; this explains, for example, the decreases in 1989 and 1990.

In the late 1980s, nonresident travel was the most rapidly growing basic industry in the Flathead. There were also some increases in high-tech manufacturing (classified in the agriculture and all other category).

Our forecasts presented in Figure 13 predict a 2.8 percent average growth rate for Flathead County between 1992 and 1995. This is tied with Missoula as the fastest projected growth among Montana's urban areas, and is dependent on a number of assumptions. Specifically, it assumes no changes in aluminum refining, only modest declines in wood products and railroad employment, and continued rapid growth in nonresident travel.

Cascade County. The 1980s were very different from the 1970s for the Great Falls area economy. Overall, nonfarm labor income in Cascade County increased between 1970 and 1980--although growth did not occur continuously throughout the decade. The early 1980s saw significant declines; nonfarm labor income decreased 14 percent between 1980 and 1982. Since 1983, nonfarm labor income has been approximately stable.

The population of Cascade County has remained relatively stable for the past twenty years. It was 82,000 in 1970, 81,000 in 1980, and 78,000 in 1990.

Total basic labor income does not provide a very good explanation of the nonfarm labor income trends in the 1970s. The peak for basic industries was early in the decade, while the nonfarm labor income peak was in 1979. Looking more closely, we can see that Malmstrom AFB was responsible for the increases early in the 1970s. But the short-term impacts of changes at military installations may be difficult to determine because of weak linkages to the local economy. For example, a new unit could have almost no effect on the local economy if most personnel lived on base and shopped at the Base Exchange.

Labor income in the basic industries provides a much better explanation for the trends of the 1980s. The declines early in the 1980s were due to the shutdown of the Anaconda refinery, reductions at Malmstrom, and small decreases in trade center activities. Paralleling nonfarm labor income, the basic industries were roughly stable during the rest of the decade.

Historically, Great Falls has been the second-largest trade center in the state, ranking just behind Billings. But Cascade County's trade center labor income was stable or even declined slightly during the 1980s. On the other hand, trade center activities in most other urban centers grew. In fact, preliminary data show that Missoula has passed Great Falls in terms of trade center labor income.

What's going on in trade center industries in Great Falls? We really don't know. The data show that the approximate stability in trade center labor income is the net result of two factors: on the positive side, the continued growth of Great Falls as a regional medical center; on the other hand, what appears to be a decline in the region's importance as a wholesale trade center. We really don't have a good explanation for what is going on in wholesale trade.

As shown in Figure 13, the Cascade County economy is projected to grow about 1.8 percent per year from 1992 to 1995. These forecasts are based on continued slow growth in overall trade center activities and no major changes in the staffing levels at Malmstrom.

Gallatin County. The Bozeman area economy consistently has been one of the fastest growing in the state. Nonfarm labor income has risen almost constantly during the last two decades, although the overall increase in the 1980s was less than in the 1970s.

Gallatin County had the fastest-growing population among Montana's major urban areas during both the 1970s and the 1980s. The number of residents rose from 32,505 in 1970 to 42,865 in 1980, and increased further to 50,463 in 1990--representing increases of 31.8 and 17.7 percent for the two decades, respectively.

Montana State University (MSU) is the largest component TABULAR DATA OMITTED of the economic base in Gallatin County. During 1990, it accounted for about 25 percent of total basic labor income. Growth at MSU accounted for much of the increase in Gallatin County's economic base during the 1970s and early 1980s. Notice, however, that MSU's impact stabilized during mid-decade and may have declined slightly by the end of the 1980s.

Manufacturing--including a significant number of high-tech firms--also grew during the late 1970s and early 1980s. This industry experienced several sharp declines in 1986 and 1987, but there was renewed growth at the end of the decade.

Nonresident travel provided an economic boost in the last few years of the 1980s. With Yellowstone National Park next door, Gallatin County is one of the centers of nonresident travel in Montana. Much of the tourist-related activity occurs in the southern portion of Gallatin County, in Big Sky and West Yellowstone, rather than in Bozeman.

According to the projections presented in Figure 13, nonfarm labor income in Gallatin County is expected to increase about 2.2 percent per year from 1992 to 1995. This level of growth is in the middle of the pack for Montana's urban areas. These forecasts are based on continued growth in nonresident travel and stability at Montana State University. A slowdown in nonresident travel and/or a wage freeze at MSU could lower the forecasted growth.

Butte-Anaconda. Recovering from a strike at the Anaconda Company in 1971, nonfarm labor income peaked in 1975. It then plummeted about 25 percent between 1979 and 1985. During the late 1980s, nonfarm labor income was stable.

The combined population of Silver Bow and Deer Lodge counties declined during both decades. Between 1970 and 1980, it dropped 12.1 percent. The corresponding figure for the 1980 to 1990 period was 12.6 percent.

The major economic news in the Butte-Anaconda area during the past several decades was, of course, the drawn-out and painful demise of the Anaconda Company. Even though declines had begun decades earlier, mining and smelting still accounted for two-thirds of total basic labor income in the early 1970s. After 1975, the downward spiral accelerated. First came the abandonment of underground mines, then the shutdown of the smelter in Anaconda, and finally the closure of the Berkeley Pit and other operations. Overall, the Butte-Anaconda economic base decreased almost 30 percent from 1975 to 1985.

One interesting feature of these unfortunate decades is that nonfarm labor income in the late seventies did not decline as much as basic labor income. This may have been due to the fact that, after decades of layoffs and employment declines, it was the most senior Anaconda workers who were the last to lose their jobs. Many may have chosen to retire in the Butte area, and their retirement income partially replaced the lost wages and salaries.

Even though it is much smaller, Butte-Anaconda now has a more diverse economic base. Instead of being dominated by one type of economic activity, no single sector accounts for more than a third of total basic labor income. The headquarters of the Montana Power Company and several subsidiaries (such as ENTECH) now represent the largest basic industry, accounting for slightly more than 30 percent of the total. Second place, representing about 15 percent of the economic base, belongs to Montana Resources Incorporated, which continues to mine one of the former Anaconda Company properties. Third place belongs to the Montana College of Mineral Sciences and Technology, with about 13 percent of basic labor income.

The declines bottomed out about 1986. Since then basic labor income in the Butte-Anaconda area has been stable, or slightly increasing.

The forecasts presented in Figure 13 predict nonfarm labor income increasing about 1.7 percent per year between 1992 and 1995. These forecasts assume no major expansions or closures among the area's major employers, such as Montana Resources Incorporated or Rhone-Poulenc.

The Postwar Baby Boom

The basic industries provide a good explanation for the long-term economic trends in Montana and large urban areas. But, they do not provide all the answers. We now turn to the postwar baby boom: the dominant demographic event of the last half of the twentieth century.

A picture of the baby boomers in Montana is presented in Figure 14. There are two reasons why the baby boomers are so important to the economy. The first is that they are all about the same age. (The usual definition includes persons born during the seventeen years from 1947 to 1964.) As a group therefore, baby boomers are relatively homogeneous. The second reason is that there are so many of them. In 1970, about 251,600 Montanans fit the baby boomer definition, accounting for 36 percent of the total population. In 1980, they numbered 257,500 and represented 33 percent of the population. In 1990, the corresponding figures were about 230,000 persons and 29 percent of the population. (The differences between the numbers in 1970, 1980, and 1990, are due to deaths and net migration.)

Consider the graph in Figure 14. You can clearly see the baby crop as it aged from 1970 to 1980 to 1990. In 1970, the boomers were six to twenty-three years old. In 1980, they were sixteen to thirty-three. And in 1990, they were twenty-six to forty-three years old.

What people buy depends in part on how old they are. Imagine the difference in the typical market basket of goods and services bought by a twenty-year-old, a thirty-year-old, and a forty-year-old. The type of living quarters maintained by a twenty-, thirty-, or forty-year-old is also likely to be very different. Multiplying these changes in living and spending habits by one-third of the total population has significant impacts on the economy.

Here in Montana, demographic changes associated with the baby boomers often have been mistaken for population increases. This is particularly true in the case of housing and real estate. In the 1970s, the leading edge of the baby boomers was just entering the age of home ownership. Most communities were already experiencing net immigration in the 1970s, and the baby boomers added to that increase in housing demand. In the 1980s the baby boomers moved out of their starter homes. They fueled what little new construction actually occurred during that decade. Now, in the 1990s, the baby boomers are almost at middle age and have children of their own. They are looking for larger homes in the higher price brackets, perhaps with room for horses.

This introduces another important demographic factor--the children of the postwar baby crop. Birth rates started to rise around 1977, and increased until 1988. The second postwar baby crop contains those two to thirteen years old in 1990. As shown in Figure 14, the second baby boom is smaller than the first, but still represents a sizable portion of the population. Again we have a large group of people who are relatively homogeneous and aging at the same rate.

And once again, the demographic effects of the second postwar baby crop are being mistaken for population increases. As these children wind their way through the educational system, local schools experience increases in enrollment. But these greater demands on our schools are caused mostly by demographic factors, not by population growth.

A Closer Look at Housing

The 1990 census provided a once-in-a-decade opportunity to look at housing. In Figure 15, we have graphed data on the age of housing units in Montana and its various cities.

First of all, notice the large share of existing housing units that was built in the 1970s. Earlier we saw the peak in construction activity that also occurred in that decade. Statewide, almost 27 percent of existing housing units were built between 1970 and 1979.

Many fewer housing units were built during the 1980s-about 18 percent of existing housing statewide. Look at Gallatin and Flathead counties. As the two fastest-growing counties in the 1980s, they had the most new construction. About 26 percent of their housing units were constructed between 1980 and 1989.

Finally, it is interesting to note where the old houses are. In the Butte-Anaconda area about 47 percent of the housing units were constructed before 1940. Second place is a tie between Cascade and Lewis and Clark counties with 22 percent each. In Helena about 17 percent of existing houses were built in the 1980s, about 31 percent in the 1970s, and about 22 percent before 1940.

Next, let's turn to home prices. The census form asked persons who live in owner-occupied housing to give the value of their homes. At first you might be skeptical about the accuracy of the responses, but a quick check with realtors--who record the average price of houses bought and sold--suggests that these summary statistics may be in the right ballpark. The advantage of the census data is that it reflects all houses, not just those that are bought and sold.

Look at Figure 16. Here we have median value of owner-occupied houses. We have data for three years: 1970, 1980, and 1990. (They have been converted to constant dollars to eliminate the effects of inflation.) With the exception of Lewis and Clark County, we see the same pattern in all cities--a rapid increase in home prices from 1970 to 1980, then a decline from 1980 to 1990. But the 1990 value is still higher than the 1970 one. (In Helena, the 1990 value was less than the 1970 value.)

Realtors in most parts of the state report increases in home values of 15 to 20 percent since 1990. This suggests that some of the decline in home prices after 1980 has been regained. But, it appears that a person who bought a home in 1980 still has lost money.

Figure 17 presents median rents. These figures may appear more reliable because most people know how much they pay in rent each month. Notice, however, that the trend is the same; rapid increase from 1970 to 1980, and then a decline from 1980 to 1990. In Missoula and Butte-Anaconda 1990 rents were lower than they were in 1970. Remember we are talking about inflation-adjusted figures here.

Gallatin and Yellowstone counties tied for the highest median rents in 1990. Third place was Lewis and Clark County Missoula, Cascade and Flathead were tied for fourth. The lowest rents were in Butte-Anaconda.

Paul E. Polzin is the director of the Bureau of Business and Economic Research, The University of Montana, Missoula.
COPYRIGHT 1993 University of Montana
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Title Annotation:Implications for Montana: Proceedings of the 18th Annual Economic Outlook Seminar
Author:Polzin, Paul E.
Publication:Montana Business Quarterly
Date:Mar 22, 1993
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