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Montana's natural resource industries: recent trends during an improving economy.

Before reviewing recent conditions in Montana's natural resource industries, recent trends in the state's economy as a whole will be briefly examined.

There is considerable conjecture on how the nationwide recession may affect economic conditions here in Montana. But it's worth noting that the state's economy has improved significantly in recent years. Total personal income has increased from as low as $10.2 billion in the third quarter of 1985 to as high as $11.7 billion in the fourth quarter of 1989 (see figure 1). On an annual basis after adjusting for inflation, state personal income has increased by 10 percent between 1985 and 1989.

About 65 percent of state personal income is some form of labor income. Although volatile because of seasonal fluctuations in agricultural income, total labor income increased from a low of $6.6 billion in the third quarter of 1985 to nearly $7.7 billion in the fourth quarter of 1989 (figure 2). Nonfarm labor income has consitently increased since the third quarter of 1986.

About 75 percent of those employed in Montana are wage and salaray employees. Wage and salary employment, which had fallen to 255,000 workers in the first quarter of 1987, rose to 290,000 in the second quarter of 1990. On an annual basis, wage and salary employment has increased each year since 1986.

The state's economy has improved considerably in recent years from its mid-1980s dolddrums. Total personal income in 1989 was a full $1 billion more than in 1985. Labor income improved by $636 million during the same four-year period. And total employment (both wage and salary employees and the self-employed) has increased by nearly 22,000 jobs since played in the state's economic improvement?

Wood Products

Nationwide Market and

Price Conditions

U.S. lumber consumption is heavily influenced by the level of residential construction activity. Housing starts have declined steadily since 1986 and recently dropped to the lowest level since 1982 (see figure 4).

Many factors are cited for this slowdown: the downturn in the economy; sagging consumer confidence; and more restrictive mortgage financing. More fundamentally, the pace of housing construction reflects growth in the number of of households. Many housing anlysts, oting demograhpic shifts occuring in the U.S. populationg, predict a sustained fall off in housing construction. With declining or slow growing populations in virtually every age group except older ones, housing construction has weakended and is expected to remain weak for some time.

Wharton Economic Forecasting Associates (WEFA) is currently forecasting 1.0 to 1.2 million starts in 1991 and no more than 1.3 to 1.4 million starts in 1992 and 1993.

Adjusted for inflation, prices of framing lumber and plywood have been fairly stable in recent years (figure 5). However, prices fell substantially during the second half of 1990, reflecting declining demand.

Industry Activity in Montana

Lumber production in Montana gradually increased in 1986 and 1987, fell in 1988 in the midst of mill strikes, and remained below 1987 levels in both 1989 and 1990 (see figure 6). With the exception of the second and third quarters of 1988, plywood production in the state has been slowly increasing over time. However, production fell slightly during the second half of last year.

About 90 percent of those employed in lumber and wood products manufacturing in the state are wage and salary employees. Although employment fluctuates considerably on a seasonal basis, the last five or six years have been relatively stable ones. Measured in constant dollars, wage and salary payments received by these workers have declined modestly since the second half of 1985. More pronounced losses are expected as the fall off in housing activity impacts the industry.

Oil and Gas Exploration

and Production

Trends in Crude Oil Prices

The dominant factor influencing oil and gas exploration activity in the United States is the level of crude oil prices. Oil prices collapsed in 1986 and remained at relatively low levels unttl the Iraqi invasion of Kuwait in August (see figure 8). After the invasion, crude prices shot up, but then wanted as expectations of a short war in the Gulf grew. Forecasts of crude oil prices in coming months are wide-ranging, largely reflecting differing expectations on the future course of events in the Gulf.

When crude oil prices plunged in 1986, oil and gas drilling in the United States fell from nearly 70,000 wells in 1985 to 39,000 in 1986. As oil prices slumped, nationwide drilling fell to almost 28,000 wells in 1989, a drop of over 70 percent in only four years. Drilling activity remains at very low levels with considerable uncertainty on the future direction of oil prices.

Industry Activity in Montana

Drilling activity in Montana trends nationally, falling from 640 wells in 1985 to 242 in 1989, a 77 percent decline. However, evidence over the last two years suggests that oil and gas producers are showing more interest in the development of the state's natural gas reserves (see figure 9).

Oil production in Montana, which peaked in 1968, has been gradually declining for years. This decline has accelerated in recent years, with production falling by a third in just the last five years (see figure 10). By contrast, gas production has been fairly stable or increasing since the mid-1970s and totaled 55 billion cubic feet last year, up slightly from the year before.

About 85 to 90 percent of those employed in oil and gas exploration and production in the state are wage and salary workers. Industry employment has dropped considerably from highs in the early 1980s. Employment has continued to fall since 1985, dropping from over 3,600 workers in the first quarter of 1985 to as few as 1,500 workers in the first quarter of 1990 (see figure 11).

If oil prices stabilize at over $20 a barrel and natural gas marketing opportunities improve for state gas producers, exploration activity in Montana should gradually improve.

Nonfuel Mineral Mining

Trends in Metal Prices

Significant improvements in metal prices provided the impetus for a major recovery of Montana's nonfuel mineral mining industry in recnt years. Platinum prices nearly doubled in 1986 and 1987. Gold prices increased nearly 50 percent. Copper prices, after years at low levels, increased sharply in 1987 and 1988 (see figure 12). However, prices of most metals have fallen considerably in the last two years.

What may happen to metal prices in the future is highly speculative. For precious metals such as gold, prices could go higher in them idst of a recession as investors seek a haven during uncertain times. But htis hasn't happened yet. Platinum prices are sometimes linked to gold prices, even though platinum is largely an industrial metal. Prices of industrial metals (including copper) usually follow the general direction of economic activity.

Industry Activity in Montana

As metal prices markedly increased in 1986 and 1987, so did activity in Montana's nonfuel mineral mining industry. The value of nonfuel mineral production more than doubled between 1986 and 1988. During this period, the value of gold and silver mined in the state increased from $87 million to $176 millon. The Stillwater Mining Company's platinum-palladium mine came on line in 1987 and produced $85 million worth of metal concentrate in 1989. However, as metal prices have declined more recently, growth by the industry has moderated and the value of production has declined slightly (see figure 13).

About 80 to 90 percent of those employed in the nonfuel mineral mining industry in Montana are wage and salary employees. Since 1985, industry employment has grown steadily, particularly in 1987 and 1988 when metal mining employment doubled. Wage and salary payments to these workers increased steadily, but this growth now appears to be moderating.

While the fast growth of recent years isn't expected to continue, several new mines and additional expansion at some existing mines in the state is expected in the next few years. Future growth in the industry depends upon evolving trends in metal prices.

Nonresident Travel

Nationwide Travel Activity

The U.S. travel industry is diverse and growing. The estimated number of "person-trips" (number of people involved in individual trips at least 100 miles from home) in the United States is steadily increasing (see figure 15). About 80 percent of this travel activity involves pleasure or nonbusiness trips; the remaining 20 percent is associated with business travel.

Travel-Related Activity in Montana

Much of Montana's nonresident travel and tourism industry is associated with vacationers and recreationists visiting the state's spectacular scenery and recreational resources. A variety of indicators shows activity in this sector of the state's economy. Counts of summer and nonsummer visitors to Yellowstone and Glacier National Parks show a pattern of steady growth (with the exception of Yellowstone during the 1988 fires). Summer visitors increased by 15 percent for Yellowstone and 26 percent for Glacier between 1986 and 1989 (see figure 16). Nonresidents visiting Montana's major ski areas are gradually increasing as well, reaching a record 445,000 last ski season.

The number of nonrersidents entering Montana by highway grew from 4.3 million persons in 1986 to 5.1 million las year, an increase of nearly 19 percent. The state's accommodations tax, instituted in 1987, is generating increasing revenues. For summer months only, revenues rose from $1.86 million in 1987 to $2.32 million in 1990, a 25 percent increase in inflation-adjusted dollars.

Reflecting these trends, estimated employment in Montana's nonresident travel industry has grown from 12,600 full-and part-time workers in 1985 to over 15,700 in 1989, up nearly 25 percent. About 90 percent of this total is wage and salary employees. Labor income received by these workers in 1989 is estimated at $174 million, up 15 percent since 1985.

Sharp increases in oil prices translating into significantly higher gasoline prices would adversely affect nationwide travel activity, particularly for areas far removed from major population centers. However, continued growth in Montana's travel and tourism industry is expected.

Farm and Ranch

Cattle and Wheat Price Trends

Agriculture in Montana is heavily dominated by wheat and cattle production, with cash receipts tied to these commodities accounting for about 80 percent of all agricultural receipts in the state. Cattle prices have steadily improved since 1986 and remain strong at well over $70 per hundredweight. Wheat prices, weak through much of the 1980s, improved temporarily in 1988 and 1989, but have sunk badly since.

At the same time, support prices for wheat under the Federal Farm Program also are much lower than in past years. The target price has been reduced from $4.38 per bushel in 1985 to a current level of $4.00. The average nationwide loan rate has been lowered from $3.30 to $1.95. When adjusted for inflation (as in figure 19), these wheat price declines are even more pronounced. In the midst of a worldwide bumper wheat harvest, the market price for wheat isn't expected to improve soon.

Production and Receipts in Montana

Cattle numbers in the United States declined considerably during the late 1970s and mid-1980s. In Montana, cattle numbers fell from 3.4 million head to about 2.5 million head. This decline in cattle numbers helped produce higher prices, but higher prices limit cattle producers' abilityt to increase marketings. About 1.1 billion pounds of cattle were marketed by Montana producers in 1989, up from 947 million pounds in 1986 (figure 20).

Droughts in 1985 and 1988 significantly cut wheat production in the state and higher production levels the last two years were partly offset by lower prices. In spite of this, cash receipts have generally increased for Montana agricultural producers (figure 21). Earnings by Montana's farmers and stockmen have improved from the disastrous levels of the mid-1980's (see figure 22). Labor earnings in both 1987 and 1989 were over $475 million as compared to much lower levels in 1983, 1984, and 1985.

The outlook for cattle producers is good. But growing worldwide grain supplies and failing grain prices make the current outlook for grain producers poor. This may create more pressure for reevaluating various provisions of the Federal Farm Program.


What's happening in Montana's natural resource industries is at least partly attributable to changing conditions and trends in these industries nationwide. This is further evidence that much of what happens in the state's economy is largely out of the control of state policymakers and business persons.

In the four years between 1986 and 1989, the Montana economy improved considerably. Total employment increased by nearly 19,000 workers, labor earnings grew by $636 million, and personal income increased by over $1 billion (see table 1). At least some of this growth is directly attributable to improvements among the state's natural resource industries.

Perhaps most important among these are improvements in agriculture. The measured labor income of agricultural producers in the state was about $475 million greater in 1989 than in 1985. Conditions remain good for the state's cattle producers, but have deteriorated significantly for grain producers.

Elements of Montana's mining industry were reborn in recent years. After years of decline, employment in nonfuel mineral mining increased by over 50 percent between 1986 and 1989, with labor income received by workers in this industry increasing by $58 million. Growth in this industry should continue, but not at the pace of the last few years.

Montana's nonresident travel industry continues to grow, with 3,100 more workers in 1989 than in 1985 and labor income received by these workers increasing by $23 million. This sector of Montana's economy also should see continued growth.

Although labor income received by wood products workers in 1989 is down about $12 million from what it was in 1985, employment in the industry has been fairly stable in recent years. This has contributed to greater stability in the state's economy as a whole. However, industry employment is expected to decline in coming years.

While the oil and gas industry continues to do poorly, most of the losses in employment and labor income by the industyr occurred several years ago. Losses more recently have been relatively small and this has reduced the industry's impact on Montana's overall economy. Conditions may be improving for some increased exploration and development drilling in the state.

In summery, improvements in agriculture, metal mining, and nonresident travel, and relative stability in the wood products industry were major factors in the state's recent economic recovery.

Larry D. Swanson is director of economic analysis, Bureau of Business and Economic Research, The University of Montana.

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Author:Swanson, Larry D.
Publication:Montana Business Quarterly
Date:Mar 22, 1991
Previous Article:Recession and its after-effects: the state and local outlook for 1991.
Next Article:Agriculture forecast.

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