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Q&A: with Montana's top economists and industry experts.

Editor's note:

During the 2015 Montana Economic Outlook Seminar series, bureau economists and industry experts presented the latest economic trends and forecasts. The keynote speaker, Bill W hitsitt, retired Devon Energy executive vice president and executive in residence at BBER, discussed the new American energy revolution and how it is reshaping Montana communities. Following is a Q&A with the seminar speakers--Montana's leading economic experts.

The Economy

Patrick M. Barkey, Paul E. Polzin

Q We've been expecting better growth in the U.S. economy for the past few years, but it has remained sluggish until recently. What has changed?

Patrick Barkey: The U.S. economy recently experienced its best six-month performance since well before the recession. And for the first time in recent memory, growth has extended to smaller businesses, which report increased optimism and borrowing. That is especially important for Montana, which is a small business state. Summarizing the U.S. economy, I think we've gotten to a point where we've seen enough job creation and income growth that we've hit what I would call a self-sustaining cycle of income growth, which is producing more consumer spending and, in turn, supporting more job growth. People expected 2015 to be better than 2014--this is the year where those expectations will finally be met. It looks like the national economy is moving into a higher gear.

Q Plunging oil prices have been a big story in the global economy. What are some of the other developments that have affected the global and U.S. economies?

Patrick Barkey: What's not very well-known is the fact that the global economy is, in fact, getting worse. So the global economy is slowing down, we're seeing essentially no growth in once high-flying countries like Brazil and Russia, while the growth in India and China is only about half of what it was seven years ago. This is a big change that will affect export markets for Montana agricultural and commodity exports.

Q For the past few years, we've witnessed something of an economic miracle in the eastern third of our state. Towns and communities that were shrinking have come back roaring --thanks to the Bakken oil boom--and portions of Eastern Montana were growing faster than Western Montana. Is that still the case?

Patrick Barkey: That was beginning to change even before the crude oil price swoon hit global markets in the fall of 2014. Cost control in the Bakken was already bringing down oil activity measures such as counts of drilling rigs, while the drivers of growth in the more populous western parts of the state were getting healthier. Taken together, these forces were already bringing growth rates around the state into closer balance. The sudden tumble in crude oil prices that began in earnest last September kicks this process into high gear. Lower energy costs can breathe life into consumer spending and confidence, while they are certain to curtail exploration and development. It all adds up to a short-term outlook for the Montana economy that has more balanced, but possibly slower, economic growth.

Q Which counties are growing the fastest and which ones are growing the slowest?

Paul Polzin: Missoula, Flathead, and Ravalli counties were particularly hard hit by the Great Recession and were very slow to recover. In the past two years, these counties have shown growth and are digging themselves out of some very deep holes. Flathead County, for example, is one of the few areas of the state where construction has almost recovered to pre-recession levels.

There are three economies that have been growing right at the state average--Great Falls, Helena, and Butte-Anaconda. These communities did not experience significant declines during the recession. But on the other hand, their recovery has been very lethargic. One explanation is that that Great Falls and Helena are government towns, which tend to be non-cyclic and slow-growing, at least in the current environment. Butte-Anaconda is a little more difficult to explain because so much of their economy is associated with natural resource extraction. The fact of the matter is that mining in Butte-Anaconda has been relatively stable over this particular business cycle.

Yellowstone and Gallatin counties both have been exceeding the statewide average in terms of growth, likely due to the indirect impact of the Bakken. Gallatin County has experienced very rapid recovery in construction, growth in the high-tech sector, and favorable enrollment trends at Montana State University.

The dramatic drop of crude oil prices means increased uncertainty for several economies in Eastern Montana. In Richland County, the agricultural sector, especially irrigated sugar beets, may help buffer the decreases in oil-related employment. Custer County--and especially Miles City has become home to several large companies serving the oil industry in the Bakken area. The amount of the indirect impacts on these firms is not yet known.

Q What is the outlook for Montana's economy for 2015?

Patrick Barkey: We thought the state economy was going to grow by 3 percent, but in the last two years it has only been 2.1 percent. With booming oil development putting on the brakes, overall statewide growth will be slower than we forecast last year. Our forecast is for growth of about 2.3 percent over the next few years.

Health Care

Bryce Ward

Q It's been about a year since the Affordable Care Act's main access provisions went into effect. What sort of impacts has the ACA had on Montana?

Bryce Ward: More people have health insurance because of the ACA. According to Gallup, the share of adults without health insurance in Montana declined from 20.7 percent in 2013 to 13.8 percent in 2014. This suggests that more than 39,000 Montanans gained health insurance during 2014. Montana had the ninth largest decline in its uninsured rate, and the largest among states that did not expand Medicaid in 2014. Such a large decline is somewhat surprising because, in general, states that expanded Medicaid saw larger declines in the number of uninsured.

Q Medicaid expansion in Montana was an important issue in this legislative session. What sort of impact will expanding Medicaid have on Montana's economy?

Bryce Ward: According to the most recent estimates, between 27,000 and 45,000 Montanans would gain insurance coverage through Medicaid expansion. Expanding Medicaid will bring the money that Montanans send to Washington, D.C., to pay for the expansion back to Montana (plus some extra because Montana will get back more than it pays). In total, approximately $200 million to $300 million per year will flow from the federal government to Montana.

Q Over the past few years, health care markets have been changing beyond the expansion in coverage. What other sorts of changes have occurred?

Bryce Ward: Researchers continue to investigate ways to improve the efficiency of the health care system. For instance, Blue Cross Blue Shield recently conducted an experiment where it made MRI prices available to consumers in some markets, but not in others. The Blue Cross study found that the average price of an MRI in the markets with price transparency fell by $95 over a two-year period, while the average price of an MRI increased by $124 in markets without price transparency. While this study has limitations, it suggests that greater price transparency can induce competition and lower prices, at least in the market for MRIs.

Another effort to improve health care efficiency has involved tying payment to quality. For instance, the federal government now penalizes hospitals with high readmission or medical error rates, and 40 percent of private plans tie payments to various quality indicators. As a result, medical errors and readmission rates have fallen. Since 2010, hospital acquired conditions (i.e., people who got sick or injured while in a hospital) have declined 17 percent. And there have been 1.3 million fewer harmful incidents and 50,000 fewer patient deaths. Similarly, hospital readmission rates have fallen by more than 5 percent.

Tourism and Recreation

Norma Nickerson

Q The travel industry in most destinations is quite seasonal, and Montana is no different. During which quarters does Montana see the most visitors?

Norma Nickerson: As expected, the third quarter (July-September) is the busiest time for nonresident visitation to Montana. In 2014, 46 percent of all nonresidents (5 million out of 10.9 million) visited during third quarter, contributing 50 percent of all spending ($2 billion out of $3.9 billion for 2014). Quarter two represented 23 percent of nonresidents (3 million) in the state who contributed 27 percent of all nonresident spending. Interestingly, the percent of visitors each quarter does not change much from year to year. The pattern seems to be very predictable. However, it is clear that the warmer months are typically when the bulk of people around the world do their vacation travel. While vacation is historically the highest primary purpose for taking a trip to Montana (34 percent in 2014), passing through the state is a close second (29 percent in 2014). Those passing through contribute to the state's economy by spending one night on average. In contrast, in 2014 vacationers spent more than six nights in Montana and were attracted by a variety of reasons depending on the quarter. In 2014, the primary attraction to Montana for vacationers in quarter one was skiing and snowboarding. During quarter two it was Yellowstone National Park, while quarter three saw Glacier National Park as the primary attraction. Finally, in quarter four, family and friends appeared as the top primary attraction to Montana. This appears to be highly correlated with the holiday season.

Q Visitation numbers have been increasing over the past several years, but they seem to have leveled off in 2014. What do you expect for 2015?

Norma Nickerson: It is accurate that the total number of nonresidents dropped from 11 million in 2013 to 10.9 million (-1 percent) in 2014, but a further look at the data revealed that the number of people per group is what decreased while the number of groups actually went up from 2013 to 2014 (an increase of 1 percent). With that said, the outlook for travel and tourism in the U.S. in 2015 is promising. This predication is based on several things: household spending should be up as the unemployment rate decreases; household debt is expected to be down and that will help with more discretionary spending; and, the U.S. dollar should be stronger. So finally, based on these national projections that do have an impact on travelers to Montana, we're forecasting that nonresident visitation to the state will be up about 2 percent in 2015. We would expect nonresident spending to be up 2 percent to 5 percent, and the economic impact resulting from that spending in Montana should be greater than $5 billion in 2015.


George Haynes

Q Montana agriculture has been pretty stable from 2013 to 2014. What are the biggest stories of the year in agriculture?

George Haynes: We were pretty optimistic in the summer that we were going to have a really record-setting year in terms of real cash receipts, but that all kind of went south with the rain storm that came through Montana in August. Quite a bit of malt barley and wheat ended up being spoiled, and a lot of hay ended up getting moldy. So we ended up revising our estimates down, and with those revisions, we are where we were a year ago. The news on the grain front was that grain producers had to deal with a little bit lower prices. The big story in agriculture is livestock. Our calf/cow producers are on the right side of the market as they have been for a few years. The forecast is that by the end of 2014, we will have set a new record in historical prices. However, everyone is sitting on pins and needles these days because of this market movement. Three other times in the past, since 1900, we've had spikes like this, and these livestock boom prices have quickly moved off of these spikes. So those will be important considerations for the livestock sector in the state.

Q Have the lower oil prices had an impact on Montana farmers and ranchers?

George Haynes: Farmers and ranchers have really benefited--not only are they getting lower diesel prices, but it also impacts their fertilizer prices as well. It's been interesting watching how this might impact their profits. The flip side is that as these oil prices lower, the demand for ethanol becomes less, and that means that we see a decline in corn prices. So farmers and ranchers might save a little money on the fuel side, but they are also losing money on profit side as well.

Q What is the agricultural forecast for 2015 and beyond?

George Haynes: The agricultural sector has had six years of very good news for the Montana economy. Lower crop prices and untimely rains have been offset by high livestock prices and favorable pasture and haying conditions for ranchers in 2014. Futures prices for the fall of 2015 suggest that crop and livestock prices should be above long-run historical averages. And Montana producers remain optimistic about the demand for high protein wheat and high quality barley. Assuming no major demand or supply disruptions, Montana producer balance sheets should remain healthy in 2015.


Todd Morgan

Q Which manufacturing sectors are growing the fastest in Montana, and what is the overall outlook for the manufacturing industry for 2015?

Todd Morgan: The largest manufacturing sectors in this state continue to be wood and furniture products; chemicals and non-metallic minerals; petroleum and coal products; food and beverages; and, fabricated metals. The big pieces of the pie really haven't changed much other than the percentages have moved around a little bit. The outlook for manufacturing for 2015 statewide is quite positive. The vast majority of manufacturers expect sales and production levels to go up in 2015 from where they were in 2014. We do expect to see some growth in employment, and worker earnings are also expected to increase somewhat this year. The impact of declining/low oil prices remains to be seen.

Q How has energy development in Montana impacted manufacturers?

Todd Morgan: Increased domestic production of natural gas and oil and relatively low energy costs compared to other industrialized countries are widely believed to benefit manufacturers. According to our recent manufacturers' survey Montana manufacturers were fairly optimistic about the impacts of energy development. The most common positive responses were from firms that indicated selling products directly or indirectly to the energy sector or its employees, and thus having increased sales and more business activity. The negative responses were from firms that noted increased costs of labor, shortages of workers, and increased transportation costs.

Forest Products

Todd Morgan

Q While new home starts in the U.S. continued to increase gradually, the gains were less than anticipated. How has the slow homebuilding recovery affected Montana's forest products industry?

Todd Morgan: New home starts in the U.S. got off to a slow start in the first half of 2014. That took some of the momentum out of the forest products industry's advances. For Montana's forest products industry, 2014 brought mixed results. Half of the Montana wood products firms surveyed annually by BBER indicated increased production in 2014, but 16 percent reported decreased output. Lumber production was estimated to be about 5 percent higher in 2014 than 2013. Several log home manufacturers also indicated increased orders and production. Production levels of panel products (plywood, particleboard, and medium-density fiberboard) were estimated to be down from 2013, with the June fire at the Plum Creek medium-density fiberboard plant, upgrades at the Missoula's Roseburg particleboard plant, and tight supplies of veneer logs. Although increases in new home construction have been rather slow, there has been positive growth for several years, which has been benefiting Montana's wood products industry. The bigger challenge for Montana mills is timber supply/ availability and being able to get enough logs to respond to the improving markets.

Q What does Montana's forest products industry have to look forward to in the next year?

Todd Morgan: Looking forward, wood products markets in 2015 are expected to improve. Continued increases in U.S. housing starts are projected, although getting back to the long-term average of 1.4 million to 1.5 million new home starts annually is still anticipated to be two or more years away. In addition to housing, several factors are expected to benefit domestic wood product manufacturers: reduced timber harvest and lumber production in western Canada resulting from the mountain pine beetle epidemic; continued overseas demand for logs, lumber, wood pellets, and other products; increasing public recognition that wood products are sustainable, renewable, and have significant carbon benefits relative to many other materials; and a U.S. Congress favoring increased use of domestic natural resources. All these factors should benefit Montana's forest industry, further stimulating production, sales, and employment for the state's mills and loggers. Some challenges to Montana's industry in the near term include the strong U.S. dollar, which can make imported wood products more competitive, and constrained timber availability in Montana, which can make logs more expensive for local mills.


Sue Larew and Paul Olson

Q Since the 2009 lows in volume of houses sold, each of Montana's seven major markets has experienced a moderate rebound. What is the reason for the slow recovery in the housing market?

Sue Larew: First-time homebuyers have definitely become the cornerstone of the housing market. If they're not purchasing, its not allowing people to trade up or to get in to bigger houses. The first-time homebuyer is having difficulty with meeting mortgage underwriting standards under the new regulations and down payment requirements. They also have mounting student debt. In fact, back in the heyday of 2008 we had many programs that required a zero down payment--there are hardly any now. So there's a change in demographics the median age of a homebuyer. In 2001, it was 36. Now in 2014, it's 44. The American generation of young professionals aren't buying homes the way their parents did. The Millennial entered adulthood during the Great Recession and recovery, so they don't know anything different than a slowing real estate market. It's not as appealing for them to go out and purchase homes as an investment. There's a gap in what people believe: 75 percent of the people believe that it's an important goal to own a home, but only 65 percent own right now. So what's getting in the way? Saving up for a down payment, credit card debt, and student loan debt have increased massively. As a result of all this, the multigenerational household is alive and well. It's really interesting--the idea that after college kids go out and buy a home and get a job is changing. The trend has doubled since 1980, where people after college go back home to live with their parents and save, pay off their debt, so on.

Q Of Montana's seven major markets, which ones are experiencing the largest increase in residential home sales?

Paul Olson: The Helena Association of Realtors reported the largest residential home sales increase of 16.6 percent, and the Northwest Association in Kalispell followed a close second, with a 14.2 percent increase. Yellowstone County had almost 2,000 units started, thanks to a big increase in new multiunit dwellings started last year. Gallatin County's 1,409 units started in 2013 were second highest in the state, with a larger proportion of single-family homes. There is also considerable building activity in oil-dominated counties such as Richland and Roosevelt counties in the east, but the changing oil prices may lead to a slowdown.


Bill Whitsitt and Terry Johnson

Q Over the past few years, a revolution has taken place in the way we produce, market, and think about energy of all forms. What is at the core of this revolution?

Bill Whitsitt: The technology development and innovation in the energy industry have been astounding. Advances in high-tech geoscience have led to the ability to better "see" underground strata with seismic data, to assess the likelihood of finding hydrocarbons in identified geologic formations, and through nanoscience, understand how oil and gas move through the pores of "tight" source rocks more dense than concrete. It is these source rocks in which oil and gas had been created over hundreds of millions of years, migrating to geologic "traps" that became the target of oil and gas explorers. But the early 2000's wedding of two well-known technologies--horizontal drilling and hydraulic fracturing allowed economic production for the first time directly from those source rocks. The success of the Bakken play in North Dakota and the eastern part of our state is a direct result of these advances.

Q What are some of the benefits and challenges of the oil boom?

Bill Whitsitt: Montana is clearly seeing benefits and some challenges from oil development. Economic activity in Eastern Montana related to the Bakken has arrested population declines in some counties, has provided new jobs, and has increased wage rates in even the traditionally lowest-paid labor categories. Challenges of the Bakken boom are also clear. Housing availability and costs, police and other service demands, and road maintenance are examples. It takes a while to address effects in particular counties or communities and might call for new thinking with respect to planning, cooperation, and voluntary action among companies and officials who may be able to provide resources to address interim needs. Companies need to continue to make sure their operating practices are meeting the highest standards, and the state must continue to make sure that its regulatory and enforcement programs are leading edge.

Q Oil prices have declined dramatically since last fall. What is the short-term outlook for the energy industry?

Terry Johnson: High oil prices have been the catalyst for such game-changing investments as horizontal drilling and hydraulic fracturing. These innovations are not going away, but the pace of investment is going to change abruptly in 2015 unless price declines are reversed in a hurry. With current prices, producers will be reluctant to invest, especially in Montana where the return potential is lower compared to other states. Reduced investments will cause production declines especially in the second half of the year. Total value of production will be below last year's amount. The industry in Montana will be stable at best.

Q What are some of the other important energy developments in Montana?

Terry Johnson: The coal industry is facing some very difficult times ahead. Slower world economic growth, combined with significant U.S. environmental issues, does not paint a bright picture for the industry. Unless the industry can find creative ways to tap into a larger export market, the industry in Montana will experience a decline. Wind is somewhat of a bright spot for Montana, with 12 wind generating facilities currently operating in the state. Environmental concerns over the use of fossil fuels, federal production tax credit incentives, and reduced costs associated with wind turbines have all contributed to enhanced wind production.

Meet the Experts

Patrick M. Barkey is the director of the Bureau of Business and Economic Research. He has been involved with economic forecasting for more than 25 years, both in the private and public sector. He previously served as director of the Bureau of Business Research at Ball State University in Indiana for 14 years, overseeing and participating in a wide variety of projects in labor market research and state and regional economic policy issues. He attended University of Michigan, receiving a B.A. (1979) and Ph.D. (1986) in economics.

George Haynes is a professor and extension specialist in the Department of Agricultural Economics and Economics at Montana State University. He holds a B.S. from University of Montana, an M.S. from Montana State University, and a Ph.D. from Cornell University. As a faculty member in the Department of Health and Human Development at MSU from 1994 to 2006, Professor Haynes has taught courses ranging from research methods to small business management. He joined the faculty in the Department of Agricultural Economics and Economics at MSU in 2006.

Terry Johnson served the state of Montana for more than 39 years as an economist, statistician, and most recently as principal financial analyst for the Montana Legislature. Johnson earned a B.S. in mathematics from Montana State University and developed expertise in economic analysis and government finance. In July 2004, he became the first Montanan to receive a national award from the National Council of State Legislatures in recognition of his achievements in revenue forecasting, state fiscal, and tax policy analysis.

Sue Larew is a vice president for First Interstate Bank responsible for consumer lending, marketing, public relations, and community outreach. Prior to this, Larew was a senior vice president, consumer executive at Bank of America responsible for sales, operations, and administrative management for 73 banks, working with consumer and small business customers. She has her undergraduate degree at the University of Colorado and her MBA from the University of Miami. She currently serves on the board of directors at the University of Montana Bureau of Business and Economic Research.

Todd A. Morgan is the Bureau's director of Forest Industry Research and is a certified forester. He oversees and conducts research related to timber harvesting, logging utilization, and primary wood products manufacturing throughout the western United States. He also is active in the Missoula and national chapters of the Society of American Foresters. Morgan earned a B.A. in philosophy and a B.S. in forest science at Pennsylvania State University before completing an M.S. in forestry at University of Montana.

Norma P. Nickerson has served as director of the Institute for Tourism and Recreation Research in the College of Forestry and Conservation at the University of Montana since 1995. ITRR works with the Governor's Tourism Advisory Council on travel and tourism-related research.

Paul Olson was raised on a farm in North Dakota, attended North Dakota State University, where he received B.A. in Economics. Olson earned his MBA from the University of Minnesota, Moorhead. He has held several leadership positions in banking since 1979 located in the Midwest and Arizona. Currently he leads the residential mortgage group at First Interstate Bank based out of Billings with offices located in Montana, Wyoming, and South Dakota.

Paul E. Polzin is the former BBER director. Professor Polzin has studied the Montana economy extensively over the past 40 years. In addition to developing economic projections for the future, he conducts research on various long- and short-term economic trends in Montana. He grew up in Detroit, Michigan, and attended University of Michigan and Michigan State University. He was granted a Ph.D. in economics from Michigan State University in 1968.

Bill Whitsitt is executive in residence at the Bureau of Business and Economic Research. He joined BBER following his retirement as an executive vice president at Devon Energy Corporation in 2013 when he returned to Montana. Whitsitt's energy-related career included positions in government, public affairs, and worldwide oil and gas marketing. His academic career includes having attended the College of Great Falls, American University, Columbia University, and The George Washington University where he earned a Ph.D. in public administration. He is a trustee of the Greater Montana Foundation.

Bryce Ward is associate director/director of Health Care Research at the Bureau of Business and Economic Research. Previously, he spent eight years as a senior economist at ECONorthwest, a Portland, Oregon-based economics consulting firm. Ward obtained a bachelor's degree in economics and history from the University of Oregon and a Ph.D. in economics from Harvard University.
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Title Annotation:Economic Outlook
Comment:Q&A: with Montana's top economists and industry experts.(Economic Outlook)
Author:Barkey, Patrick M.; Polzin, Paul E.; Ward, Bryce; Neckerson, Norma; Haynes, George; Morgan, Todd; La
Publication:Montana Business Quarterly
Article Type:Discussion
Geographic Code:1U8MT
Date:Mar 22, 2015
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