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The state and local outlook: 1990.

The State and Local Outlook: 1990

This issue of the Quarterly contains the presentations made at the annual Economic Outlook Seminars held in January and February in cities throughout the state. At each seminar, BBER researchers outlined the economic prospects for Montana and each local area in 1990. Also covered was a look at the state's natural resource industries. Each speaker's remarks are included here, along with the statistical tables and charts that were distributed at the meetings.

Bureau director Paul Polzin led off each seminar with a summary of the state and national forecasts for 1990. He then looked specifically at the outlook for Montana's three regions, and described the economic prospects for each of the seminar cities: Billings, Bozeman, Butte, Great Falls, Helena, Kalispell, and Missoula.

Over the past year, Bureau researchers noted some encouraging trends in the Montana economy. Nonfarm labor income, the best measure of overall economic performance, turned upward and continued to increase--albeit irregularly. The annual data for 1988 showed an increase over 1987, and the figures for the first half of 1989 are above the corresponding numbers for 1988.

The 1988 and 1989 increases were small. We have repeatedly referred to this turnaround as a "fragile recovery" because any one of a number of events could halt it. Nevertheless, the increases were significant because Montana's economy had experienced declines in six of the first eight years of the 1980s.

To see why these modest increases are such good news, we must put them into context by systematically analyzing the Montana economy. First, we will look at the economic indicators to identify past trends. Second, we will examine the factors that caused these trends. Finally, we will look at forecasts for the future. After analyzing the statewide economy, we will narrow our focus and repeat the same process for Montana's multicounty regions and the major urban areas.

Montana's Economy

General Economic Indicators

Four indicators are used to gauge the overall trends in the Montana economy:

* Population;

* Per capita income;

* Personal income; and

* Nonfarm labor income.

Each of these indicators measures a different part of the economy, and they may not have identical trends in the short run. But, taken together, they provide good overviews of the general condition of the state's economy.

Population. Population change is an important indicator of the economy. People will move to and stay in an area where there are jobs and other opportunities. Population is a lagging economic indicator. That is, changes in population trends usually lag behind the other general economic indicators. Therefore, as we will see later, Montana's population declines in the mid-1980s were the result of poor economic conditions earlier in the decade, rather than a harbinger of future declines. And the recent stabilization of the population (figure 1) may be associated with the "fragile recovery."

The data clearly show that Montana's population increased rapidly during the 1970s and continued to grow in the 1980s. A peak was reached in 1985, followed by a slow downward trend.

The population declines may have ended. Data just released by the U.S. Census Bureau show Montana's 1989 population to be estimated at 806,000, as compared to 805,000 in 1988.

Per Capita Income. The second general economic indicator is per capita income, which is equal to total personal income divided by population. Per capita income is a measure of economic well-being--that is, how well off is the average person. In this article, per capita income has been converted into constant 1988 dollars to eliminate the effects of inflation.

Figure 2 shows per capita income for Montana and the United States from 1970 to 1988. This graph helps to put into perspective the recent concerns about Montana's declining per capita income relative to the national average. Specifically, between 1980 and 1988, per capita income in Montana remained stable, after correcting for inflation. At the same time, per capita income in the United States continued upward. Consequently, the ratio of the Montana figure to the U.S. average declined from about 90 percent in 1980 to approximately 78 percent in 1988.

Stated differently, Montanans in the 1980s did not enjoy the same benefits of economic growth as did the residents of other parts of the country. In contrast, Montana's per capita income actually grew faster than the nation's in the 1970s. It rose from about 87 percent of the U.S. average in 1970 to approximately 90 percent in 1980.

Nonfarm Labor Income and Personal Income. Nonfarm labor income is the wages and salaries, proprietors' income, and other labor income of all employed persons--except those working on farms and ranches. Agriculture is excluded because of its volatility; the significant year-to-year changes in farm income may mask important trends elsewhere in the economy. Nonfarm labor income is used instead of gross national product (GNP) which is not available for local areas. It measures the overall economic activity in a region.

Figure 3 presents nonfarm labor income data from the first quarter of 1979 to the second quarter of 1989. These data clearly show several distinct trends in the Montana economy during the last decade. First, there were sharp declines from late-1979 to late-1982. This corresponds to the most severe national recessions since World War II. These cyclic downturns were exacerbated here in Montana by a number of closures and plant shutdowns. For example, the Milwaukee Railroad shutdown and the smelters in Anaconda and Great Falls closed.

Second, there was a modest recovery in 1983 and 1984. This was when we thought we were "out of the woods." Nonfarm labor income rose about 3.5 percent from the late-1982 to early-1984 trough. Nationally, this was the beginning of the period of sustained economic growth which continues to the present.

Third, the economy started to decline again. There is a slow downward trend in nonfarm labor income that began late in 1984 and continued to early-1988.

Finally, we come to the "fragile recovery." Nonfarm labor income turned upward beginning in early-1988. Notice that the quarterly inwere modest and sporadic. But, they were increases nevertheless. Overall, nonfarm labor income in the first half of 1989 was up a little less than 1 percent from the corresponding figure for the first half of 1988.

The Basic Industries

Basic or export industries are the major determinant of growth (or the lack of it) in Montana's economy. These industries depend heavily on markets outside the state or are otherwise influenced by factors that originate beyond the state's borders. The major examples of basic industries are the natural resource industries--agriculture, mining, and wood and paper products. Other basic industries include nonresident travel (tourism), the federal government, railroads, and certain types of manufacturing. The labor income of workers in basic industries injects new funds into Montana's economy, which creates additional income as these dollars are spent and respent in the state.

The basic industries are best analyzed in terms of labor income rather than employment, output, or production. It is the amount of basic income that is earned and spent in a local area that affects its economy, not necessarily the number of basic workers, the board feet of timber, or the ounces of gold that are produced. In addition, 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.

Our estimates of labor income in the basic industries are not accurate to the last cent. Complete information was not available for all the basic industries, and we had to make a few "ballpark" estimates. Even so, our estimates are based on the best data available.

Changes in the economic base are largely responsible for the recent trends in Montana's economy. They do not provide a complete explanation, however, and we cannot identify the cause of each blip and squiggle in each general economic indicator. The relationship between the basic industries and the rest of the economy is subtle and complex. There may be time lags, for example, that cloud the relationship between the basic and derivative sectors (industries that serve the local population). Also, the data may have different reporting periods-- personal income and nonfarm labor income are reported quarterly, while labor income in basic industries is available annually. Finally, during certain periods, national factors rather than local changes may affect the nonbasic industries. For example, the health care growth in Montana and the major urban areas, which we will see later, appears to be relatively independent of the trends in the local economic base.

Figure 4 presents labor income in Montana's basic industries from 1979 to 1988. As with most of our data, it has been converted to constant 1988 dollars to eliminate inflation. Total labor income for all basic industries along with figures for each industry have been presented for 1988.

The extreme volatility of agricultural labor income and its potentially distorting effect on total basic labor income is pictured in figure 4. The two-year drought of 1984 and 1985 is easily seen, along with the recovery in 1986 and 1987. The decline in 1988 reflects the drought of that year.

Ignoring agriculture and looking at the nonfarm basic industries' totals, we can see the same trends we saw earlier in total nonfarm labor income. Specifically, there were sharp cyclic declines from 1979 to 1982; recovery in 1983 and 1984; slow but persistent decreases in 1985, 1986, and 1987; and finally, a modest upturn in 1988.

Each of these trends was the net result of different events in specific basic industries. Looking at the most recent events first, the turnaround in 1988 was the result of an end to the declines in railroads and oil and gas exploration combined with a healthy increase in metal mining (included in nonfuels mining) and approximate stability in the other basic industries. The value of production and employment have risen by more than 40 percent in the last few years, and that metal mining is one of the few bright spots among Montana's basic industries.

Turning back to the earlier periods, we can see that the 1979-1982 decrease was due to widespread declines in many basic industries. There were permanent shutdowns--such as the Milwaukee Railroad and the smelters at Anaconda and Great Falls (these are classified as "other manufacturing"). There were also cyclic declines--the worst were in wood and paper products, but they also occurred in other basic industries. On the other hand, these decreases were moderated by the 1981 peak in oil and gas exploration.

During the aborted recovery of 1983 and 1984, there were upturns in a number of basic industries--especially wood and paper products. But, they were counterbalanced by decreases in oil and gas exploration and railroads.

The slow downward spiral from late-1984 to early-1988 is attributed to continued decreases in oil and gas exploration. The labor income in the other basic industries remained approximately stable.

One of the dominant features of the 1980s was the decline of labor income in many of Montana's basic industries. These decreases do not necessarily mean that the industries were reducing their output and production. Many of the basic industries are now in the midst of structural and technological change, or are reacting to different market or regulatory conditions. New capital investments and other innovations increased the productivity of workers.

The Multicounty

Regions

We have divided the state into the three multicounty regions shown on the map. Analysis of these regions provides a rough idea of the general trends in broad areas of the state. They correspond roughly to the Billings, Great Falls, and Missoula trade areas.

The population data for each area presented in figure 5 show that very different regional components make up the statewide trends examined earlier. In the 1970s, the Southeast and the West grew at very similar rates, while the Northeast remained relatively stable.

Turning to the 1980s, we can see that the population in the West remained roughly stable from 1979 to 1982, grew slowly in 1983 and 1984, and then stabilized again in 1986, 1987, and 1988. In the Northeast, the number of residents increased slowly in 1981 and 1982, followed by stability from 1983 to 1984, and then declines since 1985--although the downward trend appears to have moderated in 1987 and 1988. It was the Southeast region that was mostly responsible for the dominant trends in Montana's population in the 1980s. Specifically, as shown in figure 5, the statewide population increases, the peak in 1985, and the subsequent declines are all mirrored in the graph for the Southeast.

Nonfarm labor income also has different regional patterns. Both the West and the Northeast experienced declines from 1979 to 1982. The West then had a modest recovery in 1983 and 1984 followed by approximate stability from 1985 to 1987, and then increases in 1988 and 1989. The Northeast was stable in 1983 and 1984, declined slowly from 1985 to 1987, and has been roughly stable in 1988 and early-1989. The Southeast grew sporadically in the early-1980s, turned downward in mid-1984, and then stabilized in 1987, 1988, and 1989.

The major interregional differences can be explained using the spatial distribution of Montana's basic industries. The sharp declines in nonfarm labor income were greatest in the West and the Northeast, which is also where the wood products industry and other affected industries, such as the smelter at Great Falls, are concentrated.

The slow downward trend from 1984 to 1987 in nonfarm labor income and the population declines are most noticeable in the Southeast and to a slightly lesser extent in the Northeast. This may be explained by the oil and gas industry, which is primarily located in these two regions.

Montana's Major Urban

Areas

Due to the lack of space, each of Montana's major urban areas will not be discussed in detail. We will, however, present the data for the general economic indicators and the basic industries. We will also provide a brief summary of the important trends in each urban area.

Population

Based on the data presented in table 1, the population trends in Montana's seven major urban areas may be placed into three categories:

1 Declines. The population of the Butte-Anaconda area (Butte-Silver Bow and Anaconda-Deer Lodge counties) decreased from 50,600 in 1980 to 43,200 in 1988.

2 Stability. The populations of Missoula and Cascade counties were relatively unchanged. Missoula County grew by about 2,300 persons between 1980 and 1988, while Cascade County declined by about 2,500 persons during the same period.

3 Decelerating growth. Flathead, Yellowstone, Gallatin, and Lewis and Clark counties all experienced population growth in the 1980s. In each city, however, the rates of increase have moderated. With the exception of Flathead County, there have been population declines during at least one of the past few years.

Other General Economic

Indicators

Trade Center Activities. Quarterly data for personal income and nonfarm labor income are presented for each community, along with annual figures for labor income in the basic industries. In addition to the traditional basic industries--such as mining and wood products--we have also presented estimates of the labor income associated with trade center activities. These figures represent the labor income attributable to persons from the surrounding rural areas who come to the cities to shop, see a doctor or dentist, obtain financial services or advice, or conduct other business. It also incorporates wholesale and other business activities that serve adjacent areas. Labor income for trade center activities should be interpreted cautiously because they are only "ballpark" estimates derived using indirect methods. No labor income for trade center activities are shown for Flathead County and the Butte-Anaconda area. This does not mean that certain firms in these communities do not serve nonresidents. Rather, taken as a whole, locals going elsewhere outnumber nonresidents shopping in these communities.

The relationship between basic industries and the general economic indicators are not always precise and easy to see. This is true for the individual cities even more so than the state as a whole because the data for small areas may be subject to greater error. In addition, the annual basic industry data end in 1987, while the quarterly figures for personal income and non-farm labor income extend to mid-1989.

Flathead County. The cyclic downturn and the subsequent recovery in the early-1980s is clearly pictured in figure 7. Nonfarm labor income declined slightly more than 23 percent from the peak in 1979 to the trough in 1982. The trend then reversed, and nonfarm labor income rose steadily from early-1982 to 1985. It did not, however, regain its 1979 peak.

Nonfarm labor income was approximately stable during 1985 and 1986. A general upward trend began in 1987 and, although sporadic, has continued ever since. The "spike" in late 1988 was mostly due to the lump sum wage bonuses paid the workers of the Columbia Falls Aluminum Company.

The underlying causes of these trends in the basic industry are clearly pictured in figure 8. The wood products industry and metal refining, the two largest basic industries, were major contributors to both the 1979-1982 decline and the following recovery. Also, the overall stability during the next few years is also reflected in the labor income for these industries, which were undergoing structural and technological changes at this time. The data for the basic industries terminate in 1987 and do not include the wage bonuses paid in 1988.

The latest data suggest that Flathead County is currently the fastest growing of Montana's major urban areas. From the first half of 1988 to the first half of 1989, nonfarm labor income rose about 9.8 percent (even after the decline from the spike in late-1988) and personal income increased approximately 7.1 percent.

Missoula County. Missoula's economy experienced sharp declines from 1979 to 1982, a significant recovery in 1983 and early-1984, and approximate stability from 1984 to mid-1989. These trends are clearly mirrored in the labor income data for the basic industries. The wood products industry, which is notoriously cyclical, was obviously a major contributor to the overall trends. But, other basic industries also experienced the 1979-1982 declines and subsequent recoveries.

Basic labor income for trade center activities increased significantly in 1986 and 1987. Most of this growth can be traced to our estimates of the export component of health services--that is, the nonresidents coming to Missoula for treatment. There are concerns whether or not this growth will continue in the future.

Most recently, Missoula's economy has experienced modest growth. Nonfarm labor income and personal income both rose about 1.6 percent from the first half of 1988 to the first half of 1989.

Yellowstone County. The 1979-1982 declines were hardly noticeable in Billings' economy. Sporadic growth continued until mid-1985, when nonfarm labor income turned downward. These declines continued until late-1987.

Nonfarm basic labor income also turned downward in 1984. The largest decreases were in food products (which includes meat packing), mining (oil and gas exploration), railroads, and other manufacturing.

Trade center activities are the largest basic industry in Yellowstone County. The apparent stability of this industry in the last few years may be misleading because our statistics are not very precise. Energy-related industries in southeastern Montana have declined significantly, and these downward impacts would be transmitted from rural areas to Billings via the trade center activities. Better information might provide more insights into this process.

Beginning late in 1987, Yellowstone County has experienced modest growth. Nonfarm labor income in the first half of 1989 was about 3.1 percent above its value a year earlier, while there was a corresponding rise of 2.7 percent in personal income.

Cascade County. The 1979-1982 declines in the Great Falls economy were due to the closure of the Anaconda smelter and the departure of several units from Malmstrom Air Force base. Since 1982, there has been a slow but persistent decrease in the labor income associated with trade center activities. These declines were mostly in wholesale trade, and may reflect the growing tendency for retailers to deal directly with manufacturers. Great Falls' role as a retail, financial, and medical center appears unaffected.

The impact of the increase in the 301st Air Refueling Wing may turn out to be less than anticipated. For the year as a whole, nonfarm labor income in 1988 was up only 1.6 percent compared to 1987. This increase was certainly better than the declines of earlier years, but it may be disappointing to those expecting a bigger impact. The numbers, however, may be revised as the estimates of local military labor income are updated.

Both nonfarm labor income and personal income declined during the first two quarters of 1989. We do not have the detailed information needed to identify the cause. Because of these decreases, nonfarm labor income in the first two quarters of 1989 was about 1.0 percent below the corresponding period in 1988, while personal income was unchanged.

Lewis and Clark County. The cyclic declines and recoveries are not present in the Helena area economy. Neither nonfarm labor income nor personal income display the ups and downs associated with the recessions of the early-1980s.

The two largest components of Helena's economic base are state and federal government. Taken together, they accounted for about 61.1 percent of the labor income in basic industries in 1987. Both are traditionally noncylic industries.

State government labor income declined in 1986 and 1987. This decrease started before the state government pay freeze in 1987. Consequently, we anticipate a further decline in the 1988 data.

Increases in trade center activities counter-balanced the declines in state government. Trade center activities in Helena are primarily in finance and services, rather than retail and wholesale trade. The most rapidly growing component of trade center activities has been health care. As in the other communities experiencing similar increases, there is reason to be concerned about whether or not future growth will continue in this industry.

The latest data show slight declines in the Helena economy. Between the first half of 1988 and the first half of 1989, nonfarm labor income declined 4.3 percent and personal income dropped 2.9 percent.

Butte-Anaconda Area. The early-1980s saw persistent declines in all measures of the local economy. Nonfarm labor income decreased by almost one-third and personal income dropped about 15 percent between late-1979 and 1986. These trends were primarily due to the demise of the Anaconda Company, which closed its Anaconda refinery in 1980 and ceased operation at the Berkeley Pit in 1983.

On the bright side, the downward slide in personal income and nonfarm labor income did not continue. All of the negative impacts had worked their way through the economy by 1986, and were relatively stable since then. The fourth quarter 1988 spike in personal income and non-farm labor income appears to be associated with the wage bonuses paid mining workers.

The Butte-Anaconda area now has an economy based on relatively stable and non-cyclic industries. The Montana Power Company and its subsidiaries are now the largest component of the economic base, accounting for 26.1 percent of basic labor income in 1987. Next are Montana College of Mineral Sciences and Technology and Warm Springs State Hospital, accounting for 17.5 percent, and the federal government, with 13.9 percent. The resumption of underground mining is not reflected in the data for the basic industries because it began in 1988.

The latest data show a very slight upward trend. From the first half of 1988 to the first half of 1989, nonfarm labor income was up 0.6 percent while personal income rose 0.9 percent.

Gallatin County. After experiencing modest volatility in 1979 and 1980, both nonfarm labor income and personal income grew steadily from 1981 to 1985. Then, from 1985 to mid-1989, they have been stable. The extreme vacillation in personal income during 1985 can be attributed to the quarterly figures for net income in agriculture, where the estimates of payments and expenses may not be evenly allocated over the entire year.

Montana State University is the largest basic industry in Gallatin County -- it accounted for about 33.6 percent of the economic base in 1987. Next were agriculture (15.6 percent), nonresident travel (12.7 percent), and the federal government (12.1 percent). Manufacturing includes a number of "high tech" firms and several "top end" sporting goods businesses.

The growth from 1981 to 1985 and the following stability can be mostly attributed to Montana State University and manufacturing. Both of these basic industries increased during the first half of the decade, and have been stable or slowly declining since 1985. The downward trend at MSU reflects both the state's fiscal crises and lower enrollments due to demographic changes in the population. The decreases in manufacturing were caused by the closure of several firms.

The latest data suggest continued stability. Both nonfarm labor income and personal income were unchanged from the first half of 1988 to the first half of 1989.

Forecasts

Projections for Montana, the multicounty regions, and each of the major urban areas were prepared as part of the Economics Montana program, which is cosponsored by the Bureau of Business and Economic Research and U S WEST.

The outlook for the U.S. economu provides some of the underlying assumptions for the Montana forecasts. The latest projections by the Wharton Economic Forecasting Associates (The WEFA Group), a national forecasting service to which the state of Montana subscribes, are presented in table 2.

The WEFA Group believes that there will be no recession during 1990. They project relatively slow growth in the GNP in 1990, and that the economy will accelerate in 1991 and 1992. Even so, the 1992 projected growth rate of 2.9 percent is barely equal to the long-run average. WEFA also projects relatively stable inflation, interest rates, housing starts, and unemployment rates.

Statewide Projections

The statewide forecasts for 1990 are summarized in figure 21. Nonfarm labor income in Montana is projected to increase about 1.0 percent in 1990. This is less than the national figure of 2.3 percent. Similarly, personal income is projected to increase in Montana, but at a lower rate than nationwide: The state's figure is 0.8 percent, as compared to 2.1 percent for the nation.

The longer term perspective is presented in figure 22. Between 1990 and 1992, Montana personal income and nonfarm labor income are projected to grow at 1.8 percent and 1.9 percent per year, respectively. Both are less than the corresponding U.S. average.

In summary, the overall forecast for the Montana economy is for slow growth, but growth nevertheless. This is in contrast to the persistent declines in nonfarm labor income and the stability in personal income that characterized most of the 1980s.

Regional Forecasts

The substance forecasts for Montana should be interpreted with more caution than the statewide projections. Substate forecasting is a new development in regional economics. We are continually improving and modifying our methods and we are becoming more and more confident in the outcome. Nevertheless, we are still learning, and there is plenty of room for improvement.

The same set of assumptions concerning the U.S. economy and most other factors underlie all the forecasts for the multicounty county regions and the urban areas. Therefore, the projected trends are similar for the substate areas. For example, the growth rates may increase in all the regions and urban areas. Thus, the interpretation of the substate forecasts emphasizes comparisons between and among areas rather than trends over time. We will be more interested in identifying the area(s) expected to grow the fastest or the slowest, rather than the change in growth rates from one year to the next.

Multicounty Regions. As shown in figure 23, the Southeast is expected to be the fastest growing, but not by much; personal income is projected to rise 1.7 percent per year and nonfarm labor income will increase 2.1 percent per year. The West will be close behind, with personal income projected to increase 1.6 percent per year and nonfarm labor expected to rise 1.5 percent per year. The Northeast will have the slowest growth in both personal income and nonfarm labor income.

Urban areas. Yellowstone County is projected to have the fastest growth in nonfarm labor income and personal income as shown in figures 24 and 25. Next will be Missoula, Gallatin, and Cascade counties. The slowest growth is expected to be in Lewis and Clark and Flathead counties and the Butte-Anaconda area.

The rapid growth in Yellowstone and Missoula counties depend, among other things, on the continued expansion of health care. In Cascade County, military spending is crucial. Changes in any of these factors could dramatically alter the rankings.
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Title Annotation:1990: Economic Outlook Seminar; includes article on calculating Montana's population growth and migration
Author:Polzin, Paul E.
Publication:Montana Business Quarterly
Date:Mar 22, 1990
Words:4789
Previous Article:Provisional 1988 county population estimates for Montana.
Next Article:The 1990 Montana consumer outlook.
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