Date published: April 1, 2012
Journal code: MBQ
Editor's Note: Following is a Q & A with Bureau economists and industry experts throughout the state about the latest economic trends and forecasts, as well as the outlook for Montana's important sectors: housing, energy, travel and recreation, health care, agriculture, manufacturing, and forest products.
Patrick Barkey and Paul Polzin
Q: Montana seems to be slow to recover from the recession. How is Montana's economy faring as we progress into 2012?
A: (Patrick Barkey) The economy did not grow nearly as quickly last year as we thought it would. We forecast 2.6 percent growth, and we now think that it's going to come in at 0.7 percent. There are multiple reasons for that. One reason is that there was a lot more inflation than we expected. The second reason is that there were some key sectors of the economy that experienced a surprising slow down, specifically health care and government. So just between those two sectors, we saw a half a billion dollars of earnings less than what we had expected. But the really big story behind the slowdown in Montana is just the nature of the U.S. recovery. The U.S. economy this time is coming back much more slowly than previous recessions. This recession is different because it was preceded by a banking crisis. So the 0.7 percent was a real disappointment for 2011, but Montana is still looking at a growth rate of 2 percent or above for 2012. That's low by pre-recession standards, but is still pretty respectable.
Q: The recession impacts are different among cities across the state. Which cities suffered the most and which cities suffered the least?
A: (Paul Polzin) The two counties that probably suffered the greatest declines are Gallatin County and Flathead County. That's because construction was so important there, particularly construction of second homes. The two counties that have suffered least have been Cascade County and Lewis and Clark County because of Malmstrom Air Force Base in Great Falls and state government in Helena. The other cities are kind of in between. For example, in Missoula the recession has been relatively long - about four years - but relatively mild. It's exactly the opposite in Gallatin County, which had a significant decline, but it occurred over a relatively short period - about two years. There also have been relatively short and mild recessions in Yellowstone County and Butte.
Q: What are the most pressing issues in Montana's economy today?
A: (Patrick Barkey) I think the big story in Montana continues to be the slow recovery from the recession and unfortunately, the housing bust. There is another story happening with the energy development in the east.
Q: The residential real estate market for Montana showed little signs of improvement last year. When will the housing bust will recover?
A: I think it will not recover significantly until we start to see improvement in the overall economy. So until we start seeing increased confidence and some growth in the income and prospects for Montana residents, I don't really expect to see it to improve. That would push it out at least another year.
Q: How do you think that the housing bust differs across Montana?
A: The situation is very different in resort versus nonresort communities. Those parts of the state that we saw the larger percentage of second homes - vacation homes like up in the Flathead - tended to take a bigger hit than other places. Also, toward the east we are actually seeing the opposite. We are seeing housing shortages, relatively speaking. For the most part, these aren't people willing to buy, so there it's the case of increased demand for worker housing in the energy development counties.
Tom Richmond and Paul Polzin
Q: Many Montana counties are feeling the impacts of energy development. People are calling the Bakken the biggest inland oil find in the U.S. in the past 50 years. What type of potential does it have for Montana?
A: (Tom Richmond) Montana's Elm Coulee field currently has about 750 producing Bakken oil wells. During the process of development, only two dry holes were drilled. Bakken development outside of Elm Coulee has proceeded cautiously, with most new wells being drilled close to existing production near the North Dakota border and near Elm Coulee. Several successful Bakken wells have been completed in these areas, indicating good prospects for ongoing development.
Q: Why has energy development grown so much faster in North Dakota than Montana?
A: (Tom Richmond) The simple answer is that there is more oil in North Dakota. There is some pretty good potential on the Montana side of the line, but the fact of the matter is that there is more potential on the North Dakota side just because it is closer to the depositional center. The Bakken is thicker in North Dakota and has some extra pay zones that Montana doesn't have. But then we have the five barrel/day wells in central Montana, and we have the speculation up in Glacier County.
Q: How does technology affect oil development?
A: (Tom Richmond) Technology has a tendency to improve over time, sometimes very subtly. The two technological parts that make the Bakken work are horizontal drilling and hydraulic fracturing. One of the more subtle changes is in drilling technology. When 1 first started working, it would take two months to drill a 12,000 foot well. Now 20,000-feet long wells are being drilled in about 23 to 25 days. So that really affects the economics of drilling. The drilling time has gotten to be much better now with the current technology than it was 30 years ago.
What could happen is that technology could keep improving, and we might be able to recover oil that is not recoverable now in areas like the Heath (in central Montana) or what is being called the Southern Alberta Bakken (which extends into northern Montana).
Q: There seems to be a renewed interest in coal these days. What is the reason for increased optimism about coal?
A: (Paul Polzin): The optimism for Montana coal is coming primarily from growth in the Asian market and in China. It's not coming from the U.S. The US consumption of coal has been constant or even declining for the past 10 to 15 years. Between 2010 and 2035, the growth in the demand for coal in China will be more than twice as large as total U.S. production of coal. If Montana could just get one slice of that, it would be advantageous. And there's a good chance that Montana could get a slice of that because of the position we're in with respect to transportation systems.
Montana has much larger deposits of coal than Wyoming, but production in Wyoming far outpaces Montana. Wyoming is producing 400 million tons of coal per year, and Montana is producing 40 million tons per year. Why is that? If you look at a railroad map, you'll see that Wyoming coal fields are closer to the big metro areas in the South and the Midwest where there's a big electrical demand and where coal is shipped. But if we're looking at the international demand, coal would probably be shipped out of Vancouver, or out of Seattle, or out of the Oregon coast. If you look at the railroad map, you see that Montana has a transportation advantage to serving these international markets. So that's the reason for increased optimism on the coal side.
Travel and Recreation
Q: Rumor has it that we can expect some of the highest fuel prices ever by this summer. How do these fuel prices affect tourism in Montana?
A: In 2008, when we hit our high of over $4 per gallon at the pump, our visitation went down 6.5 percent, and spending went down about 1 5 percent by nonresident visitors. This had a huge impact on the travel industry in the state. People just changed their travel behaviors, whether it was how much they went to the grocery store or whether they took that weekend trip. So if people change their behaviors because of gas prices, it will have a big impact on Montana's travel industry.
Q. Another important issue in tourism is how manmade disasters and natural disasters can impact tourism. For instance, last winter a bus coming into Missoula slid on icy roads and killed a number of people. Grizzly bears killed two tourists in Yellowstone last summer. In Sidney, a school teacher was kidnapped and killed. How do disasters like this impact tourism and how would natural disasters - like wildfires or oil spills impact tourism?
A: Probably the best example is that the people I work with are not originally from Montana, and as soon as something happens, their parents, their brothers, their sisters are calling, saying, "Are you OK? Don't go into the backcountry because there are bears; don't drive on the roads because they are icy." These kinds of things happen, and they get national media attention. There needs to be a crisis management center - and I know that the tourism office in Helena has a pretty good setup and knows how to react to negative media out there. Social media is huge. Getting things on Facebook and Twitter and trying to get the word out that things aren't really quite the way they are portrayed is important. These events do affect people's perception of Montana. It is a constant struggle for those in the promotion part of tourism to make sure people feel safe when they come here.
In terms of the natural disasters, there are not huge dips in visitation due to fires. The travel industry has been pretty good at responding to that type of natural disaster, suggesting other places to go if there is a fire in the area. The other thing that we can't predict is climate change, or just the variation in climate all over the world, and Montana is certainly feeling it. Twenty years ago that wasn't an issue. It was very stable. You knew when you could start fishing because water runoff was low enough and the water temperature didn't get too warm. Last year was a very good example of fishing - and rafting - being very late in a lot of rivers and streams. I don't know if you can call it a natural disaster but it produces the unpredictability, which in our minds causes disasters in the travel industry.
Q: Health care continues to be in the spotlight as the Supreme Court ruling on the Affordable Care Act draws nearer. What are the biggest challenges for the health care industry?
A: There are two challenges and both deal with policy uncertainties that affect health care. One is the Supreme Court ruling on the Affordable Care Act. Expectations are that they will have a ruling as early as June, which may or may not change one or all provisions of the ACA. It is interesting because 26 states are partnering in this lawsuit, and many of these states have held out, for instance, any effort to establish a state insurance exchange that is supposed to be in place by 2014. So it is already having ramifications on how states pursue their health care and comply with health care law. The second challenge is the uncertainty on how the federal government will address budget deficit and debt concerns. Medicare and Medicaid account for almost one-fourth of federal spending. Few, if any, believe these programs will go untouched in some way, shape, or form. That is particularly important for Montana. In the next decade, one in five Montanans will be eligible for Medicare. Further, any changes to Medicare reimbursement will have some real implications for Montanan's access to health care, not only for Medicare patients, but for all others since Medicare reimbursement is a bellwether rate for all other payers of health care.
Q: How important is the health care industry in Montana?
A: It's big. We've done six hospital impact studies now. By the broadest measure it's about 10 percent of our economy, and that's using GDP. In fact, it was the biggest contributor to the percentage increase in GDP. On a health care earnings basis, it is almost 14 percent of earnings in the state's economy. Certainly at the community level it can run much higher. Personal spending on health care in Montana is going to be in excess of $7 billion this year, and assuming the Affordable Care Act does go through and those projections hold true, it would be over $8 billion in just two years. This year alone, personal health care spending is expected to increase by $163 million, supporting almost 6,000 jobs and generating nearly $256 million in earnings economywide.
Q: Montana's farmers and ranchers have weathered the recession with above average production and strong prices. What is supporting the strong agricultural market for cattle and wheat this year?
A: A couple of weather-related things have been very critical. The drought in the Southwest and the moisture issues in the northern plains have impacted both the cattle and wheat market. The moisture conditions in the northern plains have helped the cattle industry because we've had good pasture and hay production. On the wheat side, it was been a lot of the opposite. In Montana, around 500,000 acres either weren't planted, or were, and didn't produce much.
Even though corn is not a major commodity for Montana, corn prices impact our wheat and cattle prices. Everyone is watching the market for ethanol. Given the high percentage of corn utilized in the production of ethanol, changes in the market for ethanol impact corn prices. Most recently, blender subsidies and tariffs on imported ethanol have been eliminated, which have driven ethanol, and subsequently corn, prices somewhat lower. If renewable fuel standards were lowered, it's likely that less ethanol would be produced and corn prices would move lower. Corn and wheat prices often move together because they are substitute commodities, hence lower corn prices will lead to lower wheat prices. However, lower corn prices translate into lower feed costs for cattle feeders and these cattle feeders are willing to pay more for our calves.
In the international market, the wheat export market looks softer than it has in the past, while the beef export market looks substantially stronger, especially in these emerging economies. The strength of the world's economy is really a big issue in agriculture.
Q: Food prices have increased more than 4.5 percent over the last year. Why has this inflation occurred?
A: I think the link that people like to make is that food price is related to commodity price inflation. It is part of the formula, but it isn't a large part of it. There is always an opportunity when commodity prices come up by substantial percentages for people marketing those products to take advantage and maybe try to experiment with a little higher prices in those markets. I think that has happened to some degree. Obviously, over the longer run those things get bled out of the market.
The largest increases in food prices over the past year have been in fats and oils, eggs, dairy products, and beef and veal, which increased by 10 percent or more. Products made from our wheat and other grains (cereals and bakery products) increased by 6.2 percent. When assessing food price inflation, there are many other factors than prices at the farm gate, or when the product leaves the farm. When assessing food price inflation, about 19 percent of cost of a product is at the farm gate, while 81 percent of cost of a product is in processing and marketing.
Q: The recession of 2007-2009 and subsequent weak economic conditions have led to declines in manufacturing. What are the most important issues in Montana's manufacturing industry?
A: When we surveyed Montana's manufacturers this year, thek most important issues were health insurance costs and workers' compensation rates. Increasing energy costs were also a concern for 58 percent of the manufacturers surveyed (about 120 manufacturers). Many of the manufacturers were worried about losing skilled workers to energy jobs in eastern Montana or North Dakota. There were a couple good news items. Only about a quarter of Montana manufacturers reported decreasing employment at dieir facilities. Another very bright spot was that 90 percent of manufacturers said they did not reduce thek capacity. Likewise, very few of them had curtailed production. To kind of temper diat though, only about half said they made a major capital expenditure in 201 1 , and half expect to make a major capital expenditure in 2012, which says mat they are not really looking for things to change much in the near future.
Q: What sectors in manufacturing should we be optimistic about?
A: Certainly chemicals, petroleum, and coal products are doing pretty well. In terms of employment, that sector has grown, and worker earnings have increased about 21 percent. In terms of income to workers, die food and beverage sector has also increased, about 5 percent from 2009 to 2011. Another area that is doing well is machinery, computers, and electronics - the high-tech sector. A lot of that growth has been spurred by the defense arena. There are a lot of manufacturers in Montana that make products that go into weapons systems, or in aircrafts, or on ships. Those items are still in demand, but with budget cuts in the federal government, even die military is going to see some cutting. I think the more direcdy related a manufacturing product is to a soldier, a sailor, or a Marine, the better. If it is a new aircraft or armored vehicle that may not see much nearterm use, there may not be a whole lot of excitement about developing something like that. These kinds of things are a little more risky for manufacturers now.
Q: What is the weakest sector in manufacturing?
A: Certainly, wood products - and I hate saying this being a forester - is among the weakest in Montana's manufacturing. Seventy-three percent of wood products manufacturers said they did not make a major capital expenditure in 2011, so they are really not looking for things to turn upbeat anytime soon. On the bright side, 80 percent said they didn't eliminate any capacity. They haven't folded up shop completely, but there are a declining number of mills in this state.
Q: In the last few years, many mills have closed and many of the ones that are open are just operating on survival mode. What lies ahead for Montana's forests if the mills don't survive?
A: I think our forests are going to become increasingly expensive to manage for all types of landowners as milling infrastructure declines. Look at states like Colorado and Arizona where forest products industries had very major collapses in the 1990s. They are now facing critical issues in diek forest management because they don't have the infrastructure to deal with die issues of die land - insects, disease, fuel for wildfires - and they don't have the mills to convert harvested timber into saleable products. This situation is exacerbated in me interior West states because we have high portions of forest land in these states owned by the federal government. There are different processes diat the federal government, die U.S. Forest Service, and the Bureau of Land Management have to go through to do treatments on the land. It is a lot different than what a private landowner has to experience. Even so, the federal government's management, or lack of management, has impacts beyond die acres they actually manage. Agency land management decisions impact private landowners and businesses too. Insects, disease, and wildfkes don't stop at ownership boundaries. Likewise, mills and loggers depend on all types of landowners to supply timber. So, a major land owner like the U.S. Forest Service can significantly impact private landowners, mills, and loggers by changing the level of harvest on just its fraction of the land.
Q: What is the best option for providing for the state's forest health?
A: The best option we have is to maintain existing milling and logging capacity and keep all the existing pieces. Without the key pieces of logging and milling infrastructure, private and public landowners' options and abilities for managing the land are quite limited - even when markets do recover. There is a lot of controversy surrounding federal lands. To some extent there is not much that we can do in Montana to make things change, other than to petition to federal government and the Legislature to make some land management law changes. That is a big issue. Congress is a slow ship to turn around. Through DNRC, the state of Montana actively manages state forest lands, and I think they see a role for themselves as helping to maintain existing capacity in this state, both logging and milling capacity during this downturn in the market.