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High energy prices, mortgage foreclosures, bank failures, and the collapse of Wall Street have launched the U.S. economy into a state of chaos and confusion. Yes, much has happened since the Bureau of Business and Economic Research released a very optimistic forecast for the Montana economy back in February. For our midyear forecast released in July, we did our best to assess and incorporate all of the happenings in the national and global economies in the first six months of 2008. Since that time, major events--particularly on Wall Street--have burst into the news. So the question people are asking is: What's ahead for the Montana economy?
It helps to construct a timeline and to understand as best we can where the economy stands today. It also helps to look at how the economy has actually performed over the most recent months--compared to how we thought it was going to perform when we made our first forecast at the beginning of the year.
In many respects, the U.S. economy has done a lot better than many thought it would. The economy has continued to grow over the first half of 2008, although that growth has not been strong enough to keep job growth positive. Credit the strength in U.S. exports abroad--which, in turn, can be laid at the feet of the weak dollar--and the impact of the stimulus package passed by Congress last winter for that. And even though job growth has been going in the wrong direction in the national economy, at least the declines have been fairly small.
The bad news about the U.S. economy is that the forces working against economic growth are still moving--in the wrong direction. The housing market is in disarray; home prices have not yet hit bottom, new home construction has plunged, and the spending power that consumers used to take out of their once-rising home equity has evaporated. Energy prices remain very high, even if they have backed off their recent peaks. And perhaps worst of all, banks and other lending institutions are making credit harder to obtain.
All of these things add up to a recession for the U.S. economy in the second half of 2008. The question of how long and how severe that recession will be is still in play.
As grim as that sounds, it is really not that different from what most forecasters--including the Bureau--were saying would happen last winter. Despite the unfavorable U.S. scenario, we nonetheless said at that time that we expected the Montana economy to grow at a very healthy rate--4 percent growth in inflation-corrected nonfarm income--for 2008 and 2009. Has anything happened in the state to make us change that projection?
It's a tougher question to answer than you would think. The most up-to date data we have also tend to be the most unreliable because they are revised and then revised again as better, more complete information--such as quarterly unemployment insurance filings by employers--become available. As of now, we have state-level jobs data through August and personal income figures through the second quarter (to June 30). So keep in mind that any pronouncements on Montana's economy based on these early data are subject to change.
The job data through August are encouraging. Montana's year-over-year payroll employment growth of 1.3 percent during the last 12 months was better than all but four of the 50 states. Like a number of other mountain states with strong basic industries such as natural resources and agriculture, Montana's trends are more influenced by the fast growth in China and other developing countries than by the U.S. economic slowdown. Unemployment rates have edged up statewide, and headlines of job losses from shutdowns in companies like Columbia Falls Aluminum and Plum Creek are showing up, but the stability and growth in natural resources and agriculture more than counterbalance these negatives and will lead to another year of respectable growth in 2008.
The income numbers are also strong. Nonfarm labor income grew at an annual rate of 4.6 percent during the first quarter of 2008 and 4.5 percent during the second quarter. These figures were down from5.7 percent to 6.5 percent during 2007, which is consistent with the modest slowing we are predicting. As a footnote, unlike our usual practice, these growth rates are uncorrected for inflation. We believe the very high inflation figures during the first part of 2008 were strongly influenced by energy prices, and they are now receding. Therefore, adjusting for a short-run and temporary blip in inflation actually makes interpretation of these data more difficult rather than easier.
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Other news on the state's important industries is more mixed. The era of robust growth in construction ended in Montana in mid-2007, and employment trends in this industry are now stable. But even this stability, looks good compared to the rest of the country, where steep declines are the norm. And the news on agriculture--particularly for Montana's wheat farmers, who have seen or are expected to see an increase of $650 million in gross receipts over the last two years--is mostly good.
Those observations caused us to only slightly lower our very optimistic forecast that we made in February for the state's economy for the next two years. Our midyear update scaled back our growth expectations--but only a bit. We now expect the state economy to register 3.3 percent annual growth in inflation-adjusted nonfarm income for 2008 and 2009 as compared to 4 percent to 5 percent growth between 2004 and 2007.
The Impact of the Financial Crisis
Today there is substantially more uncertainty concerning the length and severity of the expected U.S. recession. The reverberations of the failure of Lehman Brothers and AIG continue to percolate through the financial and investment communities. And there remains little doubt that the financial crisis--and the critical absence of liquidity--remains very much in force in the national economy. The question, of course, is how this will specifically impact Montanans?
A more severe than expected U.S. recession has always been a risk to BBER's forecasts for the Montana economy. Montana does not have a huge exposure to the financial services industry--thus we have so far minimized the impact of the expected severe downturn in that industry (following years of above-trend growth in employment and earnings) for our state. But if a national financial paralysis were to continue such that it would the limit the availability of credit throughout the economy, the recession would pose a much greater threat to Montana.
A forecast for the state economy that incorporates the latest vote in Congress, the latest swing of the stock market, or even the latest company to be thrown a lifeline from the Treasury would be, at this point, nothing better than a guess. As forecasters, we must operate under the assumption that the Treasury and the Federal Reserve will continue to act to limit the negative fallout from the financial crisis to the rest of the economy. It appears certain that the resources needed to carry that out will be substantial.
Short of a financial meltdown that no one wants and few realistically expect, the impact of the financial crisis on the Montana economy, if any, will come from the "real"--nonfinancial--side of the economy. If the events of recent weeks--the bank failures and takeovers, the demise of the investment banking industry, and the end of Fannie Mae and Freddie Mac's sway in mortgage markets--result in a longer, deeper U.S. recession, its impact will be felt in Montana. There are still too many uncertainties to make an informed estimate of when or by how much our state forecast would change as a result, but we still remain cautiously optimistic.
Patrick M. Barkey is director of The University of Montana Bureau of Business and Economic Research.
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