Economists Scale Back Flathead Growth Forecast

By Beacon Staff

Two University of Montana economists are reducing their growth forecast for Flathead County, now anticipating significantly slower economic growth than they predicted at the beginning of the year. Economists Paul Polzin and Pat Barkey of UM’s Bureau of Business and Economic Research also revised their forecast for Montana’s economy from 4 percent to 3.3 percent growth, bucking the recession in the national economy they predict for the second half of this year.

Flathead County’s economy should grow at a rate of 3.5 percent in 2008, down from an initial forecast of 6.4 percent, Polzin, the newly retired head of the BBER, said in a presentation last week sponsored by the Kalispell Chamber of Commerce. In 2009, Flathead County’s economy should grow at a rate of 4 percent, Polzin said, which is solid growth – though it may not look like much after several years where the valley saw annual growth of 6 percent and higher.

“This is still a very optimistic forecast for Montana and Flathead County,” Polzin added. “Growth in the next couple of years will be less than the last couple of years.”

Polzin attributes the Flathead’s growth slowdown primarily to a construction downturn, the recent layoffs at the Columbia Falls Aluminum Company (CFAC), and the relative lack of agriculture here, compared to elsewhere in the state where soaring wheat prices are buoying regional economies.

Because the recent 125 layoffs at CFAC were high-paying jobs, there will be a greater impact on the local economy than the loss of minimum wage jobs, Polzin said, and are likely to result in an additional 125 to 150 jobs lost in the Flathead.

“For every job (loss) at CFAC, you’re going to lose another one to 1.5 jobs elsewhere in the economy,” Polzin estimated. “Slow growth in Flathead County’s going to be around for a year or two.”

To arrive at his prediction, Polzin studied the Flathead’s major industries and sources of jobs – wood products, tourism, federal agencies and retail – and drew a conclusion about the local economy as a whole. While still well behind areas like Bozeman and Billings, Polzin said “Kalispell is now emerging as a second-order regional trade and healthcare center.”

Along with Missoula and Gallatin Counties, the economists also noted that median home prices in Flathead County are declining after hitting a peak of $250,000 in the summer of 2007.

But despite some less optimistic numbers, the economists emphasized that Montana’s economy continues to vastly outperform the nation and remains, overall, quite strong. Barkey painted a picture of a U.S. economy that remains fragile, despite a 1.9-percent expansion in the second quarter of this year.

“It really hasn’t been enough growth to keep employment growth positive,” Barkey said. “For six months, the U.S. economy has lost jobs.”

Last Friday, the Labor Department reported the U.S. economy shed 51,000 jobs in July. Nationwide, energy prices have spiked, housing markets continue “adjusting downward,” and the financial markets are in disarray, Barkey said, resulting in a collapse in home equity withdrawals, sticker shock over gas prices and reduced credit availability. The “silver lining” for the national economy is that exports are soaring, due in part to the weak dollar.

“I think we can thank the rest of the world for keeping the U.S. economy afloat,” Barkey said. “We’re extraordinarily weak.”

The economists expect a recovery from what is likely to be a relatively mild recession sometime in 2009. But what do these factors mean for Montana?

“I think a lot of this doesn’t mean a whole lot for Montana,” Barkey said. “In many cases we are bucking the trend.”

Job growth has been at 3 percent statewide over the last six months. Employment in natural resource industries in Montana is up 12 percent since Dec. 2007, while the construction industry has stalled but continued to add jobs at about 4 percent in that time. The state’s manufacturing sector is riding the export boom, adding jobs at about 3 percent.

“This recession is nowhere near as severe in Montana as it is nationwide,” Polzin said.

But some plant closings, like CFAC and others around the state, and a high rate of inflation are largely responsible for the growth revision by the economists.

The unknown “elephant” in Montana’s economy, Polzin said, will be the impact of the massive surge of wheat prices and how the agriculture industry handles these increases. Over the last two years, the state’s value of wheat production has increased from $693 million total in 2006 to a predicted $1.36 billion for 2008.

“This is so large that we really don’t know what farmers and ranchers are going to do with this increased revenue,” Polzin said, emphasizing that the factors contributing to the health of the state economy are numerous and complicated: “Anyone who comes up with a single explanation for economic growth is probably wrong.”