Building a stronger economy

State's construction and commodities sectors doing well

Montana's economy - thanks in large part to commodity prices that are staying relatively high - is pulling off a better year than expected.

In February, Paul Polzin forecast that four years of accelerating growth in nonfarm labor income would back off by about 5.9 percent.

Now, the director of University of Montana's Bureau of Business and Economic Research expects that slowdown to come in at about 4.8 percent.

He holds the same optimism for 2008. What he forecast in February as a 4.7 percent slowdown in the growth rate now comes in at 4.4 percent.

"What changed?" Polzin asked Thursday's gathering at the Montana Chamber of Commerce's second annual Summer Economic Outlook. He and Martin Regalia, an economist with the U.S. Chamber of Commerce, gave state and national overviews.

Two things changed since his February forecast, Polzin said. The construction industry did not decelerate as much as expected in February. And commodity prices stayed even stronger than he expected.

Farm income is looking strong, too. Polzin quoted a summary from Montana State University recapping higher grain, produce and livestock prices, with calf prices steady to slower.

In fact, all but wood products remain strong. When Polzin took this year's mining boom out of the economic picture, Montana still would have seen fairly strong growth. The same with manufacturing, he said, and the after-effects of the Sept. 11, 2001, attacks.

It all supports his stronger forecast, he said.

"There's not one reason," Polzin said. "There's multiple reasons we have strong conditions in all sectors."

Even though the Sept. 11 disaster was nearly six years ago, it still affects national and state economies.

Nationally, Polzin said, "9/11 turned what would have been a short, mild recession into a much deeper" and longer-lasting shake-up. But economic cycles and strength in sectors noted above cushioned Montana from much of the 2000 recession's impacts.

The state has had four straight years of an economic growth rate of 4 percent or higher - a phenomenon not seen since the 1970s with the booms in energy and wood products. The last time before that was in the postwar years of late 1940s and early 1950s.

Natural resources accounted for most of the strength from the 1940s to the 1970s, when the state's economy logged a 3.6 percent growth rate. But from 1971 until 2005, several sectors worked together to collectively show a 2.8 percent rate.

Even though it's a slower-growing economy, Polzin said, the state could benefit from a more stable economy with a broader base.

Volatility is the wild card, though. The level of swings from year to year remained virtually unchanged over the decades - a deceptively unsettling trend.

"Now there is slightly slower growth and no change in volatility, so it's sort of the worst of both worlds," Polzin cautioned.

He attributed Montana's natural-resource boom to the energy industry - and traced that to a growing demand from developing nations such as China, India and Malaysia. Oil-supply shocks from OPEC in 2003 and 2004, a decline in the U.S. dollar's value, and no growth in refinery capacity in 1990s all combined to strengthen Montana's energy sector.

Lead, zinc, copper and oil were showing an orderly, steady growth by Dec. 31 last year, but then took off and stayed much higher than Polzin had forecast in February.

With almost half of China's gross domestic product directly related to manufacturing - an industry that gobbles these natural resources - and 30 percent in Malaysia, Indonesia and South Korea, compared with 12 percent of America's GDP coming from manufacturing, Montana's natural resources are likely to stay strong, he said.

Still, Polzin said this natural resource boom is different from those of decades past.

From the 1970s through the 1990s it was supply-driven, in part from OPEC shutdowns in production. This time it is demand-related, primarily from Third World countries.

As a result, he predicted more concern with regulatory and site issues that will force producers to jump through more permitting hoops.

It brings with it risks, too, he said.

Virtually none of the Third World nations are stable democracies, meaning a regime change could send a nation's economy into a nosedive. There could be a slowdown in the construction industry, something that has not affected either Montana or the United States as much as touted by national media, both Polzin and Regalia said. Current labor shortages could make it virtually impossible for producers to meet orders, despite strong demand.

Policy decisions and work-force training changes will have a huge impact on the latter.

Reporter Nancy Kimball can be reached at 758-4483 or by e-mail at nkimball@dailyinterlake.com