Expert: No major problems

Compared to rest of U.S., Montana looks pretty good, economist says

Economist Lee McPheters forecasts a slowdown but not doom and gloom for Montana's economy as well as the nation's in 2008.

"Soft landing is the consensus," McPheters told an economic outlook seminar last week sponsored by First Interstate Bank. McPheters is the chief consulting economist for First Interstate.

McPheters, a professor of economics at Arizona State University, oversees publication of the Western Blue Chip Economic Forecast, a regional newsletter including Montana. He taps 70 analysts across the West to prepare his forecasts.

He called such polls conducted across the United States the "gold standard" for predicting the direction of the nation's economy. Those polls indicate the current subprime mortgage meltdown won't sink the nation into recession or worse.

According to McPheters, Montanans have less to worry about than the rest of the nation with just 3.3 percent of the state's 138,838 mortgages classified as subprime (fixed rate) and 2.6 percent subprime (adjustable rate). This compares to 5.7 percent and 6.4 percent, respectively, across the country.

Montana also had fewer foreclosures as of the second quarter of 2007 with just .62 percent compared to the national average of 1.40 percent.

McPheters said the national number shouldn't keep anyone awake nights, either.

"Mortgage delinquencies look like they always look when you have a housing downturn," he said.

Even in the worst-case scenario of 20 percent of subprime mortgages going into default, the economy would experience a loss of about $130 billion over five years. McPheters said that amounts to 1.3 percent of the $10 trillion economy.

"You're telling me this is going to bring down the U.S. economy?" he asked.

McPheters listed job losses as the number one cause of foreclosures. Although national numbers revealed a slight loss of jobs in the last quarter, he said economists revised recession probability only slightly from one in four to one in three.

As in the area of subprime mortgages and foreclosure, Montana has more to celebrate than most of the nation, adding an average of 1,000 jobs each month.

"Montana is one of the top five job-growth areas," McPheters said.

He called the Flathead's growth rate of 5 percent "pretty spectacular." The county's unemployment rate of 2.1 percent compares favorably to the nation's average of 4.6 percent.

Other areas in the West outperformed the nation as well. Utah, Wyoming and Colorado came in ahead of Montana's number 5 place at first, second and fourth respectively in the nation for job growth.

"Montana and all the Western states are the growth center of the country," McPheters said.

He organized his presentation around the theme "The Good, The Bad, and The Ugly," with the subprime and resulting credit crunch characterized as the ugly.

Under the good, he listed the nation's gross domestic product increasing by 4 percent in the second quarter.

"That represents very solid economic growth," he said. "All you can go by is the data you have."

He said economic analysts forecast slower gross domestic product growth of 2.4 percent in the third quarter and 2.1 percent in the fourth quarter of 2007. McPheters called the prediction a slowdown but not a recession where the gross domestic product drops below zero growth.

Also in the "good" column, the economist pointed to the Consumer Price Index at 2.5 percent, showing inflation in check for the last 12 months.

Under "bad" economic forecasts, McPheters said the consumer won't continue as "the strong driver of the last two or three years." He said the high price of oil, weak home sales and slower home appreciation have weakened consumer spending.

In the United States, home equity, not savings, provides wealth generation for the majority of residents.

"Consumers finance their spending by home equity withdrawal," he said.

McPheters said these factors feed into a low consumption growth prediction of 2.5 percent.

He called the housing boom of the past few years as "over, way over." But McPheters said residential building amounts to less than half of all construction. Public and private commercial construction continue expanding at record rates.

According to McPheters, residential housing market drivers include population growth, job growth and mortgage rates. He said the day of creative financing as an influence has ended.

"You actually have to prove you have an income," he said with a laugh.

In Montana, McPheters said home re-sales dipped 7 percent and permits declined 6 percent compared to national declines of re-sales of 11 percent and permit drops of 28 percent.

A national monitoring of low and median-price home sales showed Montana with value appreciation of 9 percent compared to a national average of 3 percent.

"Montana is looking pretty good," he said.

In his economic outlook for Montana in 2008, McPheters foresees single-family housing-unit permits remaining at 2007 levels.

In response to questions at the end of seminar, McPheters agreed that personal incomes in Montana remain low compared to other states. He called core purchasing power weak and not balanced by a comparable low cost of living.

"What you're exporting is your environment for tourism and part-time residents," he said.

McPheters suggested the state look to expand the knowledge or information sector of its economy to attract higher-paying jobs.

Reporter Candace Chase may be reached at 758-4436 or by e-mail at cchase@dailyinterlake.com.