Economic turnaround will take time

With consumer confidence lagging, financial problems looming in Europe and an economic slowdown in Asia at hand, crawling out of America's "Great Recession" will be a test of endurance, First Interstate Bank's staff economist said Monday.

The bank hosted its annual Montana Perspective Economic Seminar in Kalispell, with First Interstate Senior Investment Manager Rick McCann delivering a candid overview of the economic issues that will affect bankers in the coming year.

"Temper your expectation of when things will return to normal," McCann advised.

One of the biggest reasons the recession doesn't feel like it's over is that consumer confidence suffered a body blow as the national economy hit rock bottom in early 2009 and hasn't yet recovered.

"Consumer confidence is terribly important," McCann said. "If two-thirds of the engine is not running it's hard to make the case that the economy will come roaring back. This economy was much more damaged than we thought."

With the United States shifting from a want-based to a need-based economy, the U.S. is no longer at the top of consumer demand, "and that's a sociological change," he said.

"China is the engine that will drive the global economy in the next 20 to 25 years," McCann said, pointing to reports of 3,000 to 4,000 new vehicles going to China each week. "That movement of [rural] China to the middle class will drive the economy ... there will be a lot of social unrest in China before this settles out."

A positive note for oil- and coal-producing states such as Montana is that oil demand in China will increase as that society becomes more mobile, McCann said. Seventy percent of China's electric power production comes from coal.

"Ten years ago China was hardly a blip, and today 25 to 26 percent of every barrel [of oil] goes to China," McCann said.

It's an opportunity for the U.S. to use its cutting edge in oil-production technology to meet that demand, he added.

Several factors have stymied America's economic recovery, from a slowdown in manufacturing the first half of this year to a housing industry that's still distressed. Even events such as the earthquake in Japan have affected global supply chains that play into the U.S. economy.

Corporations are sitting on cash reserves, unemployment remains relatively high and projected growth rates have been ratcheted back.

"The stars didn't align for us," he said, adding that the likelihood of a second-dip recession in the United States has increased to roughly a 50-50 chance.

Consumer spending is up somewhat, but only by 2 to 3 percent. If inflation is factored in, "it's not at a pace sufficient to providing" a substantial economic turnaround.

"Business spending has continued to grow, but at a slower pace," McCann said. "Businesses continue to restrict their technology and capital spending plans.

"This is not an interest rate non-recovery," he said. "I used to say interest rates can't go below zero, but they can - T-bills did."

He was referring to the annualized yield on three-month T-bills that dipped slightly below zero in December 2008.

As for unemployment, McCann said if under-employed Americans are figured into the equation, it puts the national unemployment rate at up to 17 percent. That comes dangerously close to the 25 percent unemployment at the height of the Great Recession in the 1930s.

"I pray this is a once-in-my-lifetime occurrence," he said.

A regional snapshot of the economy has some bright spots, McCann observed. Montana's statewide unemployment rate of 7.8 percent is better than the 9.1 percent U.S. average.

Natural resources are a big plus, especially if the region invests in the infrastructure to transport those resources out of here. Projects such as construction of a major oil pipeline would boost the tax base and employment, stretching over several years, McCann said.

Health care and tourism likely will be heavyweight contenders in the economic arena, largely because places such as Northwest Montana have the natural beauty that attracts people to visit and live here.

Water will be perhaps one of the region's most important resources in years to come, he said.

"Water is the next gold," he predicted. "We need to protect the resource."

Features editor Lynnette Hintze may be reached at 758-4421 or by email at lhintze@dailyinterlake.com.