Economy – Montana

Montana's Economic Performance

Department of Labor and Industry, Research and Analysis Bureau

Montanas economy has been outperforming the national economy since the turn of the century, including having better performance during the 2007 recession and a faster, stronger economic recovery exiting the recession. Montanas outperforming economy is evidenced in nearly every economic metric: Montanas unemployment rate has been lower than the U.S. unemployment rate since the 2001 recession and has remained about 1.5 percentage points lower than the U.S. rate throughout 2014. Montana has the 8th fastest GDP growth among states over both the last five years and ten years (ending in 2013), and Montanas GDP growth was faster than the U.S. average in every year since 2000, except for 2012. Montanas personal income growth has also outpaced the national average, ranking as the 6th fastest over the last five years and 7th over the last ten years. Montana has the fifth fastest wage growth among states for both the five and ten year timeframes. Montanas economy is healthy, posting above average job growth and improvement in all economic indicators.

However, not all areas of the state have performed equally. In general, the Eastern region has posted rapid economic growth in the past decade, with rapid expansion of employment and rising wages for many counties affected by the development of the Bakken oil fields. Many counties in the eastern edge of the state have experienced the very low unemployment rates indicative of worker shortages. The Northwest and Southwest regions of Montana experienced strong growth leading up to the recession, but the concentration of construction and wood product manufacturing employment resulted in significant contraction during the national recession. Both the Northwest and Southwest regions lost over 8,000 jobs during the recession. While the Southwest region rebounded quickly, the Northwest suffered through an extended recession and still has elevated unemployment rates. Montanas seven reservation areas also posted economic growth for the last decade, but remain some of the most economically sensitive areas of our states, often with unemployment levels two to three times higher than their surrounding regions. Figure 1 illustrates the 2013 unemployment rates in the five labor market areas of Montana, along with the seven reservation areas.

Montanas strong economic growth has not yet been enough to raise Montanas wage and income levels up to the national averages. With an average annual wage of $37,575 in 2013, Montana ranked 47th among states in average wages in 2013, ahead of only Idaho, South Dakota, and Mississippi. Montana performs better comparatively in terms of income, ranking 35th for personal income per capita among states. Personal income includes income from business ventures, rental payments, royalties, social security, government transfer payments, and other sources in addition to wages. Montanas high rates of entrepreneurialism and business ownership improve our rankings for income compared to wages.

Montana is in this position of low wages and income compared to other states partially because of the slow income growth in the last half of the 20th century. Figure 2 compares real per capita income in Montana and the U.S. using all available data back to 1929. Per capita income measures the total amount of income received in the state divided by the population, providing a measure of relative wealth that can be used to compare to other areas. Figure 2 illustrates that per capita income was relatively equal in Montana and the U.S. from 1929 to about 1952, with Montanas per capita income being higher than the U.S.s per capita income for a short period from 1946 to 1952. From 1952 to 2000, the U.S. per capita income rose faster than Montanas, creating the large gap in income levels that our state is now trying to overcome. However, Montana has been on the right path since 2000, with wage and income growth faster than the national average, narrowing the gap between Montanas and the U.S. per capita income levels.

It is difficult to isolate one cause for the slower growth of Montanas economy during the second half of the 20th century. Some economists contribute the decline to the natural resource curse, which is a phenomenon where economies concentrated in natural resource industries (such as agriculture, mining, and petroleum refining) have slow long-term growth rates despite the infusion of capital into the economy from natural resource development. Other economists note the slower growth in the early 1980s corresponds with the closure the copper mine and smelter in the Butte and Anaconda area. Even others point to the slow adoption of computers and technology in the Montana economy compared to the more rapid adoption in the U.S. economy during the 1990s. The adoptions of desktop computers and technology advancements in the 1990s resulted in large productivity gains for the U.S. economy, driving up workers wages and income levels. Some data suggests that Montana lags behind other states in the adoption and use of technology, and as a result, has lower productivity levels than other states. In actuality, all or none of these factors could have slowed Montanas growth in the latter half of the 20th century.

The diversification of Montanas economy over the last sixty years has also influenced the composition and performance of Montanas economy. Figure 3 illustrates the changing roles of industries in the composition of Montana income since 1930. Like the U.S. and other developed countries worldwide, Montana has become more of a service-based industry over time as consumers have demanded more services than goods. The goods-based industries of manufacturing, construction, mining, and agriculture now comprise about 24% of Montanas personal income derived from work. The goods-producing industries are still expanding in terms of the value of their products, generally increasing production value in real terms over time, but their share of the overall economy has shrunk because the service-based industries are growing at a faster rate than the goods-based industries. This trend is expected to continue as Montana builds its post-industrial economy.

Although the service-based industries are often described as low-paying industries with undesirable jobs, like retail or tourism jobs, the service sector also includes high-paying, high-skill jobs that require advanced degrees, such as those in the professional services, health care, or financial services industries. Service-based industries also contribute to Montanas exports, bringing new money into Montana from the sale of their services, and make a sizable contribution to our states GDP. For example, financial activities is a service-based industry that includes banks, investment firms, and insurance agencies. In 2013, the average wage for the industry was over $55,000, and the industry provided 17.3% of Montanas total GDP more than any other industry.

In general, greater economic diversification is associated with faster and more stable economic growth in the long-term. The movement towards the service-based industries has increased demand for well-educated, high-skilled workers, especially in industries like professional services and health care. While it is difficult to directly compare the rate of diversification, Montanas economy may have lagged behind the national economy in the movement to a service-based industry, which could have contributed to the lagging income growth in the second half of the 20th century.

In terms of the current industry mix, there are some differences in the types of industries in Montana compared to the U.S. that may help to explain wage differences. However, the differences are too minor to fully explain the lower wages in Montana or the cause of the lagging growth over the last half century. For example, when compared to the U.S., Montana has a slightly higher concentration in the lower-paying industry of leisure activities (which includes many tourism type businesses such as hotels, bars, restaurants, and ski resources), and a lower concentration in the high-tech, high-paying professional services industry. The differences in these industry concentrations could be used to explain Montanas lower wages. But there are also industry mix differences that would suggest that Montana should have higher wages than the U.S., such as Montana having a higher concentration than the U.S. in mining and healthcare, both high-paying industries.

Figure 4 illustrates Montanas 2013 industrial composition using three different economic metrics GDP, work earnings, and employment to help demonstrate the relative size of Montanas industries and the differences in how each industry contributes to the economy. Financial activities was the largest industry for GDP, followed by the government and trade sectors. GDP measures the overall value added by the industry for economic activity, and can be thought of as the value of sales minus the costs paid for non-labor inputs. Wages earned by Montanans are included in GDP because they represent the value of economic activity added by workers to the production of goods and services in Montana.

Compared to the U.S., Montana has a much smaller share of manufacturing (12.5% in the U.S. compared to 7% in MT). However, larger concentrations in agriculture, mining, and construction make up this shortfall, leaving the goods-producing industries in Montana as roughly 24% of GDP (slightly higher than the 20% of U.S. GDP that lies within the goods-producing sectors). Montanas manufacturing is likely stymied by the long distance from Montana to major consumer cities and ports, which increase transportation costs for manufactured goods. The transportation sector comprises a larger share of Montanas economy compared to the U.S., likely because Montanas large size and rural nature requires a lot of transportation to ship our goods to consumers. Montanas share of health care is larger than the U.S., partially due to Montanas older population (the demand for health services increases as a person ages).

Personal income is also shown in Figure 4. Personal income is the amount of income received by Montana residents as a result of economic activity. Personal income includes the wages and benefits earned by workers, plus proprietor income, royalty income, rents, or government transfers. However, only work earnings (workers wages, benefits, and proprietor earnings) can be assigned to an industry, so other types of personal income are not included in Figure 4. The largest industry in terms of personal income earned from work (work earnings) is health care and education, along with government and trade.

Finally, the largest private industries in terms of employment are health care, trade, and leisure activities. These three industries combined employ nearly 45% of Montanas workers. Government is also a large employer with roughly 18.8% of employment, most of whom are employed by local governments. Employment represents the primary way that the benefits of economic growth are distributed through the economy, with most Montanans receiving their income from wages instead of capital rents like dividends or royalties. GDP, personal income, and employment all equally measure important elements of the Montana economy, just like all industries are important to the proper functioning of the Montana economy. All industries work together to create a dynamic economy.

In conclusion, Montanas economy is performing well, gaining ground on the national average in terms of wages and personal income because of rapid growth. Continued growth faster than the U.S. average is needed to regain our competitiveness with other states in terms of per capita income and higher wages, which was lost over a long period of lagging growth in the second half of the 20th century. A number of changes occurred in both the U.S. and Montana economies during this time, making it difficult to determine why Montanas economy experienced this extended period of slower growth. Diversification into a more service-based economy likely accelerated wage growth in both the U.S. and Montana. Lagging diversification, and differences in industry mix between the U.S. and Montana, may present partial answers, but they are not the full explanation. Much to the chagrin of policy makers and economic developers, Montanas economy is influenced by an infinite number of factors, many of them that are outside of our control. However, it is within our control to ensure that Montanas businesses and workers are responsive to economic changes and prepared to navigate an ever-changing global economy. This preparedness can be achieved by ensuring our workers have the education and training needed to adapt, prosper, and innovate in whatever situation is presented in the future. In this way, our workforce can become more productive, earning higher wages and greater profits for the Montana economy.

Visit link:

Economy - Montana