State economy saw growth last year, but slowdown predicted

Montana’s economy continued to grow in 2019 and performed better than forecasts had suggested, continuing a three-year trend for the state.

The Bureau of Business and Economic Research at the University of Montana gave its annual Economic Outlook Seminar at the Hilton Garden Inn in Kalispell last week, where Director Patrick Barkey and others shared their thoughts and concerns on Montana’s economic sectors.

Montana Economy

Looking at Montana’s economy as a whole, the story is positive.

In 2018 Montana continued on 2017’s steady growth, though the state underperformed compared to the rest of the western states.

In terms of 2018 real nonfarm earnings, Montana had 2.5% growth, compared to Washington’s 5.6%, Oregon’s 3.2% and Idaho’s 3.9%. Montana did beat out North Dakota’s 2.3% and South Dakota’s 2.2%, however.

In 2019, Montana saw 2.7% growth in real nonfarm earnings, a slight bump from 2018 and a better performance than the forecasted 2.2%.

Looking ahead to the next four years, Barkey expects a slowdown in Montana’s economy, with growth dropping off to 2.3% this year and falling under 2% for the next three.

Growth in Montana points west and southwest, he noted. Flathead County only grew 0.6% in real wages last year, and declined in farm earnings from 2013 to 2018 by 4.9%, but counties like Gallatin and Missoula are thriving.

One of the biggest stories in Montana’s economy has been energy, Barkey said.

“One of the biggest changes that’s happening in the Montana economy and the U.S. economy has been the incredible decline and usage of coal as a source of fuel to generate electricity,” he told the crowd. “In 2001 the market share was above 50%, and now it’s down below 25%. That steady decline in the market share of coal has largely been made up for by an increase market share in natural gas and some increased usage of the renewables.”

“That’s generally told as a market driven story ... but it’s also incomplete. Because there’s something else going on that you should know about that’s impacting coal, and that’s something I call the de-industrialization of America. We’re a country that doesn’t use as much electricity for heavy industry as we used to,” he added.

Another big part of Montana’s growth is the technology sector, Barkey said.

“The faster parts of growth in Montana tend to have tech,” he said. “By and large, where there’s fast growth, there’s also quite of bit of growth in the service category, which contains a lot of tech.”

Growth in earnings from professional and tech services have outpaced total earning growth in Flathead, Gallatin, Fergus, Missoula and Silver Bow County since 2015.

Travel and Recreation

The title of this year’s Economic Outlook Seminar was “Finding Good Workers,” and according to Norma Nickerson, that’s been the problem here in the Flathead.

Nickerson is the Director of the University of Montana’s Institute for Tourism and Recreation Research.

In annual surveys for business owners, Nickerson says the issue of finding and keeping quality employees has been paramount.

In this year’s survey, 70% of respondents said it’s more difficult to find year-round workers, while 80% said it’s more difficult for seasonal workers alone.

“Both those two stats are up from last year,” Nickerson said. “So it hasn’t gotten any better, and it’s going to be another tough year for finding those quality workers.”

In combating this difficulties, Nickerson said business owners reported a variety of strategies to lure and keep workers, including hiring retirees, offering more training, using contractors, providing more benefits and offering more flexible start and end times. Upping wages has been a solution for some owners, she said.

“There was a number of people in our surveys who wrote in, ‘If you don’t pay at least $15 an hour, you will not retain or get your employees,’ so that is happening,” she said.

Nickerson also discussed the rise in short term rentals and the overcrowding of Montana’s national parks — two issues not at all foreign to the Flathead.

For the former, the rate of people spending on and providing short term rentals is rising fast.

“The spending in rentals of cabins, houses, condos, the spending that they are providing is going up. Last year it went up 11%, but from 2013 to now, it’s gone up 129%. That is not going to stop,” she said, noting that the number of bookings coming from more traditional websites like expedia.com are now being passed by AirBnB.”

It’s good for some and bad for others, she noted.

“It’s become a business opportunity for those people who have extra money to just purchase a home and put it on as a short term rental,” Nickerson said. “That then takes out those homes for the regular employee who wants to possibly buy a home, and now it’s not on the market.”

Real Estate and Construction

Brandon Bridge, Director of Forecasting for the Bureau of Business and Economic Research, said the story of real estate in the Flathead is two-parted.

Overall, he’s optimistic, as 2019 volumes are looking stronger after a slow 2018, but affordability is getting worse — especially in the starter home market.

Affordability in general is a problem across the U.S., he said, and especially in the western states.

“Affordability across the west is getting worse,” he said. “I don’t need to talk too much about that to this crowd. Flathead County, Gallatin County and Missoula County are really three of the most affordability challenged places in the state.”

The bigger problem in the Flathead is what he calls the bifurcation of the housing market — a divide between what’s happening with starter homes and upgrade homes.

Since 2012, home price appreciation for starter homes has outpaced move-up homes in the Flathead, alongside Missoula and Gallatin, county. In median-price-to-income ratio — the number of years of income required to pay off a home — Flathead is up to 4:1, the highest in the state.

And with that comes a bigger burden for renters, he said. In the Flathead, 38% of rented households are cost burdened, compared to 26% of owners. For owners, that figure has been dropping steadily since 2012, but for renters it has held steady.

“This results in what some people have referred to as an entry level premium, basically meaning if you’re in the market for a low priced home, then you’re basically going to end up spending more than if low and high priced homes had appreciated at the same rate,” Bridges said. “What we see in Flathead County is that the low tier premium ends up being about $38,000.”

Looking ahead, Bridges said real estate markets in the state should remain strong, with low interest rates continuing to drive demand. The lingering problem, however, is affordability.

Tech

As noted by Barkey, the state owes a lot of its steady growth to the tech sector.

Christina Henderson, Executive Director of Montana High Tech Business Alliance, said she sees validation in the fact that tech has been added as a new part of the Economic Outlook Series.

“The outlook for high-tech and startups in Montana is very positive. We see record revenue, jobs and venture capital investment, but the main reason I think we know tech is really on track in Montana is that Pat Barkey finally gave us our own spot on the Economic Outlook Seminar program,” she said with a laugh.

Montana High Tech Business Alliance has been surveying Montana’s tech firms since 2014, and the figures are impressive. The state’s high-tech sector is responsible for more than $2 billion in annual revenue, is growing at nine times the rate of the state’s economy, and pays twice the median wage to employees, Henderson said.

Venture capital investments have boomed as well.

In 2015, Montana ranked last in venture capital dollars per capita, even behind Puerto Rico, but last year alone the state saw a total of $150 million invested.

Part of the venture capital boom has been in Whitefish, she said.

She pointed to the launch of Two Bear Capital, a firm Michael Goguen, who was a 20-year partner at Sequoia Capital in Silicon Valley.

“He is planning to engage capital for good, so investing in technologies that benefit humanity like artificial intelligence, biotech,” she said. “They initially said they plan to raise between $100 and $150 million to be deployed across Montana and the Pacific Northwest, but they’ve since raised their mark to $200 million. This is very good news for Montana and the Flathead.”

Henderson pointed to a number of strong start-ups and businesses in the state that have contributed to tech growth, including onX Maps, Ascent Vision Technologies and D.A. Davisdson.

In the Valley, she noted the success of Applied materials and the Whitefish-based Neuro-ID.

Founded in 2015, Neuro-ID provides real-time behavioral analytics via advanced machine learning techniques and neuro-cognitive research. As of now, the company has secured $8 million in private funding.

A big part of the growth is that it’s by Montanans, she said.

“The Montana values, our work ethic, tolerance for risk, the kinds of people who live here and are drawn here help to shape our business climate and our entrepreneurial ecosystem in ways that are very positive for entrepreneurship,” she said.

For more information, visit http://www.bber.umt.edu/.