Economists project two more years of above-trend growth in Montana’s economy with big questions about impacts from housing, a tight labor market and inflation.
The Bureau of Business and Economic Research at the University of Montana took its annual report on the road with a stop in Helena recently. This year’s report, titled “Where Housing is Headed,” is a culmination of analysis and forecasts for the successes and challenges facing the state’s economy.
“When we look outside the window today we see an economy that’s very healthy but also unbalanced,” said Patrick Barkey, BBER director.
Before the coronavirus pandemic economists were not predicting a recession. The steep drop as economies shut down was met with major government response in terms of stimulus dollars.
“This is really the story of 2021, is the economy has come roaring back,” he said. “That recovery has been much much stronger than anyone thought.”
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Patrick Barkey, director of the Bureau of Business and Economic Research, gives a economic outlook presentation in 2018.
Montana hit record low unemployment last month. Barkey says lower wage earners have seen a significant bump in starting pay, but also contributing to unemployment are about 13,000 pre-pandemic workers that have not returned to the labor force. The highest demographic that have not returned are workers over the age of 55 with a 5% decrease in labor participation.
Calling it a “jobs recession not an income recession,” Barkey believes stimulus packages came with pros and cons in terms of shortening the recession but also greatly increasing personal spending power due to strong income gains fueling demand for products.
“On one hand I think this was good, it helped make the recession short and much less painful than expected, but we notice what that did, it poured a lot of spending power into an economy that wasn’t fully equipped to handle it,” he said.
Consumer prices are noticeably up with transportation, namely gasoline prices, and the price of housing representing the bulk of inflation along with food and vehicles.
An apartment building under construction in this Missoulian file photo.
Incomes have gone up as well, but housing prices have gone up more relative to income during the same period. Annual housing price growth was already high before the pandemic at 6-8% annually. That jumped to 25% nationally last year with areas of Montana much higher.
The trend has coincided with investors increasing their share of home ownership, jumping from 11.2% in the third quarter of 2020 to 18.2% in the third quarter of 2021, according to the report. That means more competition in the market for individuals or families attempting to buy their homes.
“When prices are too high, judged by prices that are pushed up by policies, regulatory constraints and so forth, they exact a cost on the economy and society, but even when they’re not too high, even when they’re just expensive because the commodity itself is valuable and the resources required to purchase it are a lot, they matter because … it squeezes budgets for other things,” Barkey said.
High housing prices percolate throughout the economy and can stifle the capacity to grow and recruit and retain workers.
“When you have high housing prices, very high housing prices in areas of strong economic opportunity, you shut that process off, and you prohibit and inhibit the ability of people who are not doing well where they are,” Barkey said.
Housing is also import in terms of economic equality and the ability to generate wealth. Purchasing and increasing equity in a home that then increases in value represents many people’s greatest share of net worth.
Jackie Higgins hauls her son Max, 7, and a heavy basketball hoop through her neighborhood recently in Butte. Higgins is in the process of moving to a new home just blocks away. Due to the new coronavirus outbreak, the home-buying process has been slowed for many Americans. The Higgins family felt the stress of delays but after a few bumps they are moving into their new home.
“When younger people buy into a housing market they have an asset,” Barkey said. “They borrowed to get it, but when it appreciates they accumulate wealth, or even if they pay it off, they accumulate wealth. And that wealth for a lot of households is the primary component for their net worth.
“They’re not being able to buy in. They can’t get in the first square of that game with the kind of housing prices we have.”
High housing prices also tend to increase sprawl which in turn contributes to community costs and strains infrastructure.
Christina Henderson, executive director of Montana High Tech Business Alliance, said high tech manufacturing is growing at 7 times the rate of Montana’s economy, pays twice the median wage and increased revenue $400 million from 2020 to $2.9 billion last year. Still, the industry faces challenges.
“In 2022 Montana’s high tech industry is continuing to grow and create jobs,” she said. “Companies have leveraged technology and remote work to minimize the impacts of the pandemic but housing and workforce shortages are creating significant headwinds that could slow future growth.”
Economists predict above average economic growth this year and next. The omicron variant is not expected to derail growth, Barkey said.
Emma Honn, assistant pastry chef at Black Cat Bake Shop, pulls cheesecake out of the oven in April. Black Cat and several other businesses are experiencing labor shortages.
“We’re forecasting at least two more years of above trend growth n the Montana economy with some settling down towards something that’s a little more sustainable going ahead,” he said.
The big question is what will happen with inflation, which is coming from multiple sources including due to the tight labor market and supply chains. The current inflation of about 7% could settle down to 3.5-4% which is still high, Barkey said.
“You have to recognize inflation is coming from different sources now, and particularly it’s coming from the labor market,” he said. “Companies are raising wages because they have to and they’re pushing up prices because they can.”
Tom Kuglin is the deputy editor for the Lee Newspapers State Bureau. His coverage focuses on outdoors, recreation and natural resources.
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