“Rich-cession” Looms in 2023
While Montana’s economy has been doing quite well over the past couple ofyears, economists are projecting changing winds in 2023.
During the recent Economic Outlook Seminar, Bureau of Business and Economic Research Economist Pat Barkey said that while Montana’s economy grew by over two percent in 2022 it is likely to plummet to zero in 2023 and perhaps even dip into negative territory of -1.1 percent.
Barkey said that whether there will be a recession is uncertain. He noted, “A recession was supposed to be here last year.” A recession is still more likely than not – at the very least, the state’s economy will slow significantly, he said. Whatever the next year brings, “it will be a lot different than a year ago.”
In fact, Barkey explained that “There’s something called the Fed recession in our future. It’s been engineered, it’s there, it’s something the Fed is trying to do, or might do.”
While some aspects of inflation have slowed, there remains the likelihood of higher interest rates and diminished investments.
The impact of a recession could be lessened for Montana should the in-migration from other states continue, bringing with them more spending and wealth to the state. It was reiterated several times that the new comers to Montana are good for the state because they are bringing new wealth and spend money.
Barkey said he calls the likely downturn the “rich-cession” because it has had a bigger impact on higher income people than lower income. That is due in large part because of the huge demand for labor.
While not all the numbers are in, overall 2022 appears to have been a very good year for Montana, continuing the economic surge the state experienced in 2021. Statewide average growth was over 5.3 percent in 2021 – the highest it had been since 2006.
According to BBER, 2021 growth was well above average in Flathead, Gallatin and Missoula Counties, driven by the reopening of the economy after the pandemic. The one exception in the state was counties in the eastern portion of the state that are dependent upon the oil and gas industry, which has struggled given that political winds directed investment away from it.
Most of Montana’s economic activity and growth happens in its seven population centers – only 10 percent of state growth occurred outside the seven largest counties.
Perhaps, much to some people’s surprise, Barkey said that mining is Montana’s and Yellowstone County’s most prominent industry.
Barkey expressed some dissatisfaction for the decisions of the Federal Reserve because they were slow in raising interest rates – “they were asleep,” he said. Raising interest rates sooner would have slowed consumer spending sooner, which is what is driving the US economy and needs to be “moderated”.
”We are starting to run out of fuel for consumer spending,” he said, noting that consumers are running out of savings and starting to rack up charges on their credit cards.
“The economy is healing but not healed.”
Inflation is starting to ease a bit – lumber prices have come back down, commodity prices have “settled down”, big ticket consumer purchases are expected to decline in price 4 percent —“all prices are softening.” “Supply chain congestion is better than a year ago.”
While housing prices increased 52 percent statewide since 2020, creating affordability issues for many people, they have weakened somewhat but home sales have slowed. As interest rates increase home sales will continue to be slow.
Nevertheless, the construction industry has continued to be strong and may become stronger as material prices decline.
A real concern is energy prices, which have come down somewhat but are “still 42 percent higher since the pandemic.” Barkey was critical of President Biden’s policies which have discouraged investors to invest in oil and gas, which has kept the industry down and gas prices high. That industry’s struggles has been very detrimental to Montana, and to Yellowstone County other eastern Montana counties.
Since the economic impacts of COVID mandates,Montana’s health care industry has had significant struggles dealing with labor shortages and rising costs. It is expected to ease in 2023, however.
Lower consumer prices will ease pressure on the labor market. “We need less demand for workers; those pressures are pushing up costs,” said Barkey, but he also pointed out that the labor shortage was materializing before the pandemic. “The workers are there – they are working – the problem is we need more of them.”
There has been a seven percent increase in wages – but that is not more than the rate of inflation.
“Wages ae not so fat and happy as you think.”
The strength of Montana’s economy over the past couple years is evidenced in income tax collections in the state. They still show double digit growth, but “beware of any forecasting,” warned Barkey, “No one knows where you are until we go through April” – and can see tax returns.
“Last year’s 2 percent growth is amazing.” but Barkey’s forecast for 2023 will see a “slamming on the brakes” for the state.
Montana’s economy may not be as dependent upon performance as it is dependent upon the “fragile” world economy.
Barkey provided predictions from HIS Markit:
—While 2023 may see a recession it will also see the beginning of a recovery from recession which will gain momentum in 2024.
—economic weakness is expected in several segments with residential investment leading the way.
—the price of US farm output, currently more than double its pandemic low, which remain elevated through 2022 will ease as crops come in in 2023.
—slowing growth will cause oil prices to ease to $84.
—consumer spending will grow modestly through 2024, constrained by a rebound in personal savings rate from the unsustainable lows below 3 percent. Fixed income will decline to 4.1 percent in 2023 with weakness concentrated in construction, both residential and nonresidential.
—labor markets will remain tight but the trend in payroll gains is slowing.
—the fed will raise its policy rate by March to the range of 4.75 percent to five percent and allow its balance sheet to decline by about one-third through 2024.
—inflation will decline in three steps. Already underway are declines in the prices of energy and agricultural commodities that are allowing headline inflation to fall quickly below core inflation. In a second step there will be easing in supply-chain tensions, or decline in the pries of certain core goods; such as vehicles, fist used and then new. In step thee, a recession eventually tempers inflation pressures emanating from labor markets.
—a risk exists that a resilient economy remains strong for longer than previously anticipated, requiring a more aggressive and persistent monetary tightening (higher interest rates) to contain inflation which would precipitate a later and more severe recession.