Can Montana Escape Recession Ravages?

The answer is evidently now “no”, but until recently the UofM’s Bureau of Business and Economic Research director Patrick Barkey thought so:

“As early as last summer we still thought Montana would escape this recession,” he said. “We knew the national economic climate was uncertain, but Montana had been doing pretty well in the previous two recessions. We now know this is a global recession, and it is a more severe recession, and it’s a recession that’s not going to leave Montana unscathed.”

Indeed, things aren’t as bad here as they are in a lot of other places – yet. Compare our housing prices to Florida’s:

MT vs FL house price indexes

On the other hand, our overall economic situation shows a bigger hit than some places with hard-hit housing markets. Here’s the Fed’s coincident index vs. California:

MT coincident index of economic activity

As one would expect, the construction and resource sectors are particularly hard hit by the double-whammy of housing bubble and commodity price collapse. In spite of home prices that seem to have held steady so far, new home construction has fallen dramatically:

MT housing

Interestingly, that hasn’t hit construction employment as hard as one would expect. Mining and resources employment has taken a similar hit, though you can hardly see it here because the industry is comparatively small (so why is its influence on MT politics comparatively large?).

MT construction & mining employment

So, where’s the bottom? For metro home prices nationwide, futures markets think it’s 10 to 20% below today, some time around the end of 2010. If the recession turns into a depression, that’s probably too rosy, and it’s hard to see how Montana could escape the contagion. But the impact will certainly vary regionally. The answer for Montana likely depends a lot on two factors: how bubbly was our housing market, and how recession-resistant is our mix of economic activity?

On the first point, here’s the Montana housing market (black diamonds), compared to the other 49 states and DC:

State home price index vs 2000

Prices above are normalized to 2000 levels, using the OFHEO index of conforming loan sales (which is not entirely representative – read on). At the end of 2003, Montana ranked 20th in appreciation from 2000. At the end of 2008, MT was 8th. Does the rise mean that we’re holding strong on fundamentals while others collapse? Or just that we’re a bunch of hicks, last to hear that the party’s over? Hard to say.

It’s perhaps a little easier to separate fundamentals from enthusiasm by looking at prices in absolute terms. Here, I’ve used the Census Bureau’s 2000 median home prices to translate the OFHEO index into $ terms:

State median home prices

Among its western region peers, a few other large states, and random states I like, Montana starts to look like a relative bargain still. The real question then is whether demographic trends (latte cowboys like me moving in) can buoy the market against an outgoing tide. I suspect that we’ll fare reasonably well in the long run, but suffer a significant undershoot in the near term.

The OFHEO indices above are a little puzzling, in that so many states seem to be just now, or not yet, peaking. For comparison, here are the 20 metro areas in the CSI index (lines), together with Gallatin County’s median prices (bars):

Gallatin County & CSI metro home prices

These more representative indices still show Montana holding up comparatively well, but with Gallatin County peaking in 2006. I suspect that the OFHEO index is a biased picture of the wider market, due to its exclusion of nonconforming loans, and that this is a truer picture.

We're All Going to Die

Well, at least me and a few fellow Montanans. There’s an earthquake swarm in Yellowstone right now. The supervolcano is sure to blow us all to Kingdom Come. This elk my wife met seems unconcerned though:

Elk pthpt

A guy at Wolfram made a nice visualization example out of the data, though it’s not exactly a gripping movie.

Rising at the Interest Rate?

With oil back at $70, I got curious how Hotelling is holding up. The observation that resource prices ought to rise at the interest rate is looking almost plausible now, if you squint, whereas it looked rather foolish for most of the 80s and 90s. Of course, the actual production trajectory has nothing to do with Hotelling’s simple model, which produces a monotonic decline. The basic problem with Hotelling, as I see it, is that there’s a difference between equilibrium and expectations subject to uncertainty. Moreover the extraction trajectory is largely controlled by the rate at which governments lease or otherwise exploit resources, and governments have more than the usual dose of bounded rationality. (I got interested in this because I’ve been investigating Montana’s management of mineral rights on its school trust lands. So far, the state’s exercise of its fiduciary responsibility looks suspiciously like a corporate welfare program. More on that another time.)

Oil vs Interest Rates

The figure compares the nominal oil price trajectory to actual risk-free rates (3month T-bills and the federal funds rate), as well as three constant rates for good measure. At those rates, one would have to conclude that a large risk premium must apply to oil production, or that there’s been an awful lot of uneconomic production over the years (for example, everything from about 1986 to 2006), or that current prices are just a blip and will continue to revert to some more moderate long-term level.

Flying South

A spruce budworm outbreak here has me worried about the long-term health of our forest, given that climate change is likely to substantially alter conditions here in Montana. The nightmare scenario is for temperatures to warm up without soil moisture keeping up, so that drought-weakened trees are easily ravaged by budworm and other pests, unchecked by the good hard cold you can usually count on here at some point in January, with dead stands ultimately burning before a graceful succession of species can take place. The big questions, then, are what’s the risk, how to see it coming, and how to adapt.

To get a look at the risk, I downloaded some GCM results from the CMIP3 archive. These are huge files, and unfortunately not very informative about local conditions because the global grids simply aren’t fine enough to resolve local features. I’ve been watching for some time for a study to cover my region, and at last there are some preliminary results from Eric Salathé at University of Washington. Regional climate modeling is still an uncertain business, but the results are probably as close as one can come to a peek at the future.

The future is generally warmer. Here’s the regional temperature trend for my grid point, using the ECHAM5 model (downscaled) for the 20th century (blue) and IPCC A2 forcings (red), reported as middle-of-the-road warming:

Bozeman temperature trend, ECHAM5 20c + A2

Continue reading “Flying South”