Economists express uncertainty for the future of industries at webinar

Montana State University held its latest Solid Finances Webinar Thursday, where economists provided more details on the effects the COVID-19 pandemic is having on the industries of Montana and the U.S. at large.

Montana State University Extension Economics Associate Specialist Joel Schumacher asked the audience about the coming re-opening of many Montana restaurants and what their plans were.

Under the state’s phased re-opening plan, bars and restaurants can re-open today under strict requirements including on social distancing, maximum capacity and employee screening.

According to the responses to Schumacher, most said they’d gradually begin to return to their normal dining habits, with only 10 percent of them saying they would immediately go back to normal.

MSU Professor of Natural Resource and Agricultural Economics Daniel Bigelow said farmland values are an important marker to look at when discussing aspects of the agriculture economy because they are the primary collateral farmers use to secure operating loans and have consistent inverse relationship with interest rates.

He said he looked at the history of farmland values during the last recession to get an idea of where they might be going.

“Besides that brief spike and bubble, really, in the value of pasture and range land, there was no real long-term effect of the great recession on farmland in Montana,” Bigelow said.

He said farmland values have been historically high for some time, but that may be coming to an end because of rising interest rates.

“A lot of people have speculated that we are in for a correction in farmland values and they will start to come down off their historic highs that we’ve seen these last several years,” Bigelow said.

He said agricultural recreation declined significantly in Montana during the great recession, and the nature of the current pandemic and ensuing recession suggests this will likely be the case again.

However, Bigelow said, some cause for optimism in the industry exists due to the nature of farmland investments.

“Farmland, given its positive though relatively low but steady returns, tends to see an increase in investment as the broader macro-economy turns down,” he said.

Bigelow said that even with these observations it is difficult to make many solid predictions given the nature of the pandemic.

“It remains to be seen what kind of recession we’re in for,” he said.

Bigelow added that the USDA’s Land Value Estimates, which are usually collected in June and released in August, may be illuminating for the future of the markets.

That lack of certainty was shared by the MSU Department of Agricultural Economics and Economics Department Head Greg Gilpin, whose presentation focused on individual assets.

Gilpin said it is difficult to predict economic developments amid the pandemic and people are not as confident in the predictions he and his fellow economists make because of the unprecedented nature of the situation.

He said, based on his the data and predictions he’s seen, the U.S. saw a 4.8 percent decline in its GDP in the first quarter of 2020, and according to the Congressional Budget Office and the Bureau of Economic Analysis a 12-15 percent drop is likely in the second quarter.

Gilpin said the largest losses to GDP are in the retail, hospitality and tourism industries.

“These are some of the largest declines ever observed in the history of the United States,” he said.

But Gilpin said the uncertainty is great enough that he’s seen far more dramatic predictions from credible sources.

“I was able to find reputable estimates that GDP could decline as much as 50 percent in the second quarter,” he said.

Gilpin said the volatility in the stock market during this pandemic is greater than any other time in U.S. history other than Black Monday in 1987 and the crash that preceded the Great Depression.

He said Americans’ retirement plans have also taken a severe hit with 401K and other retirement account balances dropping by an average of 19 percent and 14 percent respectively during the first quarter.

“We haven’t seen a whole lot of changes at all when it comes to contributions or withdrawal, but rather just the returns on the investments,” he said.

Gilpin said more losses should be anticipated in the second quarter, but he thinks the losses in quarter third and fourth quarter drops will be far less dramatic.

He said another potential impact of the pandemic is a severe drop in consumption levels.

Gilpin said Americans generally have low personal savings, and government programs will be critical in maintaining consumption levels given the high unemployment rate and how close most citizens are to financial disaster at any given time.

In particular, he said, the federal government’s efforts to curtail mortgage foreclosures amid the pandemic may be not be sufficient.

“I think going forward the forbearance is going to have to be addressed,” he said. “Giving somebody that’s been furloughed an extra 90 days to pay their mortgage may not be very helpful at all.”

Gilpin said Americans should be ready for these problems to continue for some time yet.

“We’re going to have a very long and drawn out battle with this COVID-19, until we get effective treatment and a vaccine,” he said.

MSU Assistant Professor of Natural Resource Economics Brock Smith said the oil and gas markets are also facing serious troubles before the pandemic that have only become worse.

“Oil and some fracking companies were really already in trouble before the pandemic,” Smith said.

He said one reason for the industry’s recent decline is the advancement of alternative energies like solar power becoming more affordable in the last five years.

He said this decline has been deepening as the pandemic continues with a particularly extreme incident last week.

“The (West Texas Intermediate) … bottomed out at minus 40 dollars, which I didn’t even think was possible,” Smith said.

He said one of the main drivers of the decline the industry is facing now is a simple lack of transportation, with the majority of flights getting canceled and people not driving nearly as much amid the pandemic.

Schumacher asked people watching the webinar about how their gas consumption has been affected by the pandemic. The plurality of people said gas and diesel usage has dropped by 50 percent or more.

Smith said the future of oil prices is extremely difficult to predict and things might bounce back, but there are still a lot of open questions.

“At best, it’s gonna be a long struggle to return to the pre-COVID projection for the sector, and even then that trajectory was already not great,” he said.

Schumacher said the webinars will continue in the coming weeks.

Next Thursday’s webinar will include a presentation by health care economist Mariana Carrera, as well as Vincent Smith who will be talking about food shortages and Bureau of Business and Economic Research Director Patrick Barkey, who will be discussing job losses.