Despite some claims to the contrary, agriculture, wood products manufacturing and other basic industries remain the driving factors in Montana's economy, a Missoula economist said on Tuesday.

Paul Polzin, director of the University of Montana's Bureau of Business and Economic Research, said that changes in basic industries - those businesses that primarily serve out-of-state markets and that bring in new dollars - account for most fluctuations in the state and local economies.

"It doesn't explain everything, but basic industry is the most important determinant of both short-term and long-term trends in Montana's and Flathead County's economy," said Polzin, speaking to about 140 people during the annual Economic Outlook Seminar at the WestCoast Kalispell Center Hotel.

Wood products manufacturing is the largest basic industry in the valley.

Other components include agriculture, nonresident tourism, Columbia Falls Aluminum Co., Semitool and other manufacturing firms, the federal government, and transportation.

The Flathead also is becoming a regional trade center, Polzin noted, with people traveling here to go shopping, visit doctors and use other services. Consequently, a portion of the retail and service activities here is counted as basic industry.

The same could be true of the valley's vacation-home and second-home market, he said, but there isn't a good way to measure that segment of the economy, so it wasn't included in the projections.

Nonlabor income - such as stock dividends, interest, and state or federal transfer payments (including Social Security checks, welfare, unemployment and some retirement funds) - also is an important source of revenue, but it doesn't help explain the fluctuations in the overall economy, Polzin said.

Polzin's forecast for the Flathead calls for 3.5 percent growth in nonfarm labor income in 2005, with 3.7 to 3.8 percent growth in each of the next three years. That's similar to the forecast for Missoula and Gallatin counties, and well in excess of the 1 to 2 percent growth expected in Silver Bow, Lewis and Clark, and Cascade counties.

The statewide forecast calls for 2.6 percent growth in 2005, followed by 2.8 to 2.9 percent growth from 2006 to 2008, Polzin said.

"We're looking for continued strong commodity prices, an increase in oil production and possibly a slight slowdown in construction activity," he said. "The major risk factors [that could hurt the state or local economies] would be rapidly increasing interest rates or a decrease in commodity or oil prices."

Alternatively, a significant change in forest management policies could provide a major boost to Montana's economy.

Charles Keegan, director of forest industry and manufacturing research for the Bureau of Business and Economic Research, estimated that thinning and fire-hazard mitigation work on just 1 percent of the state and federal timberland in Montana would create about 3,000 new jobs - or about a 30 percent increase from current timber industry employment levels.

"And at 1 percent, we'd still be falling behind what's needed," Keegan said.

Reporter Bill Spence may be reached at 758-4459 or by e-mail at bspence@dailyinterlake.com