The challenges facing Alaska economy Economist comments on the nature of the state’s recession, describes the results of some modeling of how that recession may evolve ALAN BAILEY Petroleum News
With job losses in many sectors of the Alaska economy and with the state government in something of a pickle over its fiscal challenges, the state is clearly in an economic recession. But how long may this recession last? How deep will it become? And what may be the best way of addressing it?
Economist Jonathon King, vice president of Northern Economics, has been talking to various organizations about his company’s analysis of the state’s economic situation, and about the results of modeling of how that situation may develop. On Feb. 9 King spoke to the Alaska Support Industry Alliance.
Second phase of recession King told the Alliance meeting that the Alaska recession began in 2015 with employment in the high earning sectors of the economy starting to take a tumble, and is now entering a second phase. In this new phase job losses have started to spread out across the economy’s secondary sectors such as retail. Economic modeling indicates that the recession has at least another year to run, and could extend for another two or three years.
And the price of oil coupled with decisions being made by Alaska legislators will be key to the economic outcome for the state.
“The second phase of the recession is going to be a direct function of oil prices and the battle being waged in Juneau,” King said, referencing the economic debate that is heating up in the state capitol.
King commented that a recession is generally defined in terms of economic shrinkage. On that basis, because of a combination of lower oil production and a falling oil price, the state is now in its fifth year of decline, as measured by the size of the state’s domestic product.
However, given the sensitivity of the size of Alaska’s economy to the vagaries of oil production, employment in the state can make a more meaningful indicator of the state’s economic health. Thanks in particular to high levels of state spending, employment in the state remained buoyant until 2015. The number of people employed in the state then went into decline. An analysis of total wages earned in the state also showed a dip in earnings at about the same time, as the job count started to drop. And the state has seen a major fall in consumer confidence to exceptionally low levels.
Employment dropping In the Alaska oil and gas industry, employment reached record levels into 2014. But, following the fall in the oil price during the second half of that year, and as companies realized the potential length of the oil price slump, companies started shedding jobs in 2015. The job losses are still continuing, albeit at a lower rate than earlier in the downturn.
The level of construction jobs, on the other hand, has been volatile, with big peaks during periods of high public spending in the state. Construction went into decline at about the same time in 2015 as oil industry job losses began, but there is a projected potential future upswing in construction, probably because of the requirements for the F-35 fighter jets that are to be deployed to Alaska, King said.
Employment levels in companies that provide professional and business services dropped at an accelerating rate, also at about the same time as those in the oil industry and construction. Up to that point, employment in this sector had been fairly static, as businesses took stock of the situation in Alaska and were probably reluctant to hire new professional staff at a time of economic uncertainty, King explained.
The retail trade has been growing and continued to grow through the period when employment in the oil, construction and professional services businesses started to drop. But that growth in retail started falling away at the end of 2015 - there are now signs that the recession is starting to spread into the secondary sectors of the economy, as people have less money to spend on goods and services.
State government employment was fairly flat into 2015 but started to drop shortly before the oil sector began its decline. The decline rate for state employment has since flattened out at about 5 percent per year, King said.
The one outlier from the otherwise downward employment trend is the Alaska healthcare industry, where employment has been accelerating, with an upward kick in 2016 following Gov. Walker’s decision to expand Medicaid in the state.
Preserving the wealth Looking to the future, the key to any successful economy is to bring money in and then keep it by internally supplying many goods and services. Alaska has been good at bringing money in when oil prices are high and, in the past, through federal government earmarks. The three legs of the Alaska economic stool are the oil industry, the federal government, and other industries, in particular fishing, tourism, air transportation and mining.
But with little in-state production, other than oil and gas, and the need to purchase goods from elsewhere, much money flows back out of the state, making wealth building difficult. And in the current economic situation, the state is hemorrhaging money. In the context of the state budget, the state has a $3-billion shortfall in its unrestricted general funding.
Mathematically, much of that funding gap could be closed using earnings from the state’s Permanent Fund and the Constitutional Budget Reserve. Assuming an annual return on investment of 4.5 percent, these funds could generate an annual income of $2.7 billion, reducing the funding gap to $300 million, King said.
However, the annual payment of a Permanent Fund dividend makes the funding gap bigger by an amount that depends on the size of the dividend.
A broad-based tax, such as a state income tax or sales tax, could also help bridge the funding gap, but Alaskans have become used to not having to pay state taxes while also expecting state services to be available, King commented. As a consequence, the state is engaged in an ideological fight over what the state is going to look like in the future.
“And our progress has really been hampered by that food fight and about the denial and uncertainty of what’s going to go forward,” King said.
This situation is complicated by the markedly different impacts that different funding solutions have on different groups of people in Alaska. A cut in the Permanent Fund dividend, for example, would have a disproportionate impact on the poor and on people in rural Alaska. Cutting state expenditure, a move that would cause people to lose their jobs and leave the state, would have a stronger impact on the economy than a broad based tax - a tax would primarily cause people to spend less, King said.
Economic model Northern Economics is licensed to run a commercial economic model that can simulate all sectors of the Alaska economy and the demographics of the Alaska population. The company has used this model to forecast how the current Alaska recession might play out under different state economic policies. King cautioned that the results of this modeling, while very helpful in gaining insights into the ramifications of different policy options, should also be treated with some caution, given the inevitable uncertainties over what will actually happen. And the model does not assume any major new development projects, such as a North Slope gas line, or major new oil production.
Running the model using the status quo for state economic policies, with $4.2 billion of annual expenditure from the state’s unrestricted funds, a continuing payout of Permanent Fund dividends, no new taxes, and using the U.S. Energy Information Administration oil price forecast, indicates that the recession would last for about another year, with employment then leveling out before climbing very slowly. The catch, however, with this scenario is that the state would steadily run down its savings, a factor that would create a major economic crisis once the savings run dry.
Another scenario involves maintaining the same state spending level, but with a reduced Permanent Fund payout. That would extend the recession through to perhaps 2019 before, again, employment levels off and then starts to climb slowly. An alternative scenario, in which a broad-based tax is introduced, instead of a cut in the Permanent Fund dividend, results in an almost identical future employment trend. But another possibility, in which state spending is cut to $3.2 billion, with no new taxes and with the Permanent Fund dividend maintained, has the most dramatic impact on future employment: The recession would likely continue through to 2020, with sharply lower employment levels.
Lower employment levels Under the status quo, employment would drop by about 13,000 jobs from the peak in 2015, with many of these job losses having already occurred. The two scenarios in which the recession continues to 2019 could result in the loss of 24,000 to 25,000 jobs. The scenario in which there is a cut to state spending could ultimately result in the loss of more than 30,000 jobs, compared with the employment peak.
In summary, there does not appear to be any way for the state to avoid another year of recession, the recession could continue for as much as four years, and, depending on factors such as the future price of oil and any future major developments in Alaska, there is likely to be some significant longer term loss of jobs relative to the levels in 2015.
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