Providing coverage of Alaska and northern Canada's oil and gas industry
April 2017

Vol. 22, No. 16 Week of April 16, 2017

State recessions come and go

A review of state-level recessions since 1961 in shows the impact of structural changes on less diverse economies such as Alaska’s

Eric Lidji

For Petroleum News

State recessions generally start with a shock but end rather quickly, according to a review by economists from the Alaska Department of Labor and Workforce Development.

“When a state isn’t growing, that’s almost always attributable to a specific economic weakness or shock. … What lifts a state out of a recession, however, is seldom a specific event or development. … Rather, economies typically absorb the precipitating shock over a period of time and then resume growing,” economist Dan Robinson wrote in an article in the April 2017 edition of the state statistical magazine Alaska Economic Trends.

Of the 259 state-level recessions since 1961 - defined as nine consecutive months of job losses - 75 percent saw job losses end within two years and nearly 25 percent saw job losses end within two to four years. While both categories seem small, the difference between them is stark. The current recession in Alaska has been underway for about 18 months, which means job losses would end later this year under one case but not until late 2019 in another. And about 0.4 percent of all state recessions take four to six years to end, which would put the end of the current Alaska downturn sometime in late 2021.

Start with a bang

The worst state recessions, according to Robinson, typically represent structural changes to a state economy, such as the huge decline in Oregon timber production in the early 1980s or the even larger decline in auto manufacturing in Michigan during the 2000s.

As those extreme examples suggest, state recessions generally begin with a shock.

The current recession in Alaska can be traced to declining oil prices, while a recession in Washington in the early 2000s was related to the dot-com bubble and recessions in Arizona, Florida and Nevada between 2007 and 2009 were related to housing markets.

While state-level recessions usually start with a shock to major economic drivers, they end more gradually, as state economies learn to absorb changes, according to Robinson.

The idea that the $2 billion cleanup associated with the Exxon Valdez oil spill in 1989 pulled Alaska out of its first recession in the 1980s is “a myth,” according to Robinson.

He notes that employment was growing by 2 to 3 percent in Alaska in the summer of 1988 and by “a robust” 4.1 percent in the month before the spill occurred in March 1989.

Spending associated with the cleanup certainly stimulated the economy, pushing job growth as high as 8 percent for a brief period, he noted. But by 1990, job growth in Alaska had returned to pre-spill levels. “It’s important to understand that the spill didn’t pull the state out of its recession because believing something big needs to happen to spur an economic recovery can be counterproductive if it shifts focus from the basic tasks that serve an economy well over the long term, including public safety; well-maintained roads, airports, docks, and other infrastructure; good schools, and other strong public institutions that make a state a place where people want to live,” Robinson added.

The road ahead

Given the examples of these other state recessions since 1961, “the next logical question might be whether Alaska is in the midst of a structural change or simply absorbing the shock from a temporary downturn in oil prices and related activity,” Robinson asked.

Robinson is cautiously optimistic about the oil industry. With global oil demand expected to rise over the next 25 years, and North Slope operators having recently announced large oil discoveries, “Alaska’s oil industry doesn’t appear to be on the same path as Oregon’s timber industry in the 1980s or Michigan’s manufacturing industry in the 2000s.”

But while many states depend heavily on a single industry, no state relies as heavily on natural resources and mining as Alaska. Some 30 percent of the state gross domestic product came from the sector in 2014, a year when oil prices were lower than usual.

By comparison, the sector contributed 24 percent of GDP in North Dakota and 29 percent of GDP in Wyoming in 2014, and only 9 percent in Louisiana and 15 percent in Texas.

As such, the Alaska oil industry impacts the state economy in two ways - directly through jobs and indirectly through revenues. While industry might not be in the early days of a structural change in Alaska, the state government is another story, he noted: “The days of relying mostly on oil-related revenue to pay the state’s bills are likely gone. The options going forward include some combination of using investment earnings from the state’s Permanent Fund, continuing to reduce the size of state government, implementing new taxes, or reducing the size of Permanent Fund Dividends. Each option has its own set of pros and cons, but the more important point is that the state’s economy must absorb a permanent change over the next few years. All other things being equal - and of course, they never are - that means our current recession could linger for a while.”

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