150411 The Great Alaska Recession

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150411 The Great Alaska Recession

Transcript Of 150411 The Great Alaska Recession

Economic Consultants

264 NW Jefferson Place, Bend, OR 97701 319 Seward St. (suite 5), Juneau, AK 99801
Telephone (907) 957-6091 [email protected]

The Great Alaska Recession1
by Gregg Erickson and Milt Barker
April 12, 2015
How it began – How it differs from past Alaska recessions – Why it’s shaping up to be the worst economic disaster since statehood – Why the economic crisis trumps the fiscal crisis as the biggest challenge facing Alaska – And what can be done to lessen
the economic pain for Alaska households and businesses.

1 This analysis was supported under contract 15-14M with the Alaska Mental Health Trust Authority. Conclusions are solely those of Erickson & Associates.

Executive summary ............................................................................ 3 1. The beginning................................................................................. 4 2. Other forecasts............................................................................... 5 3. Other recessions............................................................................. 6
3-­‐A. The 1977 Post-­‐Pipeline Recession ..................................................................7 3-­‐B. The 1985-­‐88 State Spending Recession ...........................................................7 3-­‐C. The 2009 Spillover Recession...........................................................................8
4. Deconstructing the storm ............................................................... 8
4-­‐A. The oil price slide .............................................................................................8 4-A-1. Influence of oil prices on oil industry spending 4-A-2. Influence of oil price slide on state spending
4-­‐B. Strengthening dollar, weakening £, €, ¥, ₩, … ..............................................11 4-­‐C. Federal job losses, declining grants, shrinking military..................................13
4-C-1. Federal jobs 4-C-2. State revenue from the federal government 4-C-3. Downsizing Alaska’s military
5. Four principles.............................................................................. 18
5-­‐A. Focus on the economy ...................................................................................18 5-­‐B. Maximize the economic bang-­‐for-­‐the-­‐buck in state spending.......................18 5-­‐C. Maximize federal dollars................................................................................19 5-­‐D. Plan for an Alaska with a fewer people .........................................................19
6. Medicaid expansion and the great recession ................................ 20

Executive summary
A major regional recession began for Alaska in the summer of 2014. Alaska has experienced three previous recessions since it became a state. In contrast to prior recessions, the present Alaska downturn is being driven by a fundamental decline in the value of the region’s principal export. In that respect it differs from all previous Alaska recessions.
The current recession is likely be deep and long for two reasons:
• Alaska’s economy is so dependent on its number-one export that unless oil prices recover, this recession is likely to be proportionately worse, and last proportionately longer than the typical regional downturn.
• In regional recessions prices for labor, buildings, and real estate tend to decline. That boosts the less important export sectors and helps them grow. In Alaska the less important export sectors – seafood, mineral mining, and federal spending – are threatened or already declining.
Factors driving the recession are the effects of declining oil prices on oil industry outlays, the effect of the oil price slide on state spending, the negative effect of the strengthening dollar on Alaska exports, the negative effect of federal job reductions, the negative effect of continued local government job losses, and the potential for a shrinking Alaska military. Because of these factors, unless oil prices rebound 4,000 or more Alaska jobs will disappear by September, and a total of 20,000 or more will be lost by September 2016.
There is nothing the state government can do that will rescue Alaska from the coming recession, but the state can mitigate the economic distress, soften the hard landing and prepare the economy for the recovery that must eventually ensue by following four principles:
• Focus on the economy. Reducing spending makes the economic crisis worse. How Alaska will finance its state government is an important issue, and husbanding the state’s savings remains an important objective, but in the near term, fashioning a softer landing for the economy may be more important.
• Maximize the economic bang-for-the-buck in state spending. Adjustments to capital project spending have been the state’s traditional approach for managing the ups and downs in its oil revenue. That remains a sensible approach. Medicaid expansion (with negative own-source state outlays in the first year) is the ultimate example.
• Maximize federal dollars. Federal dollars coming to Alaska bring jobs and economic activity. Medicaid expansion is again an example.
• Plan for an Alaska with a fewer people. Unless oil prices make a dramatic recovery the state’s population and employment will shrink. Planning for this

eventuality can speed the return to growth and lay the groundwork for a more robust recovery.

1. The beginning
What is now recognized as a major regional recession began for Alaska in the summer of 2014. According to the Census of Employment and Wages, in July of 2014 Alaska counted 1,241 more jobs than in July a year earlier. The Alaska economy was still expanding. The next month, in August, the job count was 2,991 less than a year earlier. Alaska’s economic contraction had begun.2
Figure 1.1

337,000% 336,500% 336,000% 335,500% 335,000% 334,500% 334,000% 333,500% 333,000% 332,500% 332,000%

Recession$Begins$ July$2014$

1+Jul+12% 1+Oct+12% 1+Jan
+13% 1+Apr+13% 1+Jul+13% 1+Oct+13% 1+Jan
+14% 1+Apr+14% 1+Jul+14% 1+Oct+14%

Data$source:$Current$Employment$Sta4s4cs$ Showing$the$12;month$trailing$average$$
Source: Current Employment Statistics, showing the 12-month trailing average
2 These data are from the Quarterly Census of Employment and Wages (QCEW) published every quarter by the Alaska Dept. of Labor and Workforce Development (AKDOL) under a program overseen by the U.S. Bureau of Labor Statistics (BLS). The most recent data are through September 2014. Data through December 2014 are scheduled for release in June.

More up-to-date (but less reliable) data from a different source, Current Employment Statistics are shown on the Figure 1-1 above. They confirm the start of the recession.3
The principal initial cause of the recession has been the loss of government jobs – state, local and federal. By August, governments together had shed 3,474 jobs compared with the same month one year earlier. The largest part of this loss, 2,790 jobs, was in the local government sector.4
Federal and local government employment has been shrinking since 2011. Until this summer, however, growth in state government offset some of those losses. By August the state sector had also slipped into contraction, losing 203 jobs compared with a year earlier.5 The loss of government positions was partially offset by growth in the private sector, which added 483 jobs in August, also compared with a year earlier. By September, however, the engine of private sector growth also ran out of steam, posting a net gain of only 31 private jobs.
In summary, two factors brought on the recession:
(1) The rate of government job losses got faster as state government shifted from adding jobs to getting rid of jobs.
(2) The rate of job growth in the private sector slowed.
Declining government spending was behind the first factor, and likely played a role in the second.
2. Other forecasts
In most years since 1988 optimism has been the watchword of Alaska economists. Adjectives like “vibrant” and “buoyant” sprinkled their annual forecasts. Now there are new phrases like “pause,” “flattened growth” and “plateau phase.” As a former Anchorage Daily News editor long ago remarked, “ ‘plateau phase’ is a euphemism for hard times.”
Alaska’s mainstream economic forecasters agree that the job growth the state has enjoyed since 2009 is over. Marcus Hartley, chairman and principal economist at Anchorage consulting firm Northern Economics, says, “The Alaska economy is
3 Current Employment Statistics are published monthly by AKDOL under a program also overseen by BLS. Because the data are from a sample rather than a census, they are less reliable and subject to more statistical noise. The 12-month averaging procedure used to build this chart suppresses some of that noise as well as seasonal ups and downs.
4 A key factor in the loss of local government jobs is the declining real value of state appropriations for education aid and community revenue sharing. See “Inflation Adjusting and Offsetting the Loss of Selected Education Funding in Ch. 15 SLA 2014,” Legislative Research Service Report 15.266, memorandum by Chuck Burnham, Jan. 23, 2013; see also “Base Student Allocation Compared to the Rate of Inflation,” Legislative Research Service Report 13.151, memorandum by Robert Withington, Jan. 23, 2013.
5 “Employment Forecast for 2015,” by Caroline Schultz, in Alaska Economic Trends (published by AKDOL), January 2015. The article includes a useful history of Alaska government employment in the 2004 to 2014 period.

transitioning to recession.” He predicts that the first half of 2015 will appear, “pretty normal, … but the pain will hit around mid-year.” He predicts a net loss of 2050 jobs in 2015.6
The Alaska Dept. of Labor and Workforce Development (AKDOL), also in January, proffered a no-growth forecast for 2015. “Alaska is not expected to gain jobs in 2015, as the state faces downward pressure from low oil prices and tightened government budgets.”7 The department’s forecaster, who did not have the benefit of the third-quarter QCEW data now available, thought private job growth would continue to offset government job losses.8
Neither the Northern Economics nor the AKDOL forecast suggest cause for alarm. The 2050 jobs Hartley expects the economy to shed in 2015 amounts to only 0.6 percent of all jobs.9
Is the situation serious? “Yes,” answers Hartley, of Northern Economics. “Time for panic? No! … 2015 will be a challenge, [and] 2016 more so, but this is not 1988 (yet).”
3. Other recessions
Hartley’s “1988” reference is to the recession that ended in that year, the worst recession in Alaska’s history as a state. Recessions in Alaska are rare: there were only four years in the 54 years since statehood that employment did not grow. The no-growth years encompassed three recessions:
• The 1977 the Post-Pipeline Recession,
• The 1985-88 State Spending Recession,
• The 2009 spillover recession from the Great Recession that hit the U.S. and world in 2008-2009.
Regional recessions can have many causes, but most result from regional specialization, as in the manufacture of airplanes or the production of corn, combined with declining worldwide demand for the specialized product or service. The Seattle area specialized in the manufacture of large commercial jet transport aircraft. In 1970, when demand for that product ebbed, Seattle lost 70,000 jobs in the space of 19 months.10 In
6 “Alaska Economic Outlook 2015,” Marcus Hartley (Northern Economics, Inc.), a presentation with World Trade Center Alaska, January 27, 2015.
7 “Employment Forecast for 2015,” supra, footnote 7. 8 Anchorage-based Northrim Bank, Inc., has published a 2015 state economic forecast. Mark Edwards senior vice-president and bank economist, writes: “Some segments like government, construction and professional services are likely to shrink, but these losses will be offset by gains in tourism, health care, and retail. See “Alaska Economic Update,” circa Mar. 2015. http://alaskanomics.typepad.com/files/pagelayout-economic-report-update-3b-bp.pdf accessed Apr. 7, 2015. 9 In a note appended to its forecast, AKDOL describes the department’s forecasting philosophy. “These forecasts are based on the assumption that the dynamic processes governing employment demand in specific industries will not change dramatically, and they don’t attempt to forecast any economic catastrophies (sic) or booms.” Erickson & Associates believe the insights that make a forecast useful include those that warn of surprises – especially booms and catastrophes. 10 Seattle: Past to Present, by Roger Sale, University of Washington Press, 1976.

the mid-1980s declining agricultural prices triggered a regional recession encompassing much of the Midwest. 11
Hartley’s reference to 1988 implies that the current recession is more likely to resemble the mild reversal experienced in 2009. He could be right, but only if oil prices rebound to the plus $90 per barrel range experienced in 2008 and 2011-2013.
The current Alaska recession started on a path similar to the 1986-87 downturn, but has morphed into a regional recession similar to that typically experienced elsewhere. The following sections summarize the factors that caused the three prior recessions.
3-­‐A. The 1977 Post-­‐Pipeline Recession
Alaska’s 1977 recession followed demobilization of the workforce that built the trans-Alaska oil pipeline. The winding down of a world-scale construction project necessarily meant large job losses. Those losses had nothing to do with a fall in the value of oil, seafood, tourist experiences, or the other things Alaska sold (and still sells) to earn its way in the world.
3-­‐B. The 1985-­‐88 State Spending Recession
This recession was rooted in the extraordinary growth of state capital spending in the early 1980s, and the housing and heavy construction bubble the state created. When state spending stopped growing in July 1985, the bubble popped. By the following April the state was losing 1,660 jobs per month, eventually causing the loss of nearly one in every ten jobs.12
Declining oil prices played only a small role. Oil prices started to slide in December 1985, three months after the recession began, and two years after construction employment began to shrink. Speaking in 1988, here is how economist Scott Goldsmith explained the 1985-88 recession:
It is critically important to recognize that we brought this recession on ourselves, and it was not primarily the result of weakness in the markets for the goods and services that Alaska sells to the rest of the world. This fact distinguishes our recession from those that have occurred in other regional economies.13
11 The Recession, The Real Estate Crash, and Alaska’s Economic Prospects, by Gregg Erickson, published by the Alaska Division of Policy, Office of the Governor, March 1988. See also “Economy Rebounds from Recession,” by John Boucher, in Alaska Economic Trends (published by AKDOL), March 1989; Erickson’s June 1982 essay, “Managing the Collapse of the Alaska Economy;” and “After the Boom: An examination of Alaska’s economic prospects,” by Erickson and Arlon Tussing, in the Winter 1984 issue of Alaska Public Affairs Journal.
12 “Economy Rebounds from Recession,” by John Boucher, in Alaska Economic Trends (published by AKDOL), March 1989.
13 “Remarks to the Alaska Policy Forum,” Scott Goldsmith, January 7, 1988.

3-­‐C. The 2009 Spillover Recession
Alaska’s 2009 recession was likewise different from the typical regional downturn. It reflected the drying up of credit and other spillover effects from the national recession of 2008-2009.
4. Deconstructing the storm
Up to now no Alaska recession was caused by a decline in the value of what Alaska produces and sells to the rest of the world. The present Alaska downturn is now a classic regional recession, driven by that fundamental decline in the value of the region’s principal export. However, Alaska’s current situation differs from the regional model in two unfortunate ways:
• Alaska’s economy is so dependent on its number-one export that unless oil prices recover, its recession is likely to be proportionately worse, and last proportionately longer.
• In regional recessions prices for labor, buildings, and real estate tend to decline. That boosts the less important export sectors and helps them grow.14 In Alaska the less important sectors – seafood, mineral mining, and federal spending – are threatened or already declining.
In the following subsections we analyze the individual elements of Alaska’s perfect economic storm.
4-­‐A. The oil price slide
The Alaska economy faces converging threats to the way Alaska and Alaskans earn their way in the world, but of these, the oil price collapse is the most serious. University of Alaska economist Scott Goldsmith estimates that the petroleum industry accounts for half of all Alaska jobs:
• State spending of oil revenue – 31 percent • Spinoff jobs from oil wealth – 16 percent • Oil industry jobs – 3 percent.15
With this dependence on oil the 52 percent drop in world oil prices since July naturally challenges the stability of the Alaska economy. If the low prices persist through FY 17, the effects are likely to surpass those in any previous Alaska recession.
4-­‐A-­‐1. Influence of oil prices on oil industry spending
Although petroleum companies directly generate 3 percent of Alaska’s jobs, other companies serving the industry account for 16 percent of Alaska employment. Low oil
14 This was a key factor in the recovery from the 1985-88 recession, as described in “Recession’s Dividends,” and “The Real Estate Crash,” p. 7-10, in Erickson’s 1988 analysis, The Recession, The Real Estate Crash, and Alaska’s Economic Prospects (see footnote 11).
15 The Alaska Economy: How does it Work, by Scott Goldsmith, Feb. 1, 2012.

prices are already eroding jobs in this second category as oil producers and would-be producers scale back contracts with service companies and other contractors.16
Oil industry officials insist that “sanctioned” projects are moving forward regardless of oil price changes. Trond-Erik Johansen, president of Conoco-Phillips Alaska Inc. told the audience at the Resources Development Council’s annual meeting in December that the firm’s Alaska projects would remain on track despite reduced company capital spending elsewhere in the world; analysis by Anchorage-based Petroleum News of other reports by the parent company suggest some Alaska projects are being delayed.17
With oil prices at their current level the companies’ Alaska operations are hemorrhaging cash. In December the Alaska Dept. of Revenue (DOR) predicted that the U.S. West Coast price of Alaska crude in FY 16 would average $66.03 per barrel. Assuming that price and the department’s estimates of companies’ capital and operating spending, the industry’s Alaska operations in FY 16 would lose $320 million ($1.47 per barrel), figured on a cash basis.18
The price of Alaska crude at the end of March was $14 below the DOR forecast, intensifying Alaska oil producers’ incentive to do everything they can to reduce Alaska outlays. News reports suggest that is what they are doing.19
Much of the industry’s spending is for sustaining production from existing fields, so cutbacks are likely to foretell further and possibly accelerating production declines.
Alaska isn’t the only place where the collapse of oil prices threatens the regional economy. In December JPMorgan Chief Economist Michael Feroli analyzed the impact of lower oil prices on the Texas economy and found it not good. “We think Texas will, at the least, have a rough 2015 ahead, and is at risk of slipping into a regional recession.” He said the consequences could include job losses and a sharp pullback in home prices in big Texas cities.20 With Alaska’s much greater regional economic concentration in producing oil, the job losses and pullback in Alaska home prices is likely to be more severe than in Texas.
4-­‐A-­‐2. Influence of oil price slide on state spending
Fortunately, propagation of the oil price collapse to state spending, and through spending to lost jobs, will be delayed. Substantial rainy-day reserves relieve legislators of
16 “Dozens of North Slope workers called for early-morning meeting, laid off,” by Austin Baird, KTUU-Anchorage, Mar. 17, 2015.
17 “Alaska spending on track; global spending down 20% on reduced unconventional,” by Eric Lidji, Petroleum News, Dec. 14, 2014.
18 “Industry cash flow to fall faster than state revenue,” Alaska Budget Report (special bulletin), Feb. 10, 2015, and Revenue Sources Book: Fall 2014, Alaska Dept. of Revenue, Dec. 2014. DOR revised its forecast on Apr. 3, 2015, but the revision did not update the industry spending forecast or its FY 16 price forecast, so does not change the loss projection.
19 “Layoffs confirmed: ConocoPhillips reduces workforce in Alaska,” KTVA-Anchorage, April 1, 2015.
20 “Is the oil crash about to snuff out the ‘Texas miracle’?” by Michael Hiltzik, blog post, The Los Angeles Times, Dec. 22, 2015; also “JPMorgan: Texas at risk of recession next year,” by Collin Eaton, blog post, The Houston Chronicle, Dec. 19, 2014.

immediate pressure to cut the FY 15 budget they approved last session, so state outlays are unlikely to be affected at all until after June 30, the end of the fiscal year.21 But state officials, including legislators, are concerned about quickly burning through the reserves if they don’t reduce spending in FY 16.
Alaska spends more per capita on capital projects than any other state, and 2.5 times the average state.22 With the capital spending so high, Alaska has been able to use capital outlays as its principal adjustment tool for dealing with wide annual variations in its oil revenue. In years of low revenue, capital budgets were reduced, and vice-versa. That pattern appears to be continuing: Gov. Bill Walker’s proposed FY 16 capital spending plan would appropriate $544 million less than the $1.9 billion authorized in FY 15.23
Researchers suggest that would cut about 3,600 annual jobs.24 Capital projects are typically built over several years, however, so the immediate impact of this reduction on jobs is likely to be limited. As of last September the state had $10.6 billion unspent in its capital projects pipeline.25
To the extent that legislators cut the FY 16 operating budget, whether by actual reductions or – as they have in the past – by not increasing appropriations to offset inflation, most of those cuts are likely to have virtually immediate effects, showing up by the end of this summer as a direct and adverse impact on employment.
For example, the governor proposed a $96.1 million (8.5 percent) reduction in local school aid. Majority legislators in both House and Senate appear to favor the proposal (some want deeper cuts). If the $96.1 million reduction were approved, its initial signal in the jobs data would show up in the September 2015 CES jobs report. That report would likely show the loss of about 318 local government jobs, reflecting school districts’ decisions to hire fewer workers at the beginning of the instructional year. Within 18 months an additional 548 jobs would be lost from other sectors, for a total loss of 866 jobs due to the $96.1 million spending cut.26
21 In December Gov. Bill Walker froze spending on planning for six large capital projects. See “Administrative Order No. 271,” State of Alaska, Office of the Governor, December 26 2014. The freeze is unlikely to affect Alaska outlays until after the close of FY 15.
22 “Differences in State and Local Government Public Capital Expenditure Before, During, and After the Great Recession,” by Ronald C. Fisher and Robert W. Wassmer, paper presented to the Western Economic Association, Jun. 24, 2013.
23 “State of Alaska Fiscal Summary—FY 15 and FY 16,” Legislative Finance Division, Feb. 20, 2015.
24 “Estimated number of jobs created from capital spending from FY 2007 through FY 2014,” by Susan Haymes, Alaska Legislative Research Services Report No. 14.049.
25 Statewide Capital Appropriation Status Summary, Alaska Office of Management & Budget, Feb. 2, 2015. The report shows $5.2 billion encumbered, $5.5 billion unencumbered. Also see 2015 Alaska’s Construction Spending Forecast, by Scott Goldsmith and Pamela Cravez for the Associated General Contractors of Alaska and the Construction Industry Progress Fund, Jan. 20, 2015.
26 We used the coefficients that the Institute of Social, Economic and Government Research (ISER) developed using MIG, Inc.’s IMPLAN econometric model. See “Preliminary analysis of impacts of budget cuts on the Alaska Economy,” memorandum to Rep. Mark Neuman from Gunnar Knapp, director UAA Institute of Social, Economic and Government Research (ISER), Feb. 2, 2015.
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