ISER: recession hitting downstream industries

A pair of new reports from the University of Alaska Anchorage indicate job losses are slowing but Alaska’s recession might not be over and current state spending levels might not be out of line when other factors are considered.

Alaska’s recession didn’t officially start until sometime in the latter half of 2015, but economic contraction in the state seemed almost inevitable when oil prices began falling about a year earlier in August 2014.

The lag was simply the time it took for oil companies and the State of Alaska to change spending habits and start budgeting for the new circumstances.

Alaska’s workforce peaked at about 353,100 workers in June 2015 and in the two subsequent years lost 9,250 jobs, or 2.6 percent of total employment, according to the UAA Institute of Social and Economic Research, or ISER.

More specifically, statewide employment declined by more than 6,800 jobs between June 2015 and June 2016 and again fell by more than 2,400 jobs in the following year to June 2017.

The June-to-June tracking helps reflect the impact of state budgets on the economy, as the state fiscal year and its corresponding budget appropriations start July 1.

The state Labor Department estimates Alaska lost about 3,600 jobs overall in 2017.

Unsurprisingly, the initial job losses were predominantly in the closely tied oil and gas, construction and professional and business service sectors. Alaska’s construction and professional service industries rely heavily on spending by North Slope oil companies to generate their work.

According to ISER, the natural resource and mining sector — oil and gas — lost 3,260 jobs from June 2015 to June 2016. The following year the industry lost 1,280 jobs.

Overall oil and gas employment was down 26 percent from 2014 to 2017.

Similarly, Alaska contractors shed about 1,650 jobs in the 12 months following June 2015 and another nearly 1,200 jobs the following year.

Professional and business service companies — largely engineering, architecture, law and other consulting firms — shrunk by 1,660 jobs in 2015-16 and 600 in 2016-17, ISER estimates.

The construction and professional service have been hit doubly hard during the recession as state capital spending mirrored the oil price decline. Alaska’s oil revenue-driven capital spending boom peaked in fiscal year 2013 at nearly $2.1 billion in unrestricted General Fund revenue.

The litany of projects that money supported also led to ample work for small construction and design firms. By 2016 state-funded capital projects had dried up with an unrestricted General Fund capital budget of just $127 million that year. And though it takes several years for capital appropriations to flow to the projects and through the economy, construction industry analysts say the state spending downturn is now being felt.

The job losses have been sharp, but are moderating, as ISER notes in the pragmatically titled study published Feb. 5, “What Do We Know to Date About the Alaska Recession and the Fiscal Crunch?”

However, study author, ISER Economist and Assistant UAA Professor Mouhcine Guettabi wrote that the relative health of other industries provides evidence the recession is maturing rather than outright ending.

“(The) accommodation and food services, leisure and hospitality and information (sectors) were still positive in 2016 but lost jobs in 2017, while retail trade lost twice as many jobs in 2017 as it did in 2016,” Guettabi wrote. “The fact that these few last sectors have lost jobs in 2017 means that as expected, the recession has spread to the sectors most sensitive to a household’s finances which have been affected due to the initial round of losses and the uncertainty of what is to come.”

The only sectors to add jobs both years were health care and local government. Health care jobs grew by 2,350 over the two-year period tracked by ISER.

Local government employment could represent “considerable future downside” if state community assistance and pass-through funding programs are targeted in additional state budget cuts, according to Guettabi.

The Anchorage Economic Development Corp. is projecting the consumer spending contraction will result in 2018 job losses in the leisure and hospitality and retail sectors worse than they were in 2017 for Anchorage. At the same time, AEDC is forecasting oil and gas employment in the city to be flat this year, with construction and professional and business services losing about 200 jobs each — far fewer than recent years.

AEDC expects the recession at least in Anchorage, which is a bellwether for the state, will peter out late this year or early in 2019 provided a solution to the state’s budget deficits is reached this year.

AEDC and numerous other Alaska economists have attributed the recession in large part to the state’s ongoing multibillion-dollar budget deficits. Budget cuts have led to a loss of about 1,700 state government jobs in the period measured by ISER, in addition to the private industry impacts of the capital budget reductions.

Lawmakers’ inability to reach agreement on how to close the last roughly $2.5 billion of the deficit has curtailed private investment as well because business leaders don’t want to take risks until they know what state taxes and other aspects of Alaska’s financial lands will look like for years to come, AEDC CEO Bill Popp and others insist.

To that end, Guettabi concludes that based on other studies and previous recessions the uncertainty surrounding the state government’s long-term budget situation is costing Alaska somewhere between $200 million and $600 million per year in private investment.

“The decline in spending due to policy uncertainty would indicate that waiting is not a costless option. In fact, the losses due to uncertainty are important and similar in magnitude to the ones the economy would experience due to a tax or further government cuts,” Guettabi wrote.

Government spending comparison

Critics of Alaska’s government spending routinely argue the state’s budget is way higher on a per-capita basis than the rest of the country. Budget defenders rebut that the critics are ignoring Alaska’s uniquely high cost of living, to which government is not immune, and providing services to more than 200 communities not accessible by road justifies most of the state’s expenses.

Which is it?

ISER’s brief report titled, “How Does Alaska’s Spending Compare?” published Feb. 9, concludes the answer is somewhere in between.

According to ISER, the state and local governments spent $19,946 per person in 2015. The national average at the time was $8,811. Without the unusual expenses of Permanent Fund dividends and oil tax credits — each unique to Alaska — the spending dropped to $16,363 per Alaskan.

However, when adjusted for cost of living differences, Alaska was down to $12,733 per person. That $12,733 is still well above the national average but seems to fall in line with other oil producing states with small, rural populations; Wyoming spent $14,564 and North Dakota was at $10,845 per resident on an adjusted basis.

The report notes that the state and local spending figures include federal grant money, which Alaska gets at twice the rate of the rest of the country, and is very difficult to parse out.

In 2016, Alaska received federal grants totaling $4,374 per person, compared to the national average of $2,067 per person.

Federal money accounted for $3.4 billion of the state’s total $10.3 billion 2018 fiscal year budget.

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Elwood Brehmer can be reached at [email protected].

Updated: 
02/14/2018 - 10:47am

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