Alaska’s 2012 Economic Forecast
National insecurity, belt-tightening makes leaders cautious
What will the Alaska economy look like in 2012? According to a number of business and government leaders, it will look relatively flat with the potential for a few bright spots. If, however, the State moves ahead with one or more of the big projects currently on the horizon, such as the Susitna-Watana Hydroelectric Project, the entire prospect for the economy could begin a decided upsweep and encourage both businesses and residents. Alaska Business Monthly asked a number of business sector leaders for their take on the economy in 2012, here’s what they had to say.
Steven Hatter, deputy commissioner for Aviation in the Alaska Department of Transportation & Public Facilities, said two big national issues face Alaska’s airports: bypass mail and essential air service. Both programs are currently facing serious challenges to long-term federal support.
“In this position, I’ve seen how critical a lifeline aviation is to Alaska,” he said. “It’s a $3.5 billion industry, and 10 percent of the jobs statewide are aviation related. As for our international airports, Ted Stevens in Anchorage is number five in the world for cargo throughput.”
Alaska needs to be prepared to see fewer federal dollars coming in – through the U.S. Department of Transportation and Federal Aviation Administration. Hatter said nothing is firm yet, but it’s a strong possibility given the nation’s debt crisis.
“We need to spend what we do get as wisely as we can,” he added. He went on to say his office is focused on making certain the State is not deferring maintenance to the point an airport would need new infrastructure before it really needs it. In the FY 2012 aviation plan funded by the FAA, the State has netted “about what we averaged over the last three years – at $205 million for capital improvements throughout the state,” Hatter said. •••
The Alaska Air Carriers Association echoed Hatter’s concerns about bypass mail and essential air service. Joy Journeay, the association’s executive director, said the largest potential threat to air carriers statewide is the bypass mail issue. The U.S. Postal Service is the primary beneficiary, she said, “due to the reduced cost in handling parcel post that is directly inducted by the carrier and directly delivered to the customer.”
In 2009, Journeay said, the aviation community saw a significant drop in tourism and recreational activities, but cargo and basic passenger travel statistics were slightly less affected by the economy. “Passenger service is a little more stable because aviation transport is the only means of access to 82 percent of Alaska’s communities,” she said.
Journeay added that her organization is working diligently with all of Alaska’s delegation and the governor on parcel post, essential air service and safety issues. •••
ALASKA NATIVE CORPORATIONS
Margie Brown, president and CEO for Cook Inlet Region Inc., said there are some common issues facing all the Native corporations. One of those is the role of government in encouraging private development of natural resources. “We’d like to have a consistent timeline for permitting and know what hurdles will have to be overcome to move a project forward,” she said.
Another major issue facing most corporations is the continuing challenge to the SBA 8(a) program. Although CIRI isn’t heavily dependent on this program, several other corporations are.
One of the biggest issues facing the state is the declining oil flow through the pipeline. “At CIRI, we’re watching the state’s economic conditions carefully. We need a strong and robust economy for our current investments and for our shareholders,” she said. “We know that smaller companies have been doing exploration, but we need the majors to stay and to work on their assets.
Brown added that a significant part of her job, and that of all her counterparts, is to be concerned about the long-term. “The calamity of the financial markets showed me we aren’t immune in Alaska. It’s critical that we diversify our portfolios.” To illustrate, Brown pointed to NANA’s acquisition of an oil services company that works in the Gulf of Mexico.
“We’re making investments outside of Alaska,” she said. “It’s one way to diversify and protect ourselves against risk. It also shows that private capital goes where private capital is wanted. It’s worrisome that we have private capital dollars leak out of Alaska.” •••
BANKING & FINANCIAL SERVICES
Alaska banker Doug Longacre, a senior vice president at First National Bank Alaska, said he expects to see the economy stay pretty flat unless one of the big projects comes through. “I think banks are a good barometer of the economy, and it’s been fairly flat. A lot of people have been taking a ‘wait-and-see attitude,’” he added.
“We do have an extraordinary interest-rate environment, one the nation and world hasn’t dealt with before,” Longacre said. “First National had a good year in 2011, but we’re concerned going forward because there is so much relying on the petroleum industry in Alaska. We have a unique economy here, and we need to pay attention to what the drivers are.”
One of the biggest issues facing banks today, he said, are the regulations coming from the federal government. “We’re still trying to be profitable for our shareholders,” he said, “but it’s costly to comply with all the regulations handed down.”
With fewer federal dollars coming into the state, Longacre encouraged Alaskans to be concerned about the decline of oil flowing through the pipeline. “Where would we be able to replace the revenues oil brings? Alaskans do have control of the issue through our Legislature, and we do have to find new sources of oil.” •••
Associated General Contractors of Alaska’s Executive Director John MacKinnon said 2011 was a good year for the construction industry. 2012, he says, will have its ups in some sectors and downs in others, but will likely average out to be a relatively flat year.
“Point Thompson, starting next fall, should mean $300 million in access pads and other facilities,” he said. “On the other side of the market, we’re probably going to see across-the-board cuts in federal spending. In Alaska, we have a State administration and Legislature that are pro economy. We’ll all have to tighten our belts on the federal side, so we need to take our own initiative as a State and do what we need to do here.”
MacKinnon said he gets his optimism from the go-ahead attitude of the elected leaders, whether it is the next phase of investment in Susitna hydro or a gas line to tidewater for in-state use and export. “We need that kind of mega thinking,” he said. “I also believe the State should be looking long-range at three major power lines – one to the Seward Peninsula, one from Healy southwest to Bethel, and one from Cook Inlet down the Alaska Peninsula.” “Those,” he added, “would require rudimentary roads to construct and maintain, and eliminate two of the biggest impediments to development in this state – energy and transportation.”
As for upcoming trends, MacKinnon said he is concerned about federal spending but is optimistic about the mining industry and private investment projects. •••
CONSTRUCTION - U.S. Army Corps of Engineers - Alaska District
Federal government cutbacks are facing the U.S. Army Corps of Engineers and Alaska is no exception. Larry McCallister, the Alaska Corps’ director for Programs and Project Management, said FY 2011 saw about $550 million worth of projects around the state – including military, civil and environmental cleanup projects. In 2012, McCallister said the Corps is looking at about a $460 million program.
At the end of November, McCallister said the Corps was still planning on a robust year in FY 2013. “But we’ve been told that a good portion of the 2013 program across the U.S. will be cut. Right now we’re planning on awarding $370 million in projects for military construction but there isn’t an approved Army budget yet. We suspect Alaska may only get $200 million to $250 million.”
Of the money the Corps spends in Alaska, McCallister said about 60 percent goes to military projects and about 40 percent to civil and environmental projects. Though the federal budget is still up in the air, “we still have probably $100 million on environmental work and $50 million to $80 million in work for other agencies.
“The military construction program is in a big flux right now, but we expect to see the environmental program grow a little bit,” he said.
As far as a long-term outlook for the Corps of Engineers, McCallister takes a philosophical approach: “Congress comes, Congress goes. Priorities change.” •••
The employment situation is looking better here than in most other places, said Dan Robinson, chief of Research and Analysis for the State’s Department of Labor. “We’re one of a small number of states with a very small job-loss record for last year,” he added.
Jobs have been steadily growing by small increments since 2009, Robinson said, “and it looks like 2012 will probably follow the same pattern. Preliminary numbers for 2011, through September, showed a growth of 3,600 jobs, a little less than 1 percent. By industry, health care continues to be a source of growth – it’s roughly up 900 jobs from 2010. Government has been down a little and retail trade hasn’t grown much in the last few years. Oil and gas is up a little, probably closer to flat, and hospitality is up a little.”
It’s still early to say much about future trends in the job market, he said. “Things that matter are oil revenue and federal spending. Both are enormously important to Alaska; they’re the two biggest drivers.”
November unemployment for Alaska stood at 7.6 percent, at the same time as the national figure stood at 9.1 percent. Washington state’s unemployment was at 9.1 percent; California’s at 12 percent; and Oregon’s at 9.6 percent, Robinson said. “Normally, our figure is 1 or 2 percent above the nation’s, but in 2008, the U.S. rate went higher than Alaska’s and has stayed there,” he added. “Our resource-based economy has made a big difference for us.”•••
“In Alaska’s fisheries we have the benefit of two certification bodies – State and federal, so the health of the resource is good and well managed,” said Glenn Reed, president of the Pacific Seafood Processors Association. Alaska’s salmon fishery was mixed in 2011, but overall it was a good year, he says. There was a “dramatic reduction” in red crab fisheries in 2011, and 2012 looks uncertain at this point, Reed said.
“The red crab fishery may not open in 2012, or there may be a reduction in harvest,” he said. “We won’t know for several months. The opilio crab fishery saw an increase in 2011, but, again, we don’t know next year’s limits. The Bering Sea Pollock fishery will trend down for allowable catch – it looks like a 12 to 14 percent reduction. As for Pollock in the Gulf of Alaska, the trend will be up. The trend for cod will be up in both the Bering Sea and the Gulf. Other groundfish species are generally trending about flat or a little up.”
A significant issue facing the fisheries’ industry is the National Ocean Policy initiative coming out of Washington, D.C., Reed noted. It would centralize fisheries’ management in D.C. “We’ve been actively opposing this effort,” he said. We must ensure that we don’t end up with folks in D.C. making decisions on fisheries around the country. The regional folks know their fisheries better.” •••
Predictions for the health care industry in 2012, as Bruce Lamoureux, senior chief executive of Providence Health and Services Alaska saw them, call for more challenges. “The precipitating factors are the economics of health care and the continued escalation of costs,” he said. “Many employers and individual consumers choose to drop coverage because of the expense. That leads to patients delaying care or not seeking it at all until they face an emergency.”
“Health care jobs will continue to grow. We know the number of Medicare-aged people in Alaska is expected to triple in the next 20 years. That, alone, means more health care will be needed,” Lamoureux said.
Things to watch for in 2012, he added, are what, if anything, materializes from the Affordable Care Act. “A second issue is that each passing day, we have a society approaching a breaking point for lack of affordability.”
The third issue Lamoureux says he is watching is incentives and penalties applied to health care deliverance. The Centers for Medicare and Medicaid are preparing to launch value-based purchasing, he said, and hospitals that do not perform at a defined threshold are going to see reduction in their Medicare reimbursement.
“Overall, I’d say the lack of affordability is unacceptable and outrageous, and if we don’t take care of this ourselves, we’ll suffer the consequence of ignoring the problem. It’s not just physicians who are part of the problem, or hospitals. It’s not just patients, it’s not just employers – we all have a stake in it.” •••
Steve Borell, former executive director of the Alaska Miners Association – he resigned in December – said he sees continued, steady growth for the mining industry. “The driving force right now is the high price for metals,” he added. There are seven major mines in Alaska, and they will continue to try to improve their productivity and lower their costs. “I don’t know of any expansions planned by the majors,” he said.
“As for coal, about 9 percent of the state has coal under it – more coal than the rest of the country put together,” Borell said. “I expect Chuitna will get its supplemental environmental impact statement this year, and Wishbone Hill is waiting to determine final feasibility and get its permit renewals. It looks promising.”
Borell said he sees a trend of continuing exploration as long as metal prices stay high and global markets are steady.
A major concern, he said, is the future of the nation. “We are seeing the Environmental Protection Agency literally out of control. At the top of the agency now, they have people who have radical agendas and affect all aspects of mining, oil and gas, timber, farming – across the board”
Mining in Alaska, however, has a bright future, Borell said. Alaska is effectively unexplored. “We’ve hardly touched the coal and industrial minerals here.” •••
OIL & GAS
The Alaska Oil and Gas Association’s new executive director, Kara Moriarty, said the same issue that faced oil companies last year will face them this year. “Changing the Alaska tax structure,” she said. “We have the highest production taxes in the nation, so the investment climate is not conducive to the kind of capital spending required to get more oil into the pipeline.”
“Cook Inlet is definitely in changing times,” she said. “Chevron is selling assets and leaving the inlet, and we are optimistic that the new owners, Hilcorp, will find success in Cook Inlet. We’re seeing several new faces in the inlet and hoping for more production.”
As for the three majors on the North Slope, Moriarty said Exxon is trying to develop Point Thomson. “They’re about a year behind because of federal permitting issues,” she added. BP is focused on its infrastructure upkeep and hoping for an environment favorable to develop heavy, viscous oil.
“Unfortunately, the biggest trend we see in Alaska is the continuing decline of oil in the pipeline. Over the last three years, production has declined more than 20 percent. There’s been no immediate budget impact to the State because of high oil prices,” Moriarty said, “but until we see a change in the culture here, we’re not going to see the types of development that can stem that decline.”
ANWR also needs to move into the development stages, Moriarty said, and if there’s a significant find offshore in 2012, “that’s another generation of oil production. It means jobs and money for Alaska.” •••
REAL ESTATE - Commercial
There will be a slight uptick in commercial real estate in 2012, according to Chris Stephens, an associate broker and partner in Bond, Stephens & Johnson Inc. “Real estate is a somewhat lagging indicator, but generally goes with the economy,” Stephens said. “Our economy is showing some slight growth, so commercial real estate is following that trend.”
Growth in Alaska, he added, is significant considering all the bad news in the Lower 48, “and we’re impacted somewhat by national companies that are holding back a bit on business. There is a spec office building under construction on Gamble between Northern Lights Boulevard and Fireweed Lane.”
Plus, Stephens says, JL Properties will break ground this spring on a new class A office building. These two create 103,000 square feet of new office space. The vacancy rate in new buildings is very low right now. There are three new office buildings – 188 West Northern Lights, the JL Tower at 36th Avenue and C Street and Centerpoint West – those last two building have only one floor available each. 188 WNL has about four or five available floors.
“Obviously, any major construction projects – a gas line or if Shell is successful in the Chukchi Sea – will mean additional growth. With the market as tight as it already is, I think it will put additional pressure on space and raise prices,” Stephens said. •••
REAL ESTATE - Residential
Helen Jarratt, president of the Alaska Association of Realtors, said she expects 2012 to be a stable year, unless something happens with a gas line or oil exploration.
“We’re in a buyers’ market now, right on the cusp of stabilizing,” she said.
“Foreclosures in Alaska are less than 2 percent and we’re number two in the country for the lowest number of foreclosures. When we had the crash in the 1980s, we had about 5,000 homes in foreclosures in the Anchorage-Eagle River area. This time, however, our lenders held a tighter rein on their lending so we don’t have the standing inventory. What we had is pretty well gone now, so we’re beginning to see more housing starts.”
Jarratt added that there are very few homes going up because of stricter lending regulations. “Right now, there’s a proposal in Congress that calls for conventional loans requiring a minimum of 20 percent down payment and no more than 28 percent of your income going to your housing loan payment.”
Another obstacle to homebuyers now is consumer confidence, Jarratt said. “We don’t know where we’re going. We don’t know what changes Congress will make. We don’t know if any of the big projects in Alaska will materialize. There’s such a lot of uncertainty. However, interest rates are at historic lows – we haven’t seen such low interest rates since the 1950s. “ •••
The economic prognosis for the telecommunications industry is continued stability over the next six to 12 months, said Anand Vadapalli, president and CEO of Alaska Communications.
“We see a continued increase in the amount of data consumed by homes and businesses in our state, from video applications to gaming, to email and other business data-intensive applications,” Vadapalli said. “This will be a continued trend over the next several years. The other main trend is the increasing use of mobile devices – as customers expect to be able to access their data and content anywhere and at any time.”
Verizon Wireless has indicated it may be entering the Alaska market and the FCC recently approved an order making changes to the Universal Service Fund, a regulatory program that has been in place for decades. Both will affect the telecommunications industry in the state. “Over the long-term, however, we see the industry in Alaska adjusting to these two developments, in particular, our investment strategy given the FCC order,” Vadapalli said.
Overall, Vadapalli said Alaska Communications sees opportunities ahead with a growing market as customers consume more data. •••
Owen Graham, executive director of the Alaska Forest Association, said the Interior timber industry had a good year in 2011 and is growing slowly. He added that there are a few small mills on the Kenai Peninsula and around Anchorage, but they’re struggling for timber.
“The State has a lot of timber, but the mills are having trouble gaining access to it,” he said. In Southeast, he added, they logged from available timber. “The biggest thing is timber supply. The (U.S.) Forest and Park services own 94 percent of the land in Southeast and haven’t put much of it up for timber sales. The mills are all starved out. We’re working with the State to encourage the federal government to speed up the NEPA (National Environmental Policy Act) process to keep the wood coming,” he said. “The government says the NEPA process takes three years, but they’ve been averaging probably seven years.”
The market forecast is good, Graham added, but the mills’ access to timber is a production problem. “This year, we’re anticipating about a 20 percent reduction in operations due to a lack of available timber and a slight reduction in log exports to China.
“The brightest spot on the horizon, though,” Graham said, “is the State’s task force on timber. We all hope it will make a difference. The industry has become so small that it’s hard to get attention from the feds.” •••
When the final numbers are calculated for 2011 – in January or February – Ron Peck, the president and CEO for the Alaska Travel Industry Association, said he believed the industry numbers would show a slight increase. “We were up in air arrivals, both domestically and internationally, and that’s a good indicator that we have a good increase in independent travel.”
For 2012, though, Peck said he thought highway travel will be down – “a function of the price of fuel,” he said. “I’ve noted, anecdotally, that we’re seeing a decline in 25- to 30-foot gas RVs. The higher end coaches, those folks with more discretionary income, still came. The drop in numbers affects small businesses on the highway.”
Cruise numbers, he figured, would be basically flat for last year and this year. “There may be a slight reduction – maybe 1 or 2 percent in 2012. “But the good news is we anticipate new cruises from Holland America and Princess.”
International travel was up with an increase in flights by Japan, Korean and Condor airlines. “Korean Airlines had a 90 percent load factor,” he said. “If the world economy stabilizes, there’s a good opportunity for growth from Pacific Rim countries because of the weakening of the dollar. If our economy holds steady, we’ll also see a growth in the cruise industry.
“We’re rebounding slowly from the doldrums of ´09,” Peck said, “and a strong, consistent marketing effort in other states and countries will help us continue to draw visitors.” •••
Jeff Ottesen, director of Development for the Alaska DOT&PF, said FY 2011 was the high-water mark for federal highway dollars in Alaska at $580 million. Beyond that, however, Ottesen said, funding is uncertain. “Right now, we have seven weeks’ worth of our $450 million allocation. Where we go from there is the million dollar question. Without some new form of revenue for the federal highway trust fund, the whole system has to be cut by about one-third. That’s a drop back to $300 million. We have projects that will take seven to 10 years to deliver, and we have funding for seven weeks.”
Most of the money the State puts into the highway system comes in the form of matching grants. “We’re pretty fortunate,” Ottesen said. “Every $1 of State money brings $5 of federal funding. Other states aren’t having such good luck getting match money from their Legislatures.
Ottesen added that if the nation gets a new jobs bill on top of the restored 2012 funding level, Alaska could see about $600 million in highway funding. “It’s pretty hard to plan right now,” Ottesen said.
“Washington is signaling that we should spend most of our money on repairing and maintaining what we have rather than building something new. However, we’re still building from scratch. We’re just in a totally different stage of life.”
Posted: January 4, 2012