Alaska's Economy Then and Now
The Alaska economy is currently in the midst of the second year of a recession sparked by the decline in oil prices. This decline has not only resulted in a reduction of private economic activity but has also resulted in sizable budget deficits given the state’s historical reliance on oil revenues to fund government.
Naturally, legislators and the public at large are concerned about the implications of this downturn on the future health of the Alaska economy and budget. Below, I explain how Alaska’s demographics, and quality of life make it better able to sustain the fiscal and economic stresses it is currently experiencing. I also provide a short overview of where things stand and how we see them moving forward.
-Quality of life
Alaska’s population used to be male dominated and young. Today the ratio of male/female is 1.06 and the median age has increased from about 26 in 1980 to 34 in 2010. Additionally, homeownership rates were at 58% in 1980 and are currently around 66%. These changes matter because age, marital status, and homeownership are significant determinants of migration decision. A smaller exit rate as a result of the slowdown would mean the state’s labor force would not shrink as much as in the 1980’s recession.
This current recession is best thought of in phases. Phase one was in 2016 when Oil & Gas, State Government, and slightly later in the year Professional and Business Services shed the majority of jobs. Overall, the state lost 1.8% or 6,220 of its W&S jobs between 2015 and 2016. Phase 2 started in early 2017 when the initial effects described above spread to the rest of the sectors. In this phase, household spending dependent sectors such as retail, accommodation and food services started feeling the multiplier effects. These multiplier effects are essentially the ripples from investment, wage, and job losses. Given that declines in the basic sectors are continuing, we expect a reverberation of these effects into next year.
The initially affected industries have shrunk rather considerably since 2014. For example, employment in O& G in January 2017 was 78% of what it was in 2014, while state government is at 89%. The secondary sectors, while feeling the squeeze, are still holding steady relative to their pre-recession baselines.
One positive indicator is that the rate of losses in Professional and Business Services have slowed. This sector is typically a leading indicator of economic conditions.
We expect employment losses by the end of 2017 to be more pronounced- around 2.3%- than they were in 2016. They will also be more evenly spread across sectors than they were in 2016. In 2018, we also expect negative growth but a smaller year over year decline. These projections do not assume any further budget reductions or taxes.
While raising revenues through taxes imposes a negative shock on the economy, this short term pain is necessary for the future health of state. Also, we anticipate the economy to be in a better position in 2018 to absorb the taxes.
Finally given the size of the budget deficit, use of the earnings reserve coupled with revenues generated through a tax seems to be a sustainable solution that restores consumer and business confidence.
This blog summarizes a presentation I gave in Sitka to the Alaska Chamber of commerce. You can find the complete presentation here: