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State’s Economists Weigh in on 2020 Outlook

by Jan 2, 2020Construction, Finance, Magazine, Oil & Gas, Transportation

Construction, oil & gas, transportation are bright spots; heathcare, retail experience challenges

The cautious optimism with which economists approached Alaska’s 2019 economy turned out to be well-founded, with most experts indicating that the Last Frontier has turned the corner and in 2020 will claw its way out of the recession that followed tumbling oil prices several years ago. However, the recovery is not expected to be uniform, as Anchorage remains in recession and many of the impacts of the state’s budget cuts have yet to play out.

Oil & Gas Optimism

“The most recent macro-economic indicators show Alaska’s economy has begun to grow again and add jobs. In the near-term, there is concern over the effect of state government budget cuts,” Northrim Bank EVP, Chief Credit Officer, and Bank Economist Mark Edwards says. “However, there is renewed optimism in the private sector that a number of large-scale natural resource development projects are advancing and new discoveries of oil and gas are increasing investment activity for exploration and development.”

As of August, the oil and gas industry had grown by 500 jobs (5.3 percent) when compared to the same month in 2018, according to the Alaska Department of Labor and Workforce Development. An additional bolster to the oil and gas industry has been the stability of oil prices. ANS West Coast oil prices averaged between $60 and $72 in 2019 with the State Department of Revenue forecasting an annual average ANS oil price of $68. Projections put the average for FY2020 at $66 per barrel.

“On the oil front, there are promising projects and oil prices have stabilized, which should help,” says Mouhcine Guettabi, an associate professor of economics at the Institute of Social and Economic Research. “Oil remains Alaska’s most important economic base and its recovery will surely help the rest of the economy.”

However, according to the Anchorage Economic Development Corporation’s 2019 3-Year Outlook Report released in July, employment in oil and gas is unlikely to return to pre-recession levels in the near-term. Nonetheless, the report shows that robust activity on the North Slope is an encouraging sign of optimism among producers.

The Alaska Department of Revenue forecasts production on the North Slope, after a decline in FY2019 of 1.3 percent, will rise by 3.5 percent in 2020.

The AEDC report also indicates that North Slope oil production is expected to average 530,000 barrels per day in FY2019 before declining to about 491,000 barrels per day by FY2022.

“Production is anticipated to rebound to above 500,000 barrels per day in the late-2020s as several key projects come online,” the report states.

But job numbers aren’t as strong as dollars invested, AEDC President and CEO Bill Popp warns, noting that production nationwide is up by a third more oil than pre-recession, yet it’s being created with a 20 percent decrease in the workforce.

One big question that remains for the oil and gas industry in Alaska is how Hilcorp Energy’s $5.6 billion acquisition of BP’s Alaska assets will play out.

“In the short run, the question is how many of the 1,600 BP employees are retained by Hilcorp,” Guettabi says.

Popp points out that the handover wasn’t a surprise, as the Last Frontier no longer fits BP’s business model and that their exit is an understandable part of the lifecycle of an oil field.

“The big companies come in, they make the major discovery, they do a significant amount of work to develop that discovery as rapidly and fully as they can. Then, it reaches a point where it’s no longer economical for that company to do business in that particular field, and they sell it to the next generation, like Hilcorp, a smaller, more nimble company looking for new opportunities,” Popp says.

“We’re guessing within a year or two we’ll start to see new assessment/deployment in Prudhoe Bay to produce the barrels of oil from pockets of oil that were just not economical for BP to pursue. So, at the end, we think that there’s going to be more money spent and more jobs created at the Prudhoe Bay unit.”

Popp is not overly concerned about how a possibly leaner Hilcorp headquarters in Anchorage would impact job numbers in the city.

“It’s an opportunity for companies outside of the oil patch to acquire very highly skilled employees. BP is not just people working on drill rigs or working in the highest end corporate offices. They have a huge number of clerical staff, accounting staff, legal staff, permitting staff that are very much in short supply in many other companies throughout Anchorage,” Popp says. “I think it’s going to be more of an offset than it is going to be a loss.”

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Alaska Business December 2020 Cover

December 2020

Budget Cuts

Popp is less optimistic about the fate of Anchorage as a whole, predicting that the severity of Governor Mike Dunleavy’s vetoes on the capital budget chilled any chances the city had in joining the rest of the state in shaking off the recession.

“Unfortunately, due to the budget issues, impacts of the governor’s vetoes, we are seeing an extension of the recession, at least as far as Anchorage is concerned,” Popp says, noting that Anchorage is about half of the state’s economy by GDP, making up about $25 billion of Alaska’s $54 billion. The city also hosts about 42 percent to 43 percent of jobs in the state.

One of Popp’s largest concerns for Anchorage’s economy is the potential effects Dunleavy’s cuts to Medicaid might have on the healthcare sector.

“We see a lot of uncertainty in healthcare, which has been previously a fairly significant growth sector. But with the cuts to Medicaid—that is an issue for the healthcare industry,” Popp says. “The governor did pull back on some of his cuts, but not to a degree that we feel that it would have a significant effect at this time on that projection.”

The cuts to Medicaid, which Dunleavy set at about $249 million in his initial budget, ended up coming in at $159.9 million.

State economist Neal Fried notes that healthcare is the largest private sector employer in Alaska.

“It’s the sector that’s pretty reliantly providing new jobs in our economy year in and year out. In fact, there were some years when if healthcare hadn’t grown, the overall economy wouldn’t have grown,” Fried says. “Healthcare gains in 2019 have slowed considerably, and we’re not sure why. If that continues in 2020, that’s going to be something that might be absent that normally isn’t; they’re usually pretty good at providing an additional boost to the overall employment numbers.”

Other cuts that Popp cites as having a negative impact on the economy were to the University of Alaska system, state employees, and support for services performed in Anchorage by third-party agencies or nonprofits.

“It’s all kind of cumulative,” Popp says. “It’s not a deep return to recession. It’s just this small but lingering level of job loss in Anchorage that we feel will be felt again next year because many of the cuts will not manifest themselves at the university until next year, as an example. It takes a while for the cuts to filter down to the on-the-street level jobs.”

Popp wasn’t the only economist to weigh in the budget cuts when balancing what factors will impact the 2020 economy.

“The uncertainty is probably most pronounced for the healthcare sector due to the Medicaid cuts as it is unclear how/if they will be implemented and the seafood industry due to the trade tariffs. State government employment has been declining for a number of years and is currently at 2002 levels,” Guettabi says.

“Local government employment held up well during the recession but is likely to be affected as communities start making budgetary adjustments. The final budget was agreed upon in June which means it is unclear how much of the cuts have been implemented and whether they have made their way into the economy.”

If Alaska attempts to continue providing its current level of services and dividends using the historical formula, conservative estimates put it at a $1 billion deficit, according to Guettabi.

“This means either another round of cuts, a tax, a reduction in services, or a lower dividend. Without resolution, households and businesses will have difficulty making long-term decisions,” Guettabi says. “On the positive front, I expect both oil and gas and construction to continue their recovery.”

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Uptick in Construction and Transportation

In Anchorage, pent up demand for construction projects, as well as recovery efforts following the November 2018 earthquake, have led to relatively strong growth in the sector.

“I think construction’s got some opportunities for continued stability in the coming year with continued earthquake recovery work related to government facilities, like schools, that need to be repaired,” Popp says, noting that there was an uptick in commercial building projects, as well. “We’ve had a lot of years without anything going on. There is a pent-up demand for replacement buildings, expansion, remodels, things along those lines that will probably help those numbers.”

In August of 2019, construction led growth in the state with 600 additional jobs compared to August of 2018, an improvement of 3.2 percent, according to Edwards, who referenced Department of Labor and Workforce statistics.

“The oil and gas sector, as well as the construction sector, have been the drivers of the economic rebound. Between January and August 2019, construction employment is averaging 725 more jobs than during the same period in 2018,” Guettabi says. “Oil and gas employment is averaging 500 more jobs than during the same period last year. The growth has started spreading to the rest of the economy.”

Two other bright spots for the state, and Anchorage, are the tourism sector and the transportation sector.

“Airport numbers continue to remain really strong, and we continue to see some fairly significant positive trends in terms of tonnage and numbers of flights,” Popp says. “Really good passenger numbers are expected next year.”

AEDC expects 2019 air passenger volume of 5.73 million, exceeding the 2018 record by 1.5 percent.

“Strong visitor industry activity in the state will support passenger volume growth of about 1.5 percent annually through 2022,” the AEDC report states.

Air cargo is expected to grow between 2019 and 2022 at about 1 percent annually, as long as there are no further escalations in trade disagreements or a national recession, according to the report.

Retail Stalls

While those sectors show promise, retail has continued to follow the downward national trend, impacting Anchorage more than most communities in the state. In 2019, Nordstrom shuttered its operation in Alaska, an example of a national chain dealing with national issues, according to Popp.

“We’re starting to feel some of the effects of online shopping trends versus brick-and-mortar stores. Trends in Alaska are not to the level they’re feeling it in the Lower 48, but it is still starting to manifest itself here,” Popp says. “So that’s not necessarily a function of the state government cuts, at least not so far. We knew that those were coming, and we knew that those would continue to linger.”

Fried agrees the sustained downward trend in retail isn’t entirely tied to the recession, as ecommerce is putting pressure on department stores, bookstores, and similar businesses, though grocery stores have mostly not been impacted by the trend.

“It’s tied to the way we’re doing business differently. I mean, even in a booming national economy right now, retail is down,” Fried says.

The 2020 Mixed Bag

Despite some of the positive indicators, especially those seen in the oil and gas industry, enthusiasm about the state turning the economy around and crawling further out of the recession in 2020 are hampered by the uncertainties created by state budget cuts.

“Significant cuts to the state budget, as they stand now, essentially eliminate any chance of economic recovery and in fact promise to keep the local economy in recession for two to three more years,” the AEDC report states with regard to the situation in Anchorage. “As we look ahead, while the news is not all bad, sources of renewal in the economy cannot compensate for the damage being done by Alaska’s ongoing policy-induced recession.”

Though large military installments, such as those at Eielson Airforce Base, as well as optimism in the oil and gas sector can help offset the statewide impact of the continued recession in Anchorage, it won’t be enough.

“Long term planning in the face of uncertainty is very difficult and, until the state’s fiscal situation is resolved, it will continue to be difficult for households and businesses to make spending and investing decisions,” Guettabi says, echoing the AEDC report.

Alaska Business Magazine December 2020 Cover

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