Forecast: Full Economic Recovery Depends on Infrastructure Spending

Guettabi’s first post-pandemic recovery forecast does not include IIJA spending in its baseline. He cannot discount its potential effects, though.

“There’s a promise of almost $5 billion (with a B) that’s going to enter the Alaska economy over the next five years,” he says. “If one-fifth of that amount were to enter the Alaska economy this year, that could obviously be the massive catalyst and potentially help with this recovery quite a bit. I use some back-of-the-envelope math and I find that… there may be as many as 14,000 jobs added, in addition to the 7,000 that I forecast without the infrastructure spending.”

The big “if,” Guettabi cautions, is whether enough Alaska projects are ready for IIJA funding in 2022 and whether construction firms can mobilize to take advantage of that cash. Plenty of projects are lined up for infrastructure money, including $250 million for design and first phase of construction for giving Nome a deep-draft port; $185.2 million for the Lowell Creek flood diversion project in Seward; $88.6 million to continue the Moose Creek Dam near North Pole, part of a “mega project” to control flooding on the Chena River; and $28 million for erosion control along the bluffs in Kenai. That spending is approved and will come to Alaska eventually. The question is how quickly.

“The biggest catalyst going forward is the infrastructure spending,” Guettabi says. “Now, that’s good because there is, again, a lot of money that is going to enter the Alaska economy over the next five years. However, that also tells me that there aren’t a ton of what I refer to as ‘organic catalysts.’” That is, ordinary economic activity is not propping up Alaska without relying on federal dollars.

Guettabi notes that, absent pandemic-related federal rescue funds, the state’s economy would be in a worse situation. The 2019 levels against which the recovery is measured were already depressed by the longest state recession on record, from 2015 to 2018, brought on by the collapse of oil prices from their $100-per-barrel peak.

A Billion Dollars for 14,000 Jobs

The economic sector poised to benefit most from IIJA spending is, of course, construction. However, Guettabi notes that construction barely changed from year to year during the pandemic and is already back to 2019 strength.

Lately, job growth has mainly been in the services sector. Half of all jobs added in 2021 were in the healthcare, leisure and hospitality, and retail sectors, after the latter two absorbed most of the job losses in 2020. Guettabi expects that’s where most of the 7,000 new jobs in his 2022 forecast will be, likewise.

If Alaska is counting on the oil and gas sector to sustain the economy, then there’s good news and bad news. The good news is that the pandemic hardly affected production output. The bad news comes in two flavors: production has steadily declined since 2000, and oil and gas jobs are dropping even faster.

Alaska oil production used to be about a million barrels per day in 2000. Now the level is down to half of that. Furthermore, Guettabi calculates that each thousand barrels of oil were associated with thirty jobs in the industry; today, half as many workers produce a thousand barrels. (The ratio has been lower; in 2000, the level was ten jobs per thousand barrels.)

That relatively new trend has Guettabi doubtful that oil and gas jobs will recover to pre-pandemic levels.

“As of this year, we’re now at a little less than 60 percent of the oil jobs that existed in 2015,” he says. “I’m not saying ‘oil is dead,’ I’m not saying that there’s a new economy. But there’s been this driver that the economy has centered around that seems to just not be able to get back up to even pre-pandemic levels, let alone 2015 levels.”

Guettabi figures that the oil and gas sector is bound to recover jobs eventually, but not in 2022.

Alaskans at large might not share Guettabi’s conclusion that an economic recovery is well underway. What about inflation? He notes that most, but certainly not all, economists believe a spike in consumer prices is a temporary factor, but he acknowledges that it has eaten into people’s pockets.

Still, consumer spending in Alaska is back above where it was in January 2020. Guettabi calls that a reversion to normalcy, even though Alaska lags almost every other state by that measure.

“Over the last couple of months, things look like they’re almost back to those pre-pandemic levels. Again, ‘normalcy’ with air quotes,” Guettabi says. “Clearly, the emergence of Omicron now complicates things going forward.”

The Omicron variant of COVID-19 threatens to spoil another tourist season. Guettabi’s forecast makes some assumptions that anticipate 10.4 percent job growth in that sector. He notes that the large recovery is mainly because the baseline is so much lower, after the tourism sector was completely devastated in 2020.

“It’s good that we’re growing,” he says. “Yes, it’s slow, but I think we’re headed in the right direction.”

Not Great, but Good

Compared to other states, Guettabi says Alaska’s recovery ranks in about the middle: not great, but something is stirring.

Beyond 2022, Guettabi sees some structural drags on Alaska’s economic recovery. For instance, a relatively low rate of labor force participation. Guettabi notes that the phenomenon predated the pandemic, and nearly all states are experiencing the same thing.

“I think that there are some structural labor force problems that preceded the pandemic, and therefore policy solutions,” he says. “We should be thinking about those, as opposed to putting a band-aid on why people are hanging out in the basement playing video games.”

Policy is generally outside the purview of an economist, but Guettabi does have some opinions. Policymakers should “mitigate uncertainty” in the state budget. He also suggests that the Permanent Fund’s $80 billion be leveraged for a transition to “Alaska 2.0” industries, though he acknowledges that’s a controversial subject.  And Guettabi recommends investments in roads, schools, and other amenities so that Alaska “is viewed as an attractive place for smart people that make a lot of money and will spend that money.”

As Guettabi puts it, “Lean on the advantages that Alaska has. Improve them. Advertise them. Once you do that, it becomes a lot easier to pitch it for both businesses and individuals.”

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