From his presentation at Northrim's Economic Luncheon, Guest author Bill Conerly gives his reflection on the global economic forecast and Alaska's outlook.
The national and global economy offer moderately positive news for Alaska, though risks are significant. The four key elements of the big picture that are important to Alaskans are consumer spending, federal spending (especially defense), the global economy and energy prices.
Consumers across the country have been increasing their spending about in pace with income gains. They are not stretching, using a great deal of credit to extend their spending. Neither are they crawling into a hole, cutting expenditures to a minimum, as they did in the darkest days of the recession. One of the bright spots for consumer discretionary spending is how people feel about their houses. Home prices have risen nicely in the past year and buyers are scouring many markets hoping to find one last deal. In that context, consumers feel good about their finances. Their homes are not so valuable that they can justify an Alaskan vacation simply based on housing appreciation. However, if their income justifies the vacation, then the housing market is no longer an excuse to stay home.
Federal government spending has to tighten in the so-called discretionary category, because our path for entitlements spending is pretty staggering. Medicare expenditures by the federal government are poised to rise at a staggering pace, thanks to baby boomers turning 65 and getting new hips and knees and drugs. Taxes are likely to go up, but also defense spending will probably drop.
Defense spending has declined 11 percent since mid-2010. Unless a major new war breaks out, expect further reductions. Alaskans should keep in mind that at some point, across-the-board spending cuts turn into base closing. When that happens, most bases will be unaffected. But those that are affected may be totally eliminated. That’s a key risk to Alaska.
The global economy impacts Alaska through international tourism and international trade. The outlook is for better growth this year and next, though risks continue. The European financial crisis could flare up again—those weak countries are not totally safe yet. The Russia-Ukraine problems could turn into war, which would be very bad for the economy. (The folklore of war being good for the economy is false in general, though some sectors do benefit.) In addition, China’s deceleration may continue, though the mainstream economic forecast is for steady growth at a moderately good pace.
Finally, the energy market is probably the greatest long-term threat to Alaska’s economy. The lower 48 states are in an energy boom thanks to fracking and other new technologies. That boom has not yet extended to foreign countries, whose oilfields are mostly controlled by state-owned oil companies. Eventually, though, political in-fighting and bureaucratic lethargy will be replaced by greed. When that happens, exploration will blossom in many countries. As new production comes to market, oil prices will drop significantly. Global economic expansion will use up some of the new supply, but not all of it. Thus, prices will fall. Not this year or next, but in the coming five to ten years, look for significantly lower revenue per barrel of oil.
Before coming to a conclusion, understand the limitations of this commentary. It is about the world external to Alaska. A wise business leader will add to this information knowledge internal to Alaska: oil taxes, native corporations, the attitudes of small business owners and a host of other local factors.
This global and national economic environment is moderately positive for Alaska, but it contains risks that families, businesses and government must consider.