By: Mark Edwards – EVP, Chief Credit Officer & Bank Economist
In our last post we looked at the resource development industry. Today we discuss the US economy, tourism and military issues.
U.S. Economy
Real GDP growth in the United States increased at a rate of 2.9% in 2018, compared to 2.2% in 2017 and 1.5% in 2016, according to the Federal Bureau of Economic Analysis.
The 2018 improvement is attributed to increased consumer spending, exports, inventory investment, and government spending. Gains were partially offset by lower residential fixed investment and a higher level of international imports.
The Bureau of Labor Statistics reported a national unemployment rate of 3.9% at the end of 2018 compared to 6.3% for Alaska.
Tourism
The improvements in the national economy have directly benefited the tourism industry in Alaska. More people are able to vacation as consumer disposable income improves. Age demographics of the prosperous baby boomer generation are also helping the cruise industry reach record numbers.
According to a State Department of Commerce report released in November of 2018, the Alaska tourism industry generated $4.5 billion in economic output in 2017. The sector earned $1.5 billion in labor income from 43,300 annual jobs. A record 2.2 million visitors spent $2.8 billion. $126 million was earned in state government revenues from the Alaska railroad, fish & game, vehicle rental taxes and other programs. Another $89 million in revenues flowed to local governments from sales taxes, lodging taxes and dockage fees. Roughly half the visitors come by cruise ship, 47% by air and 4% by the highway or ferry system. The number of visitors has grown for five consecutive years and 2019 is forecasted to be another record year. The cruise industry is predicting 175,000 more passengers in 2019 for a growth rate of 16% from larger ships and mores ports of call.
Military
Alaska is expected to benefit from increased levels of federal military and infrastructure spending. Fairbanks has been positively impacted by the announced transfer of two F-35 squadrons to the local Eielson base between 2020 and 2022. They expect an increase of approximately 50% in base population, adding 3,300 people to the current 6,800 (including families). This is projected to require over $550 million in base construction and significant residential construction, both on and off base, according to presentations by officials at Eielson Air Force Base. 974 new housing units are projected to be needed in the next three years to support this growth.
Interest Rates
The Federal Reserve raised the fed funds target rate 0.25% to a range of 2.25% to 2.5% on December 20, 2018. This follows a quarter point rate hike in September, June and March of 2018. The Fed raised rates 0.25% three times in 2017 and once each in December of 2015 and 2016. These nine 0.25% rate increases total 2.25% in the last three years. Prior to that, the Fed had not raised interest rates for nine years since they reached 5.25% in June of 2006.
Although dependent upon a variety of economic indicators and forecasts, expectations for gradual increases were anticipated in 2019. However, the Fed did not adjust rates in their first meeting of 2019 and signaled through policy statements the possibility of no change in rates for the coming months. While rates are volatile, current levels are still below long-term historical averages and could still trend upward if the national economy continues to improve. Rising interest rates will most impact sectors that require more fixed asset investments and higher levels of financial leverage and customers with variable rate loans, such as lines of credit.
Though overnight rates have increased by 1% in the last year due to Fed monetary policy, medium and long term U.S. Treasuries have actually decreased slightly compared to a year ago. The yield curve for one month to five years in duration has been flat to even slightly inverted for most of 2019. This has been positive by providing relief to home buyers who need 30 year loans. However, inverted yield curves often foreshadow future recessions. 10 to 30 year maturities are not yet inverted, but this is an important development to pay close attention to.
In our next post, we will look at housing issues.
Written by Mark Edwards, EVP Chief Credit Officer and Bank Economist with Northrim Bank. He was an adjunct professor of economics at Alaska Pacific University. Mark served the State of Alaska as an Economist in the Department of Commerce and the Department of Revenue, and as the Director of the Office of Economic Development. He has a B.A. in Economics from the University of Virginia and a Master’s Degree in International Business from the Thunderbird School of Global Management.
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