Alaskanomics

Alaska Economic Update - May 2021

By Mark Edwards, EVP - Chief Credit Officer & Bank Economist

2020 was a challenging year for the global economy as health policies led to significant disruption in normal business activity. It is counter-intuitive to have a year where payroll jobs declined by 8.5% and gross state product fell 5% in Alaska, yet per capita income rose over 3% and housing prices and sales activity increased substantially.  This was only possible because billions of dollars in federal stimulus money reached Alaska and helped support businesses and individuals through the most challenging times. Record low interest rates and low levels of building activity also contributed to home price increases. 

Oil prices were shocked much lower at the beginning of 2020 at the height of the virus fears and low level of travel activity.  However, as the year progressed, oil prices returned to a more stable level and oil production levels in Alaska also followed a similar path.  The demand for energy increased as the transportation and tourism sectors accelerated.

March 2021 employment data from the Alaska Department of Labor shows a 6.9% reduction in total payroll jobs, a decline of 21,900 jobs compared to March of 2020.  Leisure and hospitality was hit hard from travel restrictions, down 23% year over year, a loss of 7,200 jobs.  Direct Oil and Gas jobs fell 36% or 3,600 jobs. A decline in public education positions led to a 2,000 job decrease in local government. Transportation, Warehousing and Utilities declined 10% or 2,000 jobs since last March. Professional and Business Services has also been negatively impacted, down 9% or 2,500 fewer positions.  According to the Labor Department report, State Government was the only sector to grow year over year.  The 1% or 200 job increase was attributed to hiring people for contact tracing and to process unemployment insurance claims.  The level of unemployment claims in the second week of March was 5 times higher than the same week in 2020.

Alaska’s real gross state product (GSP) was $52 billion in 2020, compared to $55 billion in 2019, according to the Federal Bureau of Economic Analysis (BEA). The U.S. GDP declined 3.5% in 2020.  Alaska’s reduction was 5% and the worst state was Hawaii at 8%.  Both states were more negatively affected by travel restrictions reducing tourism.  Alaska’s GSP declined sharply by 34% due to COVID-19 in the second quarter of 2020, but then grew by 32% in the third quarter.  This is very similar to the nationwide economic swing in production. Alaska’s largest GSP declines in 2020 came from Transportation and Warehousing, followed by Accommodation and Food Services, Oil & Gas and Health Care.  All of these sectors showed positive recovery in the 4^th quarter of 2020 in Alaska, helping place it 9^th fastest growing for the quarter of the 50 U.S. states.

Alaska’s seasonally adjusted personal income for 2020 was $47 billion compared to $46 billion in 2019, according to a report released by the BEA.  Personal income in the U.S. in 2020 increased 6% and Alaska rose 3%.  In a typical year, the majority of personal income is derived from wage earnings.  Additionally, some people receive government transfer payments, such as social security, Medicare and Medicaid. Personal income is further supported by earnings from dividends, interest and rents.  However, in 2020 earnings from wages and investments decreased in Alaska. The U.S. growth was entirely from a net $1.1 trillion increase in government transfer payments.  About half of the transfer payment increase was from unemployment insurance. Direct stimulus payments accounted for a large part of the remainder.

Per capita income in the U.S. was $59,700 compared to $64,800 in Alaska.  This placed Alaska as the 9^th highest income of the 50 U.S. states.  In Alaska, earnings from wages decreased 1.5% or $435 million in 2020 and investment income fell 1% or $65 million.  Government transfer payments however, rose 24% or $1.9 billion over 2019 levels.  By far the largest drop in wage earnings came in Accommodations and Food Services, followed by State and Local Government and Oil & Gas.  There were positive increases in wages in the Professional and Technical Services Industry and Health Care.

The price for Alaska North Slope (ANS) crude oil had monthly averages in 2018 and 2019 ranging from $59 to $80 a barrel. Prices fell quickly at the beginning of 2020, responding to fears that COVID-19 would devastate the global economy and reduce the demand for travel.  The low month was April when ANS averaged $16 a barrel.  However, by June the oil markets stabilized and for the last six months of the year the average monthly price remained between $40 and $50.  In the first three months of 2021, the monthly average has climbed from $56 to $66.

Alaska’s crude oil production averaged 485,000 barrels per day (bpd) in fiscal year (FY) 2020, which ended in June.  This was a decrease of 4.8% compared to the previous FY end.  The State Department of Revenue forecasts production on the North Slope to increase by nearly 1% in FY 2021 to 489,000 bpd.  The average production for the first quarter of 2021 has been higher than the forecast.

Alaska’s home mortgage delinquency and foreclosure levels continue to be better than most of the nation.  According to the Mortgage Bankers Association, the percentage of delinquent mortgage loans at the end of 2020 in Alaska was improving to 6.2%. However, this is still significantly higher than 2.9% at the end of 2019 before the effects of COVID impacted the market.  The comparable delinquency rate for the entire country was higher than Alaska at 7.2% at the end of 2020, compared to 4.1% at the end of 2019.

The Mortgage Banker’s survey reported that Alaska’s foreclosure rate was 0.45% at the end of 2020.  This is an improvement from 0.63% at the end of 2019.  The comparable national average rate was slightly higher than Alaska at 0.56% at the end of 2020, and 0.78% at the end of 2019. This is somewhat misleading because the federal moratorium on foreclosure activity on occupied homes led to declining numbers, even though job loss strained the economy and borrower’s ability to pay.

Many people across the country took advantage of mortgage forbearance plans available from lenders to delay payments or pay interest only on their homes.  Until they catch up on past due payments these loans will appear delinquent because they are still behind according to the original terms of the mortgage.

According to the Alaska Multiple Listing Services (MLS), the average sales price of a single family home in Anchorage rose 5.9% in 2020 to $397,000.  This is following increases of 0.5% and 2.3% in 2019 and 2018, respectively.  Average sales prices in the Matanuska Susitna Borough rose 9.9% in 2020, continuing a decade of consecutive price gains.  These two markets represent where the vast majority of Northrim’s residential building activity occurs. 

The low interest rate environment has been a major factor in rising prices.  According to the Federal Reserve Bank of St. Louis, the average 30 year fixed rate mortgage in the U.S. hit all-time record lows last year.  Rates began 2020 at 3.7% in the first week of January and fell one percent to 2.7% by the end of the year.  Rates began to rise in the first quarter of 2021 and finished March at 3.2%. However, in April they declined slightly to 3%.

The number of units sold in Anchorage was up significantly in 2020 by 19.5%, climbing from 2,719 homes sold in 2019 to 3,249 last year.  The main difference was a record number of sales occurred in the last quarter of the year, when sales activity typically declines in the winter. The Matanuska Susitna Borough also had strong sales activity, up 9.7% in 2020 to 2,135 units sold compared to 1,946 in 2019. The Mat-Su also had stronger than normal sales in the second half of 2020. 

In Alaska, the number of building permits issued for new home construction were 1,680 in 2019.  According to the U.S. Census Bureau this fell 15% to 1,420 housing units in 2020.  This does not include building in unregulated parts of the state.    

Across the country, the prosperous baby boomer population is living longer and often keeping a second cabin or vacation home.  This housing inventory is not turning over at the expected rate, as the even larger population of millennials are finally becoming home owners.  The Federal Home Loan Mortgage Corporation, commonly known as Freddie Mac, determined that the nation was undersupplied by about 2.5 million homes pre-COVID.  Now that has grown to 3.8 million homes in April of 2021.  The high cost of building has constrained construction levels and also made the price of a new home out of the reach of hundreds of thousands of first time homebuyers.

Inflation is generally caused when there is an increase in the money supply that outpaces economic growth. Trillions of dollars in COVID-related deficit spending expanded the money supply and diluted the value of existing money. Spending on a home mortgage or rent is the largest expense for consumers.  The rapid rise in home prices across the nation in 2020 will be a large inflationary force.  The second largest consumer expense is energy for home heating and transportation.  The energy index rose 13% year over year through March of 2021. The increase in oil prices have been good for the Alaska economy, but are a major part of rising inflation figures.  Across the board there are signs of rapidly rising prices of most commodities. 

The Consumer Price Index or CPI rose 2.6% between March of 2020 and March of 2021.  For the first quarter of 2021 the CPI increased 0.9%.  This was the largest first quarter increase in 13 years. The index rose 0.6% this March alone, which was the largest single monthly increase in the last 9 years.  This acceleration in inflation will be one of the most important economic indicators to track in 2021.  Since the 2008 recession, Americans have benefited from a prolonged low inflation environment, averaging only 1.7% a year over the last 12 years.  2% is the Federal Reserve’s long-term target rate for inflation. Many economists feel sustained inflation over 3% will be problematic for the economy unless GDP growth also accelerates concurrently.

Supply chain disruptions have slowed the pace of economic recovery.  Most impactful is the dramatically lower level of workforce productivity due to millions of workers losing their jobs.  Trade with our leading partners Canada and Mexico has been affected by cross boarder restrictions slowing the supply of many goods and raw materials.  Numerous companies did not have sufficient IT infrastructure in place to quickly react to a work-from-home scenario.  Government permitting and regulation approval took longer than normal in many instances. Significant storms, such as the one that hit Texas hurt chemical production and other manufacturing.  Cargo shipping had embarrassing setbacks.  These and other factors resulted in high commodity prices and low product availability throughout the world.

The economic roller coaster of 2020 was not a normal business cycle.  It was created by governments around the world forcing millions of businesses to close or seriously constrain business activity.  The economy was also rescued by massive deficit spending that reached consumers and businesses quickly to stop a serious problem.  Recent news suggests the Biden administration is preparing to increase taxes to help pay for the record deficits.  Typically, this is a drag on the economy and lowers future investment.  Therefore, more than ever, to predict where the economy is going in the coming year will depend on the policies government officials enforce on taxes, health regulations, and monetary policy.

An economic rebound is definitely occurring, it is just slightly disorganized.  Abundant cash should continue to drive consumer spending and force companies to work out kinks in the supply chain to meet a growing demand for goods and services.  Trillions of dollars in federal stimulus money is providing much needed relief to millions of Americans impacted by COVID regulations.  Excess cash is also driving investment into the stock market and leading to a slow recovery of jobs.  However, it has also created inflation by expanding the money supply and diluting the value of existing money. 

This is putting upward pressure on interest rates as investors want to maintain a “real” rate of return after factoring in the effects of inflation.  The yield curve is still flat and near record lows for maturities less than two years.  However, it is getting steeper for medium and long term rates. The five year U.S. Treasury rate has increased a half percent in the last year.  The 10 and 30 year Treasuries have both increased slightly over 1% since April 30, 2020.

Fears of higher taxes to pay back the large deficit spending is also dampening the enthusiasm of investors and led many to question if this short-run economic growth will be sustainable. At least for the near term, it appears the massive liquidity in the financial system should spur on an economic rebound.  Government health regulations, changing tax rates, and monetary policies will be the largest variables impacting inflation, interest rates, and the stock market in 2021.  There will undoubtedly be more unexpected economic challenges to come.  However, companies that are nimble in a changing environment; well-prepared to meet technological and distribution challenges; and have financial resources available can still succeed in these challenging times.

                                                                                                                                                Mark Edwards

                                                                                                                                                May 4, 2021

 

 

References:

https://www.bea.gov/

http://almis.labor.state.ak.us/

http://www.tax.alaska.gov/programs/oil/prevailing/ans.aspx

http://www.tax.state.ak.us/

www.mba.org

https://www.alaskarealestate.com/MLSMember/RealEstateStatistics.aspx

https://fred.stlouisfed.org/series/MORTGAGE30US

Standard Time.

Commonwealth North Annual Assets Review

Commonwealth North hosted its 9^th annual Alaska Assets Review on February 18. The program recognizes that as shareholders of “Alaska Inc.” the citizens of Alaska need to be informed about how the assets of their company are performing. This year Northrim Bank President and CEO Joe Beedle and former Lt. Governor Mead Treadwell presented the performance review.

A bit of a history lesson on the reason Alaska has the wealth of assets that it does. During the statehood debate, it was recognized that the state’s population would likely never have the critical mass to finance government through conventional means employed by other states, primarily per capita taxation. In recognition of the need for Alaska to have means to produce its own revenue, the state was granted 104 million acres of land and mineral rights to significant acreage on federal lands. From this, it was felt that Alaska could build and sustain an economy and pay for necessary government services. The annual program tracks the performance of Alaska’s assets, including natural resources, financial assets and enterprises.

The full report and presentation can be found at www.commonwealthnorth.org. A few highlights of the discussion are below.

Alaska's natural resources are abundant and a large part of Alaska's economy.

• The tax revenue from fisheries has increased and the industry is strong, but there is a potential challenge ahead because not all of last year’s harvest has been sold.
• Within the Division of Mining, Land and Water, Alaska’s land position is strong. The state had 100.4 million acres in FY2014, which does not include the 65 million acres of submerged land acquired at Statehood.
• There are five area wide oil and gas lease sales a year. At the most recent sale in November 2014, 300 tracks were leased for $60 million. There is encouraging development occurring on the North Slope and in Cook Inlet.

Financial assets are an important topic of discussion because of the budget issues being seen in Alaska.

• The Permanent Fund Corporation is strong. In FY2014, the fund saw a 15.5% return, which was only slightly lower than the 15.7% benchmark. There are many investment opportunities that are doing well and the corporation is looking to expand into real estate outside of the United States.
• The Constitutional Budget Reserve is one of the options that could be used to bridge the budget gap. It currently holds $12.8 billion.
• Alaska Mental Health Trust Authority is utilizing their land well and making dividends. The state is served well by their investments.
• Alaska Industrial Development and Export Authority has paid $350 million in dividends to the state since its inception.
• Alaska Housing Finance Corporation paid $30 million in dividends to the state during FY2014. Energy and low income housing programs have benefitted Alaskans around the state.

The state’s enterprises are facing challenges, but are working to stay strong.

• The Alaska Marine Highway operates in the red, but is essential for Southeast Alaska.
• Alaska Energy Authority is also operating at a loss but the situation has not changed significantly in the past few years.
• The Alaska Railroad shows a small net revenue, but is facing some major challenges in federally mandated safety regulations. Its income from freight is strong and will continue with increased activity on the North Slope and in Cook Inlet.
• The International Airport System faces challenges, but the fact that Anchorage has the fourth largest cargo airport in the world helps add revenue.
• The Alaska Aerospace Corporation is also challenged, but lawmakers understand its strategic importance and will continue to fight for its survival.
• The University System has a strong endowment and the investment is doing better than recent years. The system has some challenges ahead but will continue to be a priority because additional human capital is necessary to grow Alaska.

To wrap up, Alaska is challenged, but it is also well funded and well endowed. Many people are working on ways to find solutions to the state’s fiscal problems. Commonwealth North has produced a report for Alaska’s leadership. This report highlights some opportunities to work through the fiscal problems and ways to fix the budget gap. This report, Alaska’s Operating Budget: Critical Crossroads, Choices and Opportunities will be presented in Anchorage on February 25 at a lunch hosted by Commonwealth North.

Reviews and Forecasts- Part 1

January is a time to reflect on the accomplishments of the past year and look forward to the future. It has been called a season for measuring things. In the past week, the Building Owners and Managers Association (BOMA) and Commonwealth North hosted luncheons with a focus on reviewing 2013 and looking forward to 2014. Both luncheons featured strong panels of speakers who shared their area of expertise with the audience.

At the BOMA luncheon, Brian Meissner, of ECI/Hyer Architecture and Interiors, began by showing that 2013 was a strong year with the values of building permits going well above 2012. Permit values were at their highest level since 2006. He continued by giving an overview of new construction projects in Anchorage for 2014/15. There are a handful of new projects underway that will increase commercial space. He also noted that there was going to be a significant shift to renewal projects in the Anchorage School District. 2014 is expected to be a busy year, but with few surprises in the commercial real estate game.

Next up was Northrim Bank’s, Mark Edwards to discuss commercial finance. He focused on the major paradigm shift that is being felt in the US in technology, banking, and real estate. Due to government interventions, it is hard to predict how the market is truly doing. It does not reflect the true supply and demand for goods and services. Rapid changes in technology are reshaping commerce.  Banking has seen a drastic shift since the 1990s. The number of banks is down sharply, while the dollar amount in deposits has nearly tripled in the same time frame. Finally, real estate is facing challenges moving forward. Rising interest rates and changes in inflation create price concerns for the future.

Brandon Walker, Pacific Tower Properties, gave the forecast for office, retail, and commercial space for the coming year. Anchorage’s office vacancy is very low and has continued to drop in the past four years. Many tenants are choosing to stay put unless they are displaced from their current location. Retail vacancy is well below the national average at just over 4 percent. National retailers still have a healthy appetite for Anchorage and focus their business in three major areas, the 5^th Avenue Mall, Dimond Center and the power centers of Glen Square and Tikahtnu Commons. 2013 was a slow year for new national retailers, but 2014 is expected to pick up with the development of the Outlets of Alaska. The space is 65 percent pre-leased but retailers are waiting to announce their opening until further along in the project. Until then, the rumor mill will continue to turn as to what new stores will be landing in Anchorage. Industrial vacancy is even lower than office space. The challenges for industrial space include tenant fit/obsolescence, land scarcity, and new construction feasibility. Space will always be a challenge in Anchorage for new construction, and vacancy rates will continue to be low until price or construction costs justify new development.

Closing out the BOMA luncheon was Neal Fried, Economist for the State of Alaska. Neal outlined the pattern of Boom, Bust, Recovery and Moderation in relation to the Alaska economy since 1980. The past five years have held steady after 20 years of growth from 1989 to 2008. 2013 was a modest year in employment, seeing a growth of approximately 500 jobs, down from an increase of 3,400 in 2012. Alaska is well above the national average for median household income and places fifth in the nation. If Anchorage were a state, it would sit at the top of the list with a median household income of $86,790, over $6,000 higher than the AK average. Neal predicted that 2014 would be another flat year for employment. He shared with the audience his record on what really happened versus his predictions over the past eight years. Every year, except one, he predicted the correct direction of growth or loss, and the greatest difference was in 2012 when he predicted a 0.6 percent growth when we actually saw a 1.7 percent growth. 

As you can see, there is a lot happening within Anchorage and while 2014 isn’t expected to be a record year, growth and development is heading upwards and there are exciting new projects on the horizon. For the complete presentations from the BOMA luncheon, please visit http://www.bomaanchorage.com/.

A wrap up of the Commonwealth North Assets Review will be seen in Reviews and Forecasts- Part 2.

Make it Monday Forum Re-cap

Yesterday’s Anchorage Chamber of Commerce’s “Make it Monday” forum was titled A Good Home is Hard to Find. Bill Popp, President of Anchorage Economic Development Council, began the panel discussion by discussing the current economic conditions in Anchorage, including Anchorage’s ranking in the annual Cost of Living Index. Out of 307 cities in the national survey, Anchorage ranks 20^th in both cost of living and cost of housing.  

Art Clark, Vice President of Real Estate Brokers of Alaska, continued with the historical trends for home prices and numbers of listings. The average number of homes listed in a year is lower than it was in 1995, and the average list price has doubled during that same time period.

Jerry Weaver, community development director for the Municipality of Anchorage, and Daniel Delfino, with Alaska Housing Finance Corporation, concluded the discussion by noting that Anchorage has a strong rental market, but new construction of unrestricted multi-family rental housing is relatively modest.

The Anchorage Housing Market Analysis shows that there is not enough buildable land to accommodate future housing demand (2010-2030) under historical development patterns, current land-use policies and development options. It also notes that building mid-rise residential and mid-rise mixed-use rental development is not financially feasible in current market conditions. The full report, written by the McDowell Group and ECONorthwest can be found at http://www.muni.org/Departments/OCPD/Planning/Documents/Anchorage%20Housing%20Market%20Analysis%20Summary%20Report.pdf

The panel agreed that Anchorage is facing a significant challenge for affordable housing and that there is no easy answer. Not only is there a problem, but the outlook is getting worse and housing affordability impacts overall economic growth and business opportunities. Luncheon attendees were asked to become more educated about the problem; become involved in potential solutions, work to collaborate with others and join the conversation to bring light to the challenge of affordable housing in Anchorage.

The slides from Monday’s presentation can be found at http://prezi.com/_mfpwboermpx/make-it-monday-a-good-home-is-hard-to-find/

Alaska residential mortgage foreclosure and delinquency rates remain some of the lowest in the U.S.

The recently released survey by the Mortgage Bankers Association shows that Alaska continues to have some of the lowest levels of foreclosures and delinquencies on residential mortgage loans in the United States.  In the first quarter of 2013, Alaska ranked 3^rd best in the nation out of 50 states in foreclosures and 4^th lowest in mortgage delinquencies of all loan types.

The total inventory of foreclosures in process is 1.1% in Alaska, while the country has a much larger lingering foreclosure inventory at 3.6% due to higher rates during the recession and longer resolution times.  These rates are the same as a year ago in Alaska, but nearly a 1% improvement for the U.S. as whole.

Delinquent loans are more than 30 days past due, but not yet in foreclosure. Alaska is fourth best, slightly behind North Dakota, South Dakota and Montana in the overall level of delinquent loans.  Alaska’s delinquency rate is 3.7%, while the U.S. average is 6.8% for all loan types.  The rate is virtually unchanged in Alaska from a year ago, but is a 1.3% improvement from the worst delinquency level of 5% in the third quarter of 2010.  The U.S. delinquency rate has also been trending downward from its worst point of 10.4% at the end of 2009 to its current 6.8% rate.

Subprime lending to traditionally non-qualified borrowers was a large contributing factor to the national mortgage problems.  The survey covers just over 93,000 mortgages in Alaska.  6,650 of these mortgages, or 7%, were considered subprime, compared to 10% nationally.  The rate of delinquencies and foreclosures on subprime loans is significantly higher.  However, Alaska is in a far better position and again leads the nation as having the lowest level of foreclosures and delinquencies in this important category.  Subprime foreclosures in Alaska are at 2.5% while the national average is 10.8%.  Alaska’s subprime delinquency rate is 10.3% compared to the national average of 20%.

 

Video: 2013 Alaska Construction Spending Forecast

Associated General Contractors Executive Director John MacKinnon and Economist Scott Goldsmith from UAA’s Institute of Social and Economic Research discuss expected Alaska construction spending in 2013 during the recent Associated General Contractors annual Alaska Construction Spending Forecast.

According to the forecast, construction spending in Alaska in 2013 is estimated to be about $8.4 billion, up 8 percent from spending in 2012. Increased spending in the oil and gas sector will account for most of this growth. Spending in this sector is expected to be up 13 percent, from $3.2 billion last year to $3.6 billion in 2013. Also adding to expected growth, a large state capital budget for fiscal year 2013 and $453 million in general obligation bonds that voters approved for transportation projects in the November 2012 election.

 

Click here to download the full construction spending forecast.
Research and printing underwritten by Northrim Bank.

Alaska and U.S. residential delinquency rates drop in first quarter; Alaska still third best in nation

The first quarter 2012 survey by the Mortgage Bankers Association shows a decline in housing delinquencies for 1-4 unit residential properties in the U.S. and Alaska. U.S. delinquencies declined from 8.2% to 6.9% while Alaska’s delinquencies declined from 4.3% to 3.7%. Alaska is still third best in the nation for delinquencies.

Foreclosures in progress were flat in the U.S., at 4.4%, and increased slightly for Alaska, from 1.1% to 1.2%. Alaska also retained its third place ranking in this category.

Alaska continues to have the lowest level of problematic subprime residential loans in the country. Subprime lending to traditionally non-qualified borrowers was a large contributing factor to the national mortgage problems. The rate of delinquencies and foreclosures on subprime loans is significantly higher. Subprime delinquencies in Alaska declined from 10% to 9.2%, while subprime foreclosures declined from 3.6% to 3.4%. The U.S. figures are much higher, with 19.4% of subprime mortgages delinquent and 14.1% of subprime loans in foreclosure.

The survey covers just over 95,000 mortgages in Alaska. Approximately 7,000 or 7% were considered subprime, compared to 9% nationally.

Anchorage Office Market Strong in National Comparisons; Forecast for Somewhat Softer Market in 2012

Anchorage's office space vacancy rate is just over 5%, compared with a national rate of 16%, according to Theodore Jensen, MAI, of Reliant LLC in his January presentation to the Building Owners and Managers Association of Anchorage. Other western city vacancy rates range from about 9% in Portland to 25% in Phoenix.

Jensen forecasts another 200,000 of new Class A office space to be built in 2012, with more projects "in the wings." With low job growth limiting demand, and significant new supply, Jensen expects market conditions to soften in 2012 and result in downward pressure on rents at the high end and flat rents for the rest of the market. However, Jensen noted that Anchorage is still one of the better performing markets in the country.