Alaskanomics

2016 First Quarter Employment

By Scott Goldsmith:

The Alaska economy contracted at a 1.4 percent annual rate in the first quarter of 2016 according to the final count by the Alaska Department of Labor.  Employment was 4.5 thousand lower in the first quarter than the previous year.  Growth slowed through early 2015 and turned negative in the second half of the year. 

The drop was most pronounced in four sectors.  Petroleum was down 13 percent, a loss of 1.9 thousand jobs.  Business services declined 4.4 percent, a loss of 1.3 thousand jobs.  Construction declined 9 percent, also losing 1.3 thousand jobs.  State government was down 5 percent, also losing 1.3 thousand jobs.

Health care reported a growth rate of 2.3 percent, adding 1 thousand jobs.  Local government also increased .6 percent, or 250 jobs.  Other sectors were little changed from a year earlier.

All regions of the state shared in the loss of jobs.  The largest regional economy—Anchorage/Matsu—contracted at a .8 percent rate (1.5 thousand jobs) while employment in the rest of the state fell by 1.9 percent (3 thousand jobs).

Alaska Population Stable, Concentrating in Mat-Su, Getting Older

By Scott Goldsmith

The 2015 Alaska population was virtually unchanged from a year earlier at 737.6 thousand according to the Alaska Department of Labor. Natural increase (births minus deaths) was almost entirely offset by net out-migration of 6.8 thousand. This was the third year in a row that the number of out-migrants exceeded in migrants.

For the second year in a row Anchorage lost population (1.5 thousand) and has dipped back below 300 thousand. On the other hand, the Mat-Su Borough added 1.8 thousand and now has a population of 100 thousand. Population across the rest of the state was unchanged.

The senior population continues to grow and now stands at 10 percent. This growth is driven largely by the aging of the baby boomer generation. In fact, seniors account for nearly ¾ of the population growth since 2010.   

2015 State Employment Growth Turned Negative at Year End

By: Scott Goldsmith

Final 2015 employment data reported by the Alaska Department of Labor shows a clear trend of growth slowing over the year and turning negative in the last quarter.  Even though the overall growth rate of employment for the year was .4 percent, by the end of 2015 employment was 2 thousand below the year before.

The decline in employment was most evident in the oil and gas sector which, by the end of 2015, was 2.1 thousand below December 2014.

Employment was less than a year earlier by the end of 2015 in both the public and private sectors, and in all parts of the state except the Mat-Su Borough where there were 500 more jobs in December 2015 compared to a year earlier.

Preliminary data for the first 4 months of 2016 shows the decline continuing.  In April reported employment dropped below the same month in 2014.

Department of Labor Employment Data

By: Scott Goldsmith

Alaska wage and salary employment continued to grow in the first half of 2015 according to the latest information from the Alaska Department of Labor. Increased private sector employment more than offset a decline in public, mostly state government, employment. However growth slowed over the first two quarters of the year and will probably turn negative before the end of 2015 as the construction and petroleum industries contract.

Construction employment was higher for the 4^th year in a row, but will soon start to contract due to both a decline in state government capital spending and reduced spending by the petroleum sector. This is evident from a decline in employment in professional services, a leading indicator of activity in the construction sector, which began last year.

Petroleum employment peaked at the end of 2014 and started to fall off at the beginning of this year. The decline will continue due to the Shell pullout and the completion of the Pt. Thomson project.

Employment in health care, which has been a major contributor to growth for several years, has not increased in two years and is unlikely to be a strong economic driver in the near term future.

However the decline in federal civilian employment since 2010 may be nearing an end, and this will help to stabilize the economy.

ISER Publication: The Path to a Fiscal Solution: Use Earnings from All Our Assets

By: Scott Goldsmith

The state government's assets could generate enough earnings in fiscal year 2016 to pay the Permanent Fund dividend, boost the size of the Permanent Fund, and cut the expected General Fund deficit from $3.3 billion to just over $1 billion—which would still be a big fiscal challenge but much more manageable. That's the finding of a new analysis by Scott Goldsmith, professor emeritus of economics at ISER.

Those state assets consist of money in the Permanent Fund and other accounts as well as the value of state-owned petroleum still in the ground. Dr. Goldsmith estimates that after first paying the dividend and adding to the Permanent Fund, the state could put $2.2 billion in remaining earnings in the General Fund, which pays for public services. 

Right now the state uses only current petroleum revenues and smaller sources to cover General Fund spending—but those revenues are expected to fall $3.3 billion short of the estimated $5.5 billion in spending next year. Dr. Goldsmith finds that if the state's broader assets were carefully managed and annual General Fund spending was gradually reduced to about $4.5 billion, part of the asset earnings could be used every year, without risking the value of the assets themselves.

A grant from Northrim Bank funded this research. ISER publications are solely the work of individual authors and should be attributed to them, not to ISER, the University of Alaska Anchorage, or the research sponsors.

Read the analysis, The Path to a Fiscal Future: Use Earnings from All our Assets

Maximum Sustainable Yield: FY16 Update and Model

The Institute of Social and Economic Research (ISER) has published the update for the State of Alaska’s Maximum Sustainable Yield for FY16. Each year, Dr. Scott Goldsmith outlines the amount the state can afford to spend as part of the general fund. This outlines how much the state can spend without risking valuable petroleum assets.

For FY16, Goldsmith predicts that the state can spend $4.5 billion, which is less than the $5 billion that he predicted last year. The sustainable spending level is lower than last year due to the decrease in expected oil revenues. Goldsmith notes that the state should be moving towards sustainable spending due to the drop in oil revenues. “Budget cuts will affect the economy, which relies heavily on state money – so the cuts should be gradual rather than precipitous.”

The FY16 update has an interactive model that helps readers understand Alaska’s fiscal challenges and see the implications of different assumptions about state revenues and fiscal policies. Download the model at www.iser.uaa.alaska.edu/

The state is currently over spending what can be sustained in the future. This issue is top of mind due to the significant drop in oil prices during the last half of 2014. Goldsmith’s model recognizes ups and downs and the spending is still too high to maintain. If the state does not move towards sustainable spending, the Permanent Fund will be depleted. The Permanent Fund comprises the largest part of the state’s nest egg. As with any fiscal changes, the longer the state waits, the harder the changes become. It is much easier to make small changes, than it is to make sweeping cuts across the whole budget.

The state budget must be brought to a sustainable level soon and Goldsmith provides a strong case for the maximum sustainable yield in the FY16 update.

For further information about Maximum Sustainable Yield, visit: http://www.iser.uaa.alaska.edu/Publications/webnote/2015_01-WebNote19-2016MSYandMODEL.pdf

2015 Construction Industry Spending Forecast

The Construction Industry Progress Fund (CIPF) and the Associated General Contractors (AGC) of Alaska released the annual Alaska Construction Spending Forecast this week. The report is funded by Northrim Bank and written by Scott Goldsmith and Pamela Cravez of the University of Alaska’s Institute of Social and Economic Research (ISER).

This year, construction spending is predicted to be about 3 percent lower than 2014. The total is expected to be about $8.5 million for the year. Private spending is expected to be down in all areas, except for mining, while public spending is expected to increase slightly. Even with the drop in oil prices and state budget shortfall, state government construction spending will not likely see a negative impact this year or next. A record high $2.3 billion was appropriated from the general fund in FY2013 and that money is continuing to be spent on projects that will fuel spending this year.

Goldsmith and Cravez note that predicting the spending levels for the oil and gas industry is tricky because plans often change due to many factors. A healthy increase in 2015 was predicted in the last quarter of 2014, but those plans are likely to change due to the continued low oil price. The low price of oil means that the producers have less cash available for investment in new projects. The good news is that the industry tends to make investment decisions on conservative, long run oil prices. The current drop will have less of an impact moving forward.

Alaska’s economy has slowed over the past three years. Job growth has continued, but very slowly and the population growth has stalled. There are now more people leaving Alaska than moving here on an annual basis. Private investment will slow because many are looking to determine how long the economic slowdown will last.

As in many industries, the construction industry will wait out this period of low oil prices and work to find a balance for new projects as well as projects already in the pipeline.

For the full report can be viewed at our ‘Resources’ page.  

SB21: Sense and Nonsense

Scott Goldsmith presented his interpretation of a recent ISER report on the More Alaska Production Act (SB21) to a packed house this morning at the Resource Development Council’s (RDC) Breakfast meeting. Goldsmith outlined his presentation by covering four main points from his research.

• The so-called $2 billion “giveaway” this year under SB21 does not exist.
• Without enhanced production, future tax revenues could be higher under SB21 than ACES if recent price and cost trends continue.
• Under reasonable future market conditions, a modest increase in investment and oil production would create more state revenues under SB21 than ACES.
• New money into the oil patch creates long lasting jobs and increased consumer purchasing power.

Critics of SB21 have stated that the new tax structure is a $2.1 billion giveaway to the oil companies. Goldsmith illustrated that the revenue loss was mainly due to the $1.29 billion reduction in production tax revenue. The shift to the new tax structure accounted for only 4 percent of the lost revenue. The $90 million difference from ACES to SB21 is nowhere close to the $2.1 billion difference in the expected oil revenue for fiscal year 2014.

The tax liability under SB21 is sensitive to both oil prices and lease costs. This will allow for higher tax revenue even without enhanced production.  The price of oil has stabilized over the past couple of years and Goldsmith noted that analysts do not see much upward movement from the current price.

Even a small investment in new oil production will create more state revenue under SB21 than it did under ACES. New investment will not only generate new revenue, it will create additional employment. This includes direct jobs in the oil industry and indirect jobs that help individuals and families throughout the state.

The opportunity for increased production is here in Alaska. There are opportunities to develop marginal fields under SB21 and if the size of the revenue pie is increased, the state and its citizens win.

To watch Scott Goldsmith’s presentation, visit http://www.akrdc.org/membership/events/breakfast/1314/050114.html

The full report is available at http://iser.uaa.alaska.edu/Publications/webnote/2014_05_01_WebNote17WhereDidthe2BillionGo.pdf

Maximum Sustainable Yield: FY 15 Update

The Institute of Social and Economic Research (ISER) recently released its FY 2015 update estimating how much Alaska’s state government can afford to spend from the unrestricted General Fund (UGF) in the coming fiscal year. In this year’s report, author Scott Goldsmith estimates that the state can afford to spend about $5 billion from the UGF in FY15. This is a decrease of $.5 billion, or roughly 10 percent from the FY14 estimate. This is mainly due to declining oil revenues. The estimate is based on the state’s current $139 billion petroleum nest egg, which is a combination of $65 billion in financial accounts and $74 billion in expected oil revenue. Goldsmith notes that by saving incoming oil revenues above the $5 billion level and growth only as fast as population and inflation, the state could build up the Permanent Fund and other financial assets faster than the decline of petroleum revenues. This would allow the state to rely on petroleum earnings much longer than what is currently sustainable. If spending continues at its current rate and grows at an annual rate just 1 percent faster than population and inflation, cash reserves will be exhausted by 2024 and the fiscal gap could reach $3.5 billion.

Goldsmith continues the report by outlining the differences between business as usual spending and maximum sustainable yield (MSY) spending, arguing that MSY spending is the way to solve the budget problems that are arising from lowered petroleum revenues. If the state continues on the business as usual spending path, revenue will need to be made up after the cash balance runs out in 2024. This can be done by using the Permanent Fund and/or new taxes. Both would be needed to fill the budget gap, but would drain the corpus of the Permanent Fund.

Maximum sustainable yield spending allows the state government to determine how much can be sustainably spent from its petroleum wealth by viewing the wealth as an endowment belonging to all Alaskans. The sum of the endowment comes from future petroleum revenue and the state’s financial assets accumulated from saving a portion of petroleum revenues from past years. Goldsmith believes that if properly managed, the endowment, or nest egg, would generate an annual return which could be drawn off for current spending. By limiting this annual draw to the MSY, the nest egg would be sustainable and future generations would share equitably with the current generation in Alaska’s petroleum wealth.

Throughout the update, Goldsmith outlines his plan for MYS and how it would benefit Alaska, not only now, but for future generations. Implementation would take patience and transitioning to a sustainable spending path would be difficult. It would require a cut in spending. Delaying this cut would only postpone the inevitable. The sooner spending issues are addressed, the better. It is going to be easier to make small cuts now, rather than much larger cuts in the future to make up the deficit. Serious consideration needs to be taken when looking at the state’s budget. The concept of maximum sustainable spending is one way to avoid depleting the state’s cash reserves in the near future.

This research is funding by a grant from Northrim Bank. To view the full report visit- http://www.iser.uaa.alaska.edu/Publications/webnote/2014_01-WebNote16-MaximumSustainableYield.pdf

Alaska’s Construction Spending to be up 18 percent in 2014

The Associated General Contractors (AGC) of Alaska together with supporter, Northrim Bank released the 2014 Alaska Construction Spending Forecast. The report highlights the upcoming year for both private and publicly funded projects in construction throughout Alaska. Construction spending is expected to be $9.2 billion, up 18 percent from 2013.

The oil and gas sector is expected to account for nearly half of the total with $4.3 billion. This is over $1 billion higher than the total for oil and gas last year. Private spending, excluding oil and gas will be about $2 billion, which is slightly higher than the 2013, which was $1.9 billion. Public spending will also increase from 2013. It is expected to be $2.9 billion, up from $2.7 billion last year.

There are four major factors for the robust projection for 2014. The largest reason is due expanded investment plans by the oil and gas industry. Other factors include a larger Department of Defense budget, a reallocation of unspent funds federal highway funds, and strong spending by the state government.

The oil and gas industry is expected to see a 33 percent increase over 2013. It is suspected that this is due to the climate of optimism with the passage of the new oil tax structure for 2014. Not only will new construction be a factor in the coming year, aging infrastructure will be will addressed on both the North Slope and in Cook Inlet.

Mining is expected to see a drop in 2014 due to the fact that the price of gold is dropping. More than half of the expected spending in the mining industry will be on maintenance, continued exploration, and new facilities at the operating mines in Alaska. The six large mines currently in operation are Red Dog, Fort Knox, Pogo, Kensington, and Greens Creek all mineral mines and Usibelli, is the state’s only coal mine. There are also smaller projects that will have construction activity throughout the state.

Utilities are expected to see a jump in 2014 with two new large plants being built for MEA (Matanuska Electric Association) and ML&P (Anchorage’s Municipal Light and Power). There will also be hydroelectric projects and renewable resource projects, like wind and biomass. There will also be an increase in telecommunications in 2014. Spending will be a mix of new firms (Verizon) coming into the market and GCI and Alaska Communications expanding and upgrading current facilities. Utility spending is a combination of private and public spending.

On the public side of the forecast, much of the increase for public spending will be seen by defense spending. There will be a huge increase in military spending for facilities on bases and formerly used defense sites. Fort Wainwright has seven new projects including a new warm-storage hangar, which will cost $36 million. Fort Greeley will also see a large increase in projects, including a $1 billion expansion to the missile defense system, which will last over the next seven years.

Other areas of public spending will see slight decreases that are offset by the increase in defense spending. Overall, there will be a modest 6 percent increase in public spending, in comparison to the 24 percent increase in private spending.

The construction trade is Alaska’s third largest industry, paying the second highest wages. Accounting for 20 percent of Alaska’s total economy, the construction industry reflects the pulse of the economy. These numbers do not include construction workers that are in other industries, such as oil and gas, mining, and utilities. It also doesn’t account for self-employed construction workers. In 2011, it was estimated that there were 9,000 self-employed construction workers in Alaska.

The economy has continued to grow in Alaska. This means more jobs and a growth in the population. This growth has been a catalyst for the residential and commercial construction sector. The oil and gas sector is an obvious driver for this growth, but the other areas discussed above are also helping add to the positive forecast for 2014.

The 2014 Construction Spending Forecast was compiled and written by Scott Goldsmith, Mary Killorin and Linda Leask of the University of Alaska’s Institute of Social and Economic Research (ISER). Visit Alaskanomics’ Resource Section for the full report.