2009 in review: State's economy downshifting

Posted: Wednesday, December 23, 2009

Alaska's economy is slowly downshifting. Some of this is being driven by real reductions in dollars coming into Alaska -- fewer tourists, fewer oil wells being drilled, lower payments to fish harvesters this year -- but some of the slowdown is also being driven by psychology -- weak consumer confidence, and more caution by investors and borrowers.

"We know there are people out there with money looking at investments, but they're being very cautious," said Chris Anderson, deputy director for credit at the Alaska Industrial Development and Export Authority.

AIDEA is the state's development finance corporation, which works in partnership with banks on commercial loans. Lending is flat, Anderson said. On the other hand, loan delinquencies are at very low levels. That indicates underlying economic health in most of the economy, she said.

Scott Goldsmith, senior economist at the University of Alaska's Institute of Social and Economic Research, said Alaska is losing jobs, and that will continue into 2010, but things could be far worse.

"The jobs loss so far has been modest -- perhaps 1 percent," compared to many regions of the U.S. reporting jobs losses of up to 8 percent, Goldsmith told the Resource Development Council luncheon in Anchorage Dec. 8. "In Alaska the job loss has been concentrated in tourism, transportation and petroleum, but inevitably the slowdown has been spreading out to other industries including construction, retail trade, services and local government."

Government has held steady, Goldsmith said. That's no surprise given the sturdy military presence in Alaska and the steadiness of state oil revenue. Health care employment has continued to grow.

Next year will see more of the same.

"The Alaska economy will continue to contract," Goldsmith said. "We know tourist visits will be down. Major oil companies have announced reductions in their capital budgets. Consumers are cautious and have less cash from a smaller permanent fund dividend this year. Many support businesses are going into the new year with weakened balance sheets."

Neal Fried, an economist with the state Department of Labor and Workforce Development, agrees with that assessment. After 21 years of steady employment growth in almost every sector of the economy, Alaska has started shedding jobs, down about 4,000 so far this year compared to last year.

Alaska is in better shape than most others states, however. Fried said Alaska has lost about 1.3 percent of its wage and salary jobs since the recession effects hit earlier this year. Oregon, in contrast, has lost 6.5 percent of its jobs since the recession began.

Fried ticked off a list of Alaska industries that are shedding jobs. Construction has been down for some time, he said. A lot of this is due to the slowdown in commercial and private building over the last year, and very few commercial building projects are foreseen in 2010.

Public construction has sustained the industry, but even the government-funded building has been focused on transportation projects, with less on buildings. Structural building, in general, tends to employ more people than building highways.

Transportation employment is also down. The sharp drop in international cargo flights stopping at Anchorage's airport for refueling and servicing this year took a bite out of airport-support jobs, and this was followed by a drop in summer tourism.

There are indications that things have bottomed out for air cargo and there may be small increases in air cargo flights, but the shutdown of Northwest Airlines' cargo hub in Anchorage at the end of December will cause another 50 to 100 air transportation workers to lose jobs, Fried said.

There's also the bleak outlook for tourism in 2010 that will mean fewer summer travelers and air flights.

Oil and gas employment remained strong through most of late 2009 and much to 2010, despite last year's record volatility in oil prices, which dropped from $140 per barrel to $30 per barrel and then rebounded to the current range of about $70 per barrel.

Much of what sustained industry work were projects already under way or committed to before the price drop, or major maintenance projects that had been planned.

Those are finished now and there are fewer large industry projects underway. After a long climb, oil employment is now dipping.

The effect of the national recession on Alaska's consumer confidence, and a smaller permanent fund dividend in 2009, has had an impact on retail in the state. Some parts of retail that are lagging clearly indicate Alaskans' more cautious attitudes toward spending.

Employment with motor vehicle and parts dealers are down, for example, and these jobs are mostly tied to purchasing by local residents. Clothing store employment is also down; the drop in tourism as well as less purchasing by Alaskans affected these jobs.

General merchandise store jobs showed a gain, but this appeared to be caused by the opening of two Target stores and a Kohl's store in the Anchorage area in 2009.

One expanding industry is mining, Fried said. The new Kensington gold mine near Juneau is in the final stages of construction, the Fort Knox gold mine near Fairbanks is expanding, the Usibelli coal mine in Healy is mining and exporting record amounts of coal, and the Red Dog Mine north of Kotzebue expects to receive permits for a new pit that will extend its mine life.

Companies are also exploring a large new gold find north of Fairbanks that could become a second Fort Knox-type large surface mine.

All of this is expected to sustain mining jobs that have been on a steady climb since 2004.

"Mining is one of the more positive parts in our economy right now," Fried said.

Health care employment has also seen steady growth.

"It has been quite robust. This industry had flattened out in 1986 and 1987, but it has grown every year since then," Fried said. "All the large health care operators are expanding: Providence Health Systems, the Southcentral Foundation, the tribal health consortium."

As mild as Alaska's version of the recession has been, and will likely continue to be, ISER's Goldsmith is optimistic growth will resume, but that it will probably lag the national recovery.

"The tourists will come back, although we will have to work at getting our share of the market. The FedEx jets will return full from the Far East, and consumers will regain confidence and start spending," Goldsmith told the Resource Development Council.

But for the long term, Alaskans should be concerned about the state's continued dependence on its main cash cow, petroleum, for state revenues, the declining production in that industry and uncertainty about its future.

Despite the growth of mining, fisheries, tourism and other non-petroleum industries in recent years, it is oil and gas and federal spending that underpin most of the state's economy, Goldsmith said.

The loss of the "Ted Stevens effect" in federal appropriations, that is the loss of the senior member of Alaska's congressional delegation last year, will eventually have impacts on federal spending in the state.

As for oil and gas, "not everyone understands what petroleum can contribute or what its contribution has been," Goldsmith said.

Alaskans understand the importance of a possible natural gas pipeline, but support for outer continental shelf drilling is lukewarm from some quarters because the state will not be able to collect royalties or severance taxes from that production, he said.

"This way of thinking not only ignores the jobs potential (of OCS), which is an order of magnitude greater than a gas pipeline, but also the spin-off (state) revenues from onshore production activity stimulated by the expansion of infrastructure on the Slope," Goldsmith said. "Consider this: If recoverable (oil) reserves are 10 billion barrels and the price of a barrel is $50 the total value of OCS development would be $500 billion. Surely Alaskans have the imagination to see this as an opportunity worth pursuing."

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