Alaska economy on the mend after pandemic, but recovery is gradual

In an economic briefing for Alaska business leaders Northrim Bank said the buildup of private investment is continuing despite concerns over inflation, rising interest rates and workforce shortages. “Last year there seemed more hesitation and willingness to delay amid uncertainties, but that is not the case this year,” Northrim’s CEO Joe Schierhorn said.

The renewal of the summer cruise ship season to pre-pandemic levels is a big factor in rising business confidence. There’s also pent-up demand in general after two years of restraint during the pandemic, as well as many businesses, along with consumers, having cash on hand, Schierhorn said. The infusion of almost $2 billion in federal loans and grants was a significant in helping Alaska firms weather the pandemic, he said. The economic briefings were presented in Fairbanks, Anchorage and Juneau.

Here are key points that were made:

• Alaska’s Gross Domestic Product, home prices and incomes all rose in 2021• Several billion dollars federal stimulus money helped avert an economic disaster during the pandemic

• Higher interest rates and inflation will affect the economy in 2022

• Health restrictions are easing and the jobs picture is improving

• Nimble companies with good IT and financial resources will do well

• Demand is strong but supply chains are disorganized

• The focus on domestic production could improve the political climate for resource development

• Alaska’s economy will underperform its potential from a lack of skilled workers. This is true on the state as well as national level

• Demographic trends are also at work, including the aging of skilled workers, low population numbers among middle-age workers (who tend to be experienced and with higher skills); COVID and immigration policies are slowing permits for skilled workers from outside the U.S. (which will affect Alaska’s seafood and tourism this summer)• Shortages of health care workers, particularly skilled nurses, are a concern in health care

• Gross State Product, or GSP, a measure of economic activity, was down 7 percent in first quarter 2021; up 4 percent in the second quarter; up 0.4 percent in third quarter

and up 3 percent in the fourth quarter. Transportation and warehousing, health care and accommodation and food services were drivers in the 2021 growth• Alaska personal income was up 5.9 percent in 2021 compared with 2020, growing $2.76 billion. Within this, wage income was up $1.014 billion; dividends, interest and rents were up $39 million; government transfer payments were up $1.79 billion, which includes the Permanent Fund Dividend. Personal income growth still lagged the nation, where personal income was up 7.4 percent in 2021 over 2020.

In a separate presentation on the economy, given to state legislators in Juneau by Dan Robinson, chief of the Research and Analysis group in the state Department of Labor and Workforce Development, Alaska was depicted as improving gradually but lagging behind the U.S. as a whole and most other states.

Alaska and Hawaii’s recovery have been slower because, among other things, the tourism industry in both states was clobbered in 2020 and was weak in 2021, Robinson told the state Senate’s finance committee. Unlike tourism in other states, trips to Alaska and Hawaii required air travel and, in Alaska’s case, dealing with an international border.

In Alaska, oil was hit hard and is showing little recovery so far, Robinson said. Oil’s decline as a part of the state’s Gross Domestic Product has been most striking. In 2013 petroleum accounted for a third of state GDP. It is now about 10 percent, he said. “Oil’s long-term future as a contributor to the state’s GDP is uncertain, like a lot of other things right now. It’s not impossible that other resource sectors, such as mining, might take the place of petroleum at some point,” Robinson said, although Russia’s invasion of Ukraine makes it more likely that oil prices will remain high for the near-term.

“If oil were pulled out of the state GDP calculation GPD would be basically flat, which illustrates the strong influence of petroleum on the calculation,” Robinson said. Oil revenues to the state are part of the GDP calculation as well as industry employment and purchasing.

An important aspect of this was that oil work was already at a low ebb when the pandemic hit in 202. The industry had suffered several years of decline after the collapse of oil prices in 2016 and downsizing of industry activity in the years immediately following.

While the industry is showing some gradual recovery this will speed up if one or more pending new projects move ahead. The Pikka project by Oil Search and Repsol is the most likely major new project in the near term.

Other states are recovering fast, Robinson told the senators. He cited Utah and Idaho as two states “roaring” out of the recession. Both states were economically strong going into the pandemic and have advantages of a lower cost of living, relatively inexpensive housing, and strong technology sectors, he said.

Alaska’s personal income was bolstered by a massive infusion of federal money in 2020 and 2021 totaling about $5 billion, which than offset a$2 billion drop in 2019 to 2002, or from $50 billion to $46 billion in 2020. Personnel income climbed back to $48 billion in 2021.

There was massive pandemic-related unemployment during the period, but government unemployment compensation provided a safety net. However, not all unemployed Alaskans filed for benefits.

Sen. Click Bishop, R-Fairbanks, cochair of the Senate committee, citing a recent article in Alaska Economic Trends, the state labor department’s monthly magazine, said 75,000 Alaskans had exited the workforce by the third quarter of 2021 but only a third of these filed for unemployment compensation. “This is not the majority of the out-of-work who filed,” Bishop said.

Robinson said the argument that generous federally-backed unemployment kept people out of the workforce is mostly a red herring. “When people were getting the extra $600 a week in unemployment benefits, it was fair to ask whether that was keeping people out of the workforce, but the evidence suggested it was never a major factor,” Robinson said.

“Also, those supplemental payments and the suspension of work-search requirements in order to be eligible have been gone for a long time now,” Robinson said. Other factors, like lack of child care and continued presence of COVID-19 in the workplace, were more important, he said.

A related note: Even with heavy draws in 2020 and 2021 the state’s Unemployment Compensation Insurance trust fund generally intact through 2020 and 2021. The fund had been at a very healthy $500 million going into the recession and did drop to $270 million in March, 2021 but has since recovered to about $300 million range, in the range considered solvent.

If the balance in the trust fund falls too low state law requires the UIC tax paid by employers to be increased to rebuild the balance. This did not happen during the recession.

“Other states with different UIC financing systems often require political decisions to raise tax rates, and they did not fare as well. In some, the UIC funds were depleted and states had to contribute general funds to return them to solvency,” Robinson said.