With the nation now mired in recession, how long can it be until this bug spreads to Alaska?
Economists: Don't worry, but be wary 120308 BUSINESS 1 Morris News Service, Alaska With the nation now mired in recession, how long can it be until this bug spreads to Alaska?
Wednesday, December 03, 2008

Story last updated at 12/3/2008 - 2:01 pm

Economists: Don't worry, but be wary
Alaska currently the only state showing employment growth during meltdown

With the nation now mired in recession, how long can it be until this bug spreads to Alaska?

The state is an island of relative prosperity, thanks mainly to oil - though that's looking shaky of late. Moody's, the financial rating service, says Alaska is now the only U.S. state still showing employment growth, though it is modest at just over a 1 percent increase.

Alaska has been on that gradual job-growth track for the past 21 years, and Alaska's other numbers still look pretty good. Per capita income for the first two quarters of 2008 was up 5 percent, to $42,038, after rising 5.8 percent between 2006 and 2007. Home values are still rising in the state's major cities, up to an average of $329,000 in Anchorage.

While home sales are slow and even down in some cities, Alaska's situation is nothing like that of other states.

Alaska's banks have good liquidity - $1.7 billion in state-chartered banks, $5.4 billion in national banks and $3.8 billion in credit unions, bankers recently told the Anchorage Chamber of Commerce. The state of Alaska is flush with about $10 billion in reserves, not including the permanent fund.

There are also several billion dollars of state capital projects approved by the Legislature over the last two years that are yet to hit the streets.

The state's development corporations, Alaska Industrial Development and Export Authority and Alaska Housing Finance Corp., are financially strong.

Chris Anderson, lending director at AIDEA, said her agency is seeing its second-lowest delinquency rates ever in its commercial loans, which are issued in partnership with banks. As of June 30, AIDEA's delinquency rate was 0.65 percent of $48.24 million in loans outstanding.

Having AIDEA is a real asset for Alaska businesses because the state development corporation is financially strong enough to fund business lending, and even expanded lending, out of earnings on its loans and other projects, said Valorie Walker, the authority's finance director.

This assumes Alaska's economy doesn't implode and that borrowers make their payments, she said. That isn't likely, however.

What's good about this is that because it can fund loans from its income the authority doesn't have to go to the bond market to finance lending. "I'd hate to be going to the market for bonds right now," Walker said.

Anderson said Alaska Native corporations are another source of resident capital that strengthens the state's economy. Many of these corporations are well capitalized even in the current downturn, she said. They like to invest within Alaska, too.

Alaskans also believe an ace up their sleeve is a mega-project on the drawing boards, the gas pipeline.

So, should Alaskans worry?

Maybe not worry, but they should be wary and watchful, say two leading Alaska economists, Scott Goldsmith at University of Alaska's Institute of Social and Economic Research, and Neal Fried at the state Department of Labor and Workforce Development. Both agree things look OK for now, but point to some areas for concern.

Goldmith is concerned about the gas pipeline, for one thing. With energy prices sinking and prospects that the recession may be prolonged, it may be difficult for TransCanada, for example, to attract customers to its proposed project in 2010.

The producers have their own gas resources behind their pipeline project, Denali, but tight credit worldwide could put the squeeze even on very large companies like BP and ConocoPhillips, who own Denali.

When both Denali and TransCanada have their open seasons in 2010, they will be asking customers who would ship gas to make tens of billions of dollars of financial commitments, which could be tough if worldwide credit markets are still tight.

A decline in federal spending is also possible and even likely, Goldsmith said. The federal government is becoming financially stretched with huge new bailout commitments.

Fried says federal spending is an important part of the state's economy and it is slightly up -

$9.25 billion in 2006, compared to $9.4 billion in 2007 - but when inflation is taken into account it is flat or even slightly lower.

Meanwhile, how firm is the state's job growth? It's really propped up by oil industry work, Fried points out. If the petroleum industry wobbles, job numbers could quickly go into the negative.

Petroleum employment grew 14 percent in 2007 and is continuing to grow in 2008, according to a recent analysis by Northrim Bank. These are premium jobs with average salaries of $108,326 per year, more than twice the state's average per-job salary. Without them, the picture doesn't look so good.

The recent decline in oil prices to below $60 per barrel is worrisome, but a lot of the industry work is focused on infrastructure renewal with some of it in anticipation of the gas pipeline.

Lower oil prices also mean there will be effects on the state budget, Fried said. The state's ample cash reserves will cushion impacts, at least for the short term.

Goldsmith said a $1,200 per-citizen energy rebate is unlikely next year, but the permanent fund dividend should dip only a bit because of way the dividend is calculated, averaged over five years.

Tourism is expected to be down, Fried said, because of the wallet-tightening around the world among consumers. However, some Americans may still opt to come to Alaska instead of going overseas, so tourism is a tough one to call, Fried said.

There are some positives in the picture. Fried said he has heard of construction costs coming down and rapidly in some areas, so that some projects that weren't economic are now viable.

"There are a lot more people bidding on jobs, and a lot more competition," he said.

However, there are huge unknowns, Fried said. "Our numbers still look good but what we can't see easily are changes in Alaska consumer behavior. Spending will be influenced by the shrinkage of retirement accounts and 401(k)s, and people will be influenced by what they read in the newspapers, even if our regional economy is still good," he said.

"We saw this in real estate markets last year. Our local markets have been fairly good, but when people here read about the troubles nationally they started holding back" on home purchases, which caused the Alaska markets to slow, he added.

Fried said economists have few ways to measure consumer spending, so that's somewhat of an unknown.

"Sales tax receipts measure consumer spending, but Anchorage, which is half the state's economy, doesn't have a sales tax and the reporting on tax receipts is delayed in municipalities that do have sales taxes, so we don't have a lot of tools," he said.

Goldsmith said the 401(k) effect might be smaller in Alaska than in other states because the state has a higher proportion of younger people still in the workforce and fewer retired people compared to other states.

"Those of us thinking about retiring may have to work longer, and we may have to defer that big new TV," he said.

Anderson said the biggest problem in downturns like this is the psychology of the market.

"Fear and uncertainty is causing people to just wait to see what will happen. I know there are people with money out there to invest, even in Alaska, but they're holding back. A lack of confidence can make this a self-fulfilling prophecy. We can create our own downward spiral. In fact, this happened in Alaska in the 1980s."