On economy: Prepare, don’t panic

  • Wednesday, April 13, 2016 10:21pm
  • News

Northrim Bank leaders say Alaska’s state fiscal outlook may be grim, but the economy has some positives to focus on as well.

The bank has launched a new speaking series geared specifically towards helping businesses navigate the state’s new fiscal environment. The key point is psychology, the bank’s leaders say. They don’t deny the importance of the state’s $4.1 billion budget deficit and they don’t deny that an economic downturn is in the works, but they say handwringing is the wrong response.

“What’s better than panicking is preparing,” said Mark Edwards, the bank’s senior vice president and chief economist, to a room packed with hundreds of Alaska businesspeople. “No matter how long you live here you’re going to eventually feel an earthquake, so we can’t really stop that. The best thing we can do is prepare for it. Same sort of thing in a recession. No matter where you live in the world, you’re going to feel one every 10, 20, 30 years. It’s going to happen.”

Edwards and the rest of Northrim’s management use the term recession with a dash of salt. Northrim’s Chairman and President Joe Beedle said during an editorial board meeting April 12 that recession is a specific term to apply to specific industries, rather than the state as a whole.

“There will be geographies in a recession, and there will be industries in a recession,” said Beedle. “It’s not the overall economy. It’s how that economy affects the individual businesses.”

Clearly, they acknowledge, the oil and gas industry, along with the construction industry and state finances attached to them, is in the midst of a slowdown that could be considered a recession.

North Slope layoffs and declined production tied to the slide in oil prices contribute to a Department of Labor prediction that Alaska will lose 2,500 jobs in 2016, reversing the gain of 1,700 jobs in 2015 that staved off fears of an economic downturn. Oil and gas drive the largest segment of the state’s construction industry, and state workers will suffer under budget cutbacks.

Despite oil-driven economic woes, Edwards said the state still sees growth in other industries. Unlike Alaska’s 1986 recession, driven by a similar oil price plummet, Alaska’s economy is now broader and more diversified. Tourism, health care, and retail business, Edwards said, provide a bright spot for the Alaska economy.

Last year was a big one for Alaska tourism, with more than 2 million visitors, a 7 percent increase from 2014. National retailers have been moving into Anchorage, and consumer spending driven by gas pump savings should keep the trend flowing, Edwards said. Health care is predicted to see a major employment boost to offset the oil-related job losses.

“As we age and need more health care and the cost of health care increases, we’re seeing more construction activity,” said Edwards. “It’s predicted to be another 400 jobs in 2016.”

Edwards drew attention to, but did not quantify, the economic impacts of Native regional corporations. Native corporations, established by the Alaska Native Claims Settlement Act in 1971, are an unappreciated economic mover in the state, Edwards said, which spread wealth throughout low employment areas outside of urban Alaska.

Other positives for business owners include Anchorage’s housing market and wage rates, Edwards said. Alaska’s per capita income grew 3.8 percent in 2015 to $55,940, the sixth-highest in the nation.

Edwards did not mention that Alaska’s cost of living is also commensurately higher. According to the Council on Community and Economic Research, Alaska’s cost of living index for the first quarter of 2015 was 132.9, meaning Alaska is about 33 percent more expensive than the national average. In Anchorage, the housing index is 63 percent greater than the national average.

According to the U.S. Bureau of Labor Statistics’ Consumer Price Index, “Anchorage residents spend the most by far on housing, at more than 40 percent of their income.” For businesses, Edwards highlights the housing expense as a positive, urging them to make the most of Alaska’s low interest rates for personal refinancing and housing stock movement.

Along with a record high average home price in Anchorage, mortgage rates are at their lowest, around 3.7 percent, unlike the 16.6 percent interest rates paid by Alaskans in 1981. Alaska also ranks second nationally for the least amount of delinquent loans, roughly half the national rate.

“Prices increased 2.4 percent on average for homes here in Anchorage,” said Edwards. “That’s the fourth year in a row that we’ve had prices increase in Anchorage. Our housing market has not been affected yet.”

Northrim said it supports Gov. Bill Walker’s plan to restructure the state’s finances to cut government spending, restructure the Permanent Fund, and implement broad based taxes. The traditional explanation for state fiscal troubles, Edwards said, are valid — overreliance on declining oil revenue combined with state overspending.

However, he believes the root of the problem is an Alaskan cultural expectation of government services without the will to pay for them or the infrastructure to collect sales or income taxes that are common in Lower 48 states.

“The deeper reason is that many of the traditional sources the government uses to balance their budgets are off limits in Alaska,” Edwards said. “I think we’ve become complacent that oil can pay all the bills and we haven’t had to make some of the tough decisions. In the inverse, we actually received $1.3 billion in dividends last year. So we’ve gotten to this point of expecting money from the government instead of paying into it as all the other states do.”

Edwards highlighted Alaska’s lack of private property ownership as one of the primary reasons municipal governments lack a tax base. Without it, the state picks up much of the tab for local services.

“The state owns about 104 million acres of land, but only half of 1 percent of the state is owned privately,” he said. “So it’s hard for local governments to provide a tax base, typically from property taxes, to pay for local government sources. So the state has been left with things like power cost equalization, municipal revenue sharing, and the structure really hasn’t been determined yet.”

To prepare, rather than panic, Northrim urged businesses to follow a few key points of recession survival. Fraud increases during a recession, so businesses should be mindful and consider cash king; slowing dividends is an effective coping strategy. Companies and investors should also consider losing their poorest performing assets and tracking the economic viability of both their competitors and their clients.

Above all, businesses should take pains to have plans and strategies to tell their employees as layoff stories begin to circulate, Edwards said.

“You’ve got to make sure that you have a positive message, that you have a strategy, and that you’re focused. You want to shift the focus from past problems to future opportunities.”

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