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The Smoke Clears

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I sat down to write this month’s blog and I realized ash and soot blown in from the Swan Lake Fire across Cook Inlet covered my desk. It’s been that kind of summer here in Alaska where, at times, it felt like the state was literally and figuratively on fire. I don’t know about you, but the societal angst experienced over the last three months regarding the Fiscal Year 2020 budget process has been stressful.

If I had a dollar for every time in the past two months that I’ve been asked some variant of “Are we going back into recession with the upcoming state budget?” I couldn’t fix the budget issues, but I would be a lot closer to a “full PFD”. Let’s get right to the point regarding the FY20 budget and its likely effect on the economy. Bill Popp and AEDC nailed it on the head on July 31st when they announced that AEDC’s 3-Year Outlook Report would state:

“Significant Cuts to the State budget, as they stand now, essentially eliminate any chance of economic recovery and in fact promise to keep the local economy in recession for two to three more years. As we look ahead, while the news is not all bad, source of renew in the economy cannot compensate for the damage being done by Alaska’s ongoing policy-induced recession.”

Kudos to AEDC’s staff and board, and The McDowell Group, for writing such a direct, succinct, and bold statement. As I mentioned last month, between January and May 2019 our economy averaged about 1,500 more jobs per month than 2018; I think the data will in the end show that we popped out of recession.   The early data from this summer reinforce our understanding of that trend- May 2019 had an estimated 900 more jobs than May 2018 while June and July were 1,500 and 1,800 jobs ahead of last year respectively. The best performing sectors May to July year-over-year are construction and oil & gas. Construction, of course, is being juiced by earthquake repair efforts while oil & gas is benefitting from the minor price premium associated that ANS oil is receiving from the market at the moment. AEDC and McDowell asked the question “Is the economy strong enough to withstand hundreds of millions in additional cuts at this moment?” They answered the question with a resounding “no” and there’s not one reputable professional economist in the state that’s come up with substantially different expectation since June veto announcements.

Okay, that was late July and here it is nearing late August. The Governor and the legislature have gone back and forth. The legislature effectively reversed the Governor’s June vetoes via new budget bills passed in the July special session. Yesterday the Governor made his final decisions regarding those budget bills by largely standing by his vetoes excepting some high-profile programs where he reversed himself. Barring any new legislative action we can finally get “smoke free” picture of the budget. The takeaway- the “final” FY20 budget is going to be MUCH smaller than the FY19 budget. Overall, the state is planning on spending $942.8 million less in FY20 than it did in FY19 including $644 million in all state funds (i.e., UGF, DGF, and other) and just under $300 million less in federal funds. The enacted budget is 10 percent smaller in total than the FY19 budget.  The enacted budget predicts a surplus of nearly $146 million. If you’d like to review the budget, it can be found here.

Short story-We stand at a place where the state will inject nearly $1 billion less into the economy in this fiscal year than it did in last fiscal year.  The state’s economy was worth $54 billion in 2018, so even excluding any multiplier effects, we are looking at a roughly 2 percent cut to the value of that economy.

So, here we are at the same question that we started with at the beginning of the blog- Are we headed back into recession?. Well, we are going to feel the reduction in spending in our employment markets, it is just a question of how much and when. I think the response provided by AEDC and The McDowell Group still holds. In 2016, ISER estimated that every $100M of broad-based state cuts reduces Alaska employment by 980 to 1,260 jobs all things being equal. The simple math would tell you that $940M in cuts equals a large number of lost jobs on paper. In the real world, the timing, distribution, and enaction of those cuts, as well as what else is going on in the economy, will determine what we experience on the ground. However, I think it’s safe to say that barring some significant positive economic event that that budget cuts are above the level the economy can absorb without noticeable negative repercussions.

Jonathan’s Takeaway: Buckle up and expect economic conditions to worsen over the next year as these cuts take hold barring that unknown, and perhaps mythical, “significantly positive event”.   If we head back into recession it will be the first time the state’s history we’ve entered a recession as the result of an internal policy choice and not as the result of external shock (i.e., oil price drop).

Jonathan King is a consulting economist and Certified Professional Coach. His firm, Halcyon Consulting, is dedicated to helping clients reach their goals through accountability, integrity, and personal growth. Jonathan has 22 years of social science consulting experience including 16 years in Alaska. The comments in this blog do not necessarily represent the view of employers and clients past or present and are Jonathan’s alone. Suggested blog topics, constructive feedback, and comments are desired at askjonathan@apcm.net.

 

 

 

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