Alaska could see a loss of nearly $2 billion in gross domestic product in the second quarter of this year compared to last year due to massive economic losses associated with COVID-19. That’s according to a report by Mouhcine Guettabi, an economist with the University of Alaska and director of the Investing for Alaska’s Future Program at the UA Institute of Social and Economic Research.
Guettabi, who compiled the report on his own over the span of about 10 days, studies and teaches urban and regional economics as well as health economics, all of which are elements woven together right now to produce what he calls a collection of “ugly numbers” exhibiting just how much the state will feel the upfront blows and lingering wounds of the virus-related shutdown.
The study uses a combination of national data and economic models to produce what Guettabi calls educated assumptions loosely mapping out what could be the next several months of economic performance in the state.
“It’s not a prediction,” Guettabi said, noting his models assume the business closures will sustain for at least the next few months.
One of the central concerns lies in the fact that more than 10% of the state’s economy consists of leisure and hospitality businesses. These are the most vulnerable industries, Guetabbi notes, and the complication here is twofold.
The first is the educated assumption that fewer residents will be spending at food and beverage service businesses due to mandated closures as the state works to mitigate COVID-19. Similarly, with the ban on most intrastate travel, fewer residents will be spending money within the accommodations portion of that sector.
The second blow to this sector is brought to light in noting that the hospitality and leisure sector is directly tied to the state’s tourism and seasonal work industries.
“In 2019, total wages were $437 million higher in July than they were in January. Of that amount, $130 million is due to the leisure and hospitality sector. This large increase is due to the seasonal nature of tourism and the fishing industries, both of which are in jeopardy,” the report cites.
Based on national estimates, the hospitality and leisure, transportation and retail sectors will feel these drops most keenly.
“Specifically, we assume the Leisure and Hospitality sector will employ 50% fewer people starting March 15th, and the retail and transportation sectors will each experience a 20% decline in employment starting on the same date,” the report reads.
Using these initial shocks, Guettabi calculated employment losses and wage losses for March, April and May.
“The direct effects of the assumptions above indicate that March 2020 employment will be 26,319 less than March 2019. Total wages will be $34 million less than March 2019,” the report reads. “For the first full month post closures (in) April, employment will be 27,072 less than the previous year, while total wages lost will equal $79.1 million.”
Other industries will be affected, the study notes.
“These industries are not siloed. Every business buys from other businesses, so it’s essentially a cable that draws through different sectors,” Guettabi said.
Taking that into consideration, the study calculates that unemployment levels at the end of this month will be about 48,000 individuals higher than April of last year. This depends on the length of closures and how quickly federal aid arrives for individuals and businesses.
As a result of the loss in individual employed and wages earned, spending will naturally decrease in turn wounding state GDP.
The analysis does not take into consideration additional losses in unemployment and revenue due to the crash in current oil prices, forecasts of sustained price and production drops and recent announcements from ConocoPhillips of the temporary idling of large oil rigs on the North Slope to protect workers from the disease.
Guettabi wanted to keep his report specifically focused on economic impacts of the health mandates in the state closing businesses and shutting down most travel.
“The goal of the analysis was to try and understand what are the potential economic effects of these mandates but also make it clear that the tools that are going to be needed because of the scale of the losses are large and the physical actions that are going to be needed in response are also large,” he said.
Initially hesitant to publish the report, Guettabi said he doesn’t want his study to be misinterpreted as a call for the state and country to reopen as soon as possible to save itself from economic hardships.
“I think the worst mistake would be reopening too quickly. Economies are not faucets, so you can’t just reopen economic activity and tell people to go out to bars and restaurants and start spending money because people right now don’t have the money to go out and spend it, but also they don’t have the confidence necessary to go out and congregate in busy places,” Guettabi said.
The best thing to do at the moment is to contain the virus quickly while supplying as much relief as possible to individuals and businesses so that once the disease is contained, the economy can pick up more completely.
Ultimately, Guettabi said it’s hard to know anything for sure — pointing to models and educated assumptions as the basis for his report — because this type of economic crisis is relatively unprecedented.
“We’re talking about something that is not your average recession,” he said. “It’s a completely different beast.”
A full copy of the report can be found at bit.ly/2JUzeXd.