What better way to start a discussion about a mistaken declaration of recession in North Dakota than with a misquote of Twain. For those interested the actual quote from Twain was “The report of my death was an exaggeration.”
We have to be very careful here and define terms well to have a meaningful discussion about this. This is not meant as a “rah-rah” piece and suggest that everything is, or will be, alright. That said, I do not think the North Dakota economy is currently in recession. Nor do I think it will be this year. However, I would agree that the risks of a recession for this year, and the next, increased.
Working definitions of recession vary, sometimes significantly. This is part of what makes the discussion of this issue difficult. As an example, one of the most common definitions looks at consecutive quarters of negative economic activity. What is economy activity you ask? Once again there is no clear standard. Let’s consider private non-farm earnings. Why am I making the argument counter to my stated opinion? Mostly because I think it is not a strong argument so what is to fear from it. Let’s look at this from a year-over-year perspective to remove any seasonal issues from the data. In that case 2015q2 and 2015q3 were negative percentage changes at -.17% and -3.15%. Two negative quarters, with one barely in the red.
For further context we should also recognize that private non-farm earnings in 2015q3 is 1.66 times the level of 2010q3. If we looked at simple quarterly percentage changes then we have three consecutive negative quarters because 2015q1 is also negative. In this case 2015q1 was -1.61%, 2015q2 was -4.22% and 2015q3 was -.26%. Again, these numbers hardly indicate full-scale and massive decline in the economy, and in fact, by the 2015q3 number may actually be in decline.
[mks_pullquote align=”right” width=”300″ size=”24″ bg_color=”#ffffff” txt_color=”#000000″]It continues to surprise me that one of the least appreciated aspects the North Dakota economy is its inherent flexibility. Yes oil is more important now than at any time, but it still only topped out at 14.5%. There are plenty of other businesses, and communities for that matter, that could use this opportunity to increase their activity and develop plans for growth going forward.[/mks_pullquote]
So are there some negative numbers in terms of earnings. Yes. Is there any reason this will stay this way? No. It continues to surprise me that one of the least appreciated aspects the North Dakota economy is its inherent flexibility. Yes oil is more important now than at any time, but it still only topped out at 14.5%. There are plenty of other businesses, and communities for that matter, that could use this opportunity to increase their activity and develop plans for growth going forward.
I long argued that oil patch growth was a constraint on growth in Grand Forks with so many firms looking at the higher revenue streams offered by activities in western North Dakota. While these brought income into the community it did represent a constraint on internal activities that could enhance growth further.
There is more to the story though.
Income or earnings are but one measure of economic activity. Let’s also consider labor markets. Why? Labor markets have been a problem for North Dakota since I came here. In the early 2000s the issue was too many young people leaving and jobs going unfilled. In the oil boom the problem was too many jobs going unfilled because we could not generate enough labor internally and could not attract enough labor from outside the state.
I am seeing a recurring theme here.
North Dakota needs to deal with recurring labor constraints. This is actually good to know. It should direct economic policy at private firms and government. The limits on North Dakota growth are more likely to come from labor supply issues, which actually means there should be investigations of business models that rely less on labor and more on technology or capital. Alright, side discussion over, but noted for a future post.
Many media outlets noted that North Dakota employment went down, and I suspect is another part of the rationale used for a declaration of the state economy being in recession. On a seasonally adjusted basis employment in the state declined by 8,552 from December of 2014 to December of 2015. Before you run a victory lap and suggest that declining employment and declining income surely lead us to a declaration of recession let me raise a hurdle in your path (we will say you are running a steeple chase). Unemployment in the state actually declined over the same time frame by 432. As we lost employment saw unemployment decline.
We also need to think about this spatially. Where did the employment change occur? We will use data that is not seasonally adjusted (nasa) in this case and so I will use year-over-year numbers as a quick correction for seasonal fluctuations. (If you want an explanation for why this works I suggest hiring one of my students in an analyst capacity.)
Year-over year state employment (December 2015 compared to December 2014) (nsa) declined by 4,546. For the four core Bakken counties over this same time period employment actually increased by 1,160. So the Bakken counties were not a source of this decline. Maybe it was in the state MSAs? Think again. Bismarck, Fargo, and Grand Forks saw employment increases of 1,049, 1,386, and 783. The major areas of economic activity did not see employment decline. That’s good news, and seems to mitigate the suggestion of a widespread recession.
Of course the big news still remains the state revenue collections which are going to be down. This is an important piece of the puzzle. The forecasts of measures like this represent an important aspect in the formation of expectations and that is what I think we are dealing with here. The call of “recession” is mostly coming against expectations, erroneous expectations at that. I talked numerous times of KNOX radio about the lack of clarity in the revenue forecast numbers and it seems to be a big part of the problem we are dealing with currently.
I mentioned at the outset that risks of recession are certainly higher. It is also clear that there are painful adjustments for businesses and communities, currently and in the near future. Those issues do not, however, make it the case that the entire state is currently, or will soon be, in recession. Such a claim gives too little credit for the flexibility in the state economy, both on an industry basis and a geographic one.