Monday, July 31, 2017

Fifteen Industries In Decline

Last week I reported that the Wyoming economy has the worst GDP growth in the country. In the first quarter of 2017, our state's economy contracted by an inflation-adjusted 3.7 percent over the same quarter in 2016. Regular readers of this blog are not surprised: I have written numerous articles about the poor-to-disastrous performance of our state's economy. 

Equally unsurprising is the report that the Department of Workforce Services released recently, with labor-market numbers for June. It shows that:

--From June 2016 to June 2017, employment is down statewide by almost one percent;
--Fifteen counties have had a reduction in employment;
--Statewide, the workforce has declined by 2.5 percent.

In other words, for every 100 people who have lost their jobs in Wyoming in the past year, the workforce has lost 275 persons. 

Not only does this explain our low unemployment rate - which, frankly, under these circumstances is a useless measure of our state's economy - but it also corroborates population numbers that I have reported on previously. Our state has one of the worst population trends in the country: in 2016 we ranked 46th, and we would have fallen further in ranking had not Laramie County benefited from an inflow from Colorado of people looking to escape state and local income taxes, and to reduce their cost of living. 

The Colorado commuter migration will almost certainly end, and probably reverse, if our state legislators start raising taxes. But more importantly, the Workforce Services report confirms my analysis of the state of our state's economy: we are out of a painful macroeconomic decline, but that only means that our economy is stabilizing - not that it is going to start growing again.

A closer look at last week's GDP numbers confirms this. Of 20 industrial categories ("industries") in our state economy, only five expanded in the first quarter of 2017 over the first quarter of 2016. The rest saw declines of anything from 0.9 percent (health care and social assistance) to 37.5 percent (agriculture). Size-wise, every industry that represents more than five percent of the state economy - there are seven of them - declined. 

Here are the industries by growth (left column) and by size (right column); they are sorted by their size, i.e., their share of the state economy:

Growth Size
      Mining -4.2% 25.0%
  Government -2.7% 15.6%
      Real estate and rental and leasing -4.7% 11.4%
      Transportation and warehousing -1.5% 6.2%
      Retail trade -4.8% 5.7%
      Manufacturing -2.1% 5.5%
      Construction -7.9% 5.0%
      Health care and social assistance -0.9% 4.4%
      Wholesale trade -5.2% 4.3%
      Accommodation and food services -2.1% 3.1%
      Professional, scientific, and technical services -4.9% 2.7%
      Utilities 3.3% 2.6%
      Finance and insurance 2.0% 2.6%
      Information 0.8% 1.8%
      Administrative and waste management services 1.8% 1.5%
      Other services, except government -5.8% 1.4%
      Agriculture, forestry, fishing, and hunting -37.5% 1.1%
      Arts, entertainment, and recreation 9.2% 0.7%
      Management of companies and enterprises -17.6% 0.3%
      Educational services -2.9% 0.2%
Source: Bureau of Economic Analysis

It is notable that government actually reduced its activities by 2.7 percent. This is far below the decline in overall private-sector activity (-3.9 percent) but it does reflect the reductions in state and local spending that were implemented in 2016. 

That said, it is also worth noting that it was after these reductions that Governor Mead declared that our government sector was operating at "bare bones". That is, of course, not true, but his position is consistent with that of many legislators who have dug in their heels and refuse to consider any other fiscal policies than higher taxes. 

On one point, though, I will agree with those who focus all their attention on taxes. We need to change the way we are funding government here in Wyoming. Heavy reliance on severance taxes is not good under any circumstances, but it is particularly bad when the severance-tax paying industry is in decline. As share of the Wyoming economy, the minerals industry has fallen from 32 percent ten years ago to 25 percent today (adjusted for inflation). In the meantime, the industrial category known as "real estate and rental and leasing" has increased its share from 7.7 percent to 11.4. These numbers alone illustrate a need for a new tax structure. 

The problem is that while there is a transition going on in the private sector, the private sector is also declining. By simple arithmetic, if government at the same time does not decline, it expands its share of the economy. Alas, over the past ten years, government's share of our economy from 13.5 percent to 15.6 percent. 

In other words: let us first structurally and permanently reduce the size of government. When those reforms are well under way, we can start working on a tax reform that will allow us to sustainably fund law enforcement, fire and rescue services, transportation and infrastructure, and a school system that allows parents to choose between public and private K-12 schools.

If we do not do reforms in this order, we will soon find ourselves in a situation where our lawmakers will go into panic mode and apply a slash-and-burn tactic to reducing runaway deficits in both the state budget and in local government finances. That would hurt every corner of government, from law enforcement to tourism services.

Only a proactive, long-vision reform strategy can preserve and secure the core functions of government. 

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