FARGO — The coronavirus pandemic has already battered the local economy and things aren’t looking up in the near term, according to an economic outlook report released Tuesday, May 5 by North Dakota State University.
Total wages and salaries in North Dakota are predicted to drop by 20 to 60%, the labor force will decrease by 7.5 to 15%, the unemployment rate could reach 20%, gross state product will drop by 25 to 50%, and tax collections may fall by more than half, according to the report titled “Forecasting the effect of COVID-19 on North Dakota” authored by Jeremy Jackson, director of NDSU's Center for the Study of Public Choice and Private Enterprise.
“The forecast scenarios in this report paint a bleak picture for the coming months in North Dakota,” Jackson wrote. "While these forecast outcomes represent economic trials to come, much uncertainty remains about what will happen as the pandemic clears and businesses begin to operate again.”
The forecasting model uses a range of potential future oil prices and national unemployment rates as variables to predict the status of the state economy through early 2022. The higher oil prices and lower unemployment rates mean better forecasts for the state economy, while lower oil prices and higher unemployment rates mean worse forecasts.
Because of its reliance on crude oil, North Dakota’s economy tends to run counter-cyclical to the national economy, the report explains. The national economy tends to grow when oil prices are low and slows when oil prices are high, while North Dakota’s economy is just the opposite. It grows when oil prices increase and slows when oil prices decrease.
Because of the plunge in demand for oil during the pandemic, oil prices have sharply declined. Low oil prices mean poor outcomes for the state’s economic future.
The model in the report used West Texas Institute (WTI) crude oil prices of $40, $25, $15 and $5, and national unemployment rates of 13%, 20% and 30% to estimate the future of North Dakota's economy.
The model’s worst outcomes for the state come in conjunction with the lowest oil prices and the highest unemployment rates, while the best outcomes come with higher oil prices and lower unemployment.
The WTI price per barrel was $25.09 on Tuesday, and the national unemployment rate was estimated at between 12 to 13% in April. If those numbers hold through 2021, North Dakota’s wages and salaries will climb in the third quarter of 2020 before dropping significantly in the fourth quarter of 2020 and through 2021, the state unemployment rate will increase by about 5% by 2022, the report predicts. Though those numbers could be optimistic.
“Crude prices are currently about 50% of what they were at the beginning of the year, and further decreases are possible,” Jackson said in the report. “The recent collapse of WTI futures prices into negative territory signify that low crude oil prices may persist. The economic shutdown caused by the COVID-19 pandemic has also led to historic increases in unemployment.”
Several factors could cause the report’s forecasts to become inaccurate. If something causes a fundamental shift in the way the economy operates, the entire model can be thrown out. And there's a wide variance in the outcomes of the report, so Jackson says economic conditions could be better than predicted in the report, or they could be worse.