THE FORECAST

Louisiana’s Economic Future NAVIGATING THE

ROAD AHEAD BY STEPHEN BARNES

With the fourth wave of the pandemic pushing a full economic recovery further down the road, it’s important that we reflect on how our economy is changing so we can capitalize on new emerging opportunities. For many, the COVID-19 pandemic has been an extended detour, providing an opportunity (or in some cases, forcing us) to reassess major aspects of our lives, jobs, and businesses.

Our daily routines were turned upside down, creating more downtime, but also new stress. Schools worked tirelessly to reinvent education in real time. Vacations were canceled while outdoor recreation boomed and many across Louisiana gained a renewed appreciation of Louisiana as the Sportsman’s Paradise. For those fortunate to stay employed, the typical workday was reshaped by remote work and Zoom meetings, or PPE and social distancing, or all of the above.

Businesses have navigated government-mandated closures, supply chain disruptions, and massive distortions in product demand. Ways of doing business that could have never been imagined have become the norm. RETHINKING SYSTEMS & GOALS

After launching the Kathleen Babineaux Blanco Public Policy Center in August 2019, a new research center at the University of Louisiana at Lafayette, we were finally getting key staff in place and had just hosted our first major event in March 2020 when the pandemic sent us on our own extended detour. In the earliest days of the pandemic, we were brought into the state’s efforts to forecast COVID cases; I served on the Louisiana Economic Recovery Task Force established by Senate President Page Cortez and House Speaker Clay Schexnayder to guide the legislative response; briefed Governor Edward’s Resilient Louisiana Commission; and served on the Unemployment Compensation and Trust Fund Task Force.

We’ve spent much of the last year and a half tracking the economy, fielding myriad pandemic-related questions, and supporting several state agencies with research and data analysis to aide in navigating the rapidly changing environment. One theme that has become clear when looking at this moment in time is that we are in the midst of a rare opportunity to rethink systems and goals. While we have much work ahead to rebuild what was lost, we must do so in a way that is future oriented so we can push Louisiana to a path of long-term sustainable economic growth.

According to the Current Employment Statistics, Louisiana lost more than 280,000 jobs between February and April 2020 (14% of pre-pandemic employment). An initial rebound added back nearly 100,000 jobs by the end of summer 2020 as businesses developed ways of adapting and reopening in the midst of the pandemic. Since that time, the recovery has been more sluggish with another 30,000 jobs added over the last year. Today, Louisiana is still sitting more than 150,000 jobs below pre-pandemic levels.

Louisiana’s recovery has lagged the national economy where nearly 75% of lost jobs have come back. Louisiana has regained less than half. Louisiana’s poor performance is due in part to the importance of tourism and oil and gas to the state’s economy. Though some travelers have returned, tourism is still far from normal. For example, international travel, which brings the highest per-trip expendi-

tures, remains 65% below pre-pandemic levels. Meanwhile, the oil and gas industry, which has been heavily impacted by the pandemic, is grappling with a shifting regulatory environment and accelerating changes in global consumer demand that are pushing for greater use of renewable energy and alternative fuels.

Despite all of this economic turmoil, the state budget has weathered the storm fairly well. After the bottom fell out of the economy during the initial pandemic lockdown, it didn’t take long for anxious watchers to begin worrying about tax revenues and the state budget. Fortunately, strong revenues leading up to the pandemic gave the Revenue Estimating Conference a little breathing room to watch and see how this event would unfold. In our May 2020 meeting, the Revenue Estimating Conference adopted relatively modest decreases in projected total revenues amounting to about a 3% drop for Fiscal Year 2020 and an 8% drop for Fiscal Year 2021.

Consumer spending on taxable goods stayed strong, in part, thanks to massive federal supports including direct stimulus checks and enhanced unemployment benefits. Higher income jobs were more likely to be deemed critical, or able to be done remotely helping to maintain the personal income tax base. Though still below the pre-pandemic forecast, Fiscal Year 2020 ended slightly above expectations at less than 1 percent below the pre-pandemic benchmark. As time passed, waves of federal funds and the early recovery led to higher expectations for 2021 with an upward revision at the Revenue Estimating Conference to $12.2 billion in state taxes, licenses and fees, or about 5 percent below the pre-pandemic forecast for the year. While better than the initial forecast of an 8% drop, tax revenues have clearly taken a hit and will take some time to recover.

LABOR PRODUCTIVITY UP

In any recession, businesses find new and creative ways to operate with fewer workers and this pandemic certainly pushed many businesses to think far outside the box. With leaner operations, greater use of technology and processes that have been redesigned from bottom to top, economywide labor productivity is up.

New business formations soared both nationally and in Louisiana several months after the pandemic began and have remained well above pre-pandemic norms. Entrepreneurs saw new opportunities in the pandemic shakeup and would-be entrepreneurs finally had time and resources (thanks to federal stimulus checks and funding via other pandemic programs) to launch new businesses. In Louisiana, the uptick in business starts has held more than 85% above pre-pandemic levels compared to just over 50% nationally.

In Louisiana, the uptick in business starts has held more than 85% above pre-pandemic levels compared to just over 50% nationally.

As businesses continue to evaluate supply chain alternatives and consumers try out new services, restaurants, and retailers, we should all look for opportunities to support those new Louisiana businesses and keep more of those indirect and induced economic effects here in Louisiana.

Another sign of a robust recovery ahead is the strong demand for labor with the number of positions open for hire now almost 50% higher than pre-pandemic levels

and reflects a record for job openings since data collection began in 2000. Even better is the fact that this economic momentum has touched many sectors across the economy including manufacturing, professional and business services, education and health services, and leisure and hospitality.

This past summer, economic expectations were rising for a faster path to a full recovery thanks to widespread availability of vaccinations, low virus infection rates and the support of large, continued federal stimulus. However, just when it seemed economic growth would accelerate, the Delta variant and fourth wave of the pandemic seems to have put the brakes on our move toward full recovery. So we find ourselves taking another pandemic detour offering one more opportunity to step back and think strategically about how we should focus our efforts to move Louisiana out of this challenging time and chart a new path for future prosperity.

UNDERLYING TRENDS

Looking back at how the pandemic has reshaped the economy, it’s easy to forget that several underlying trends that stand out as critical factors today have been steadily reshaping the economy for years. The 2020 Census showed that Louisiana’s population growth failed to keep pace with national trends, increasing by only 2.7% compared to national growth of 7.4% since the last census.

It is easy to fixate on the seemingly endless string of events that have disrupted our long-term plans for growth dating back to Hurricanes Katrina and Rita; the Deepwater Horizon oil spill; and most recently Hurricane Laura (not to mention a range of other major floods and hurricanes and, of course, the pandemic). However, the bottom line is that Louisiana has fallen behind after decades of outmigration and brain drain with our most highly educated and skilled workers leaving for better opportunities elsewhere. The pandemic may have dramatically accelerated the evolution of these trends, but they will certainly not disappear as we move beyond the pandemic.

ENERGY SECTOR CHANGES

Perhaps most notable among the underlying economic trends is the transition taking place in the energy sector, which has been a major economic driver of Louisiana’s economy for decades. In fact, for most of its history, this group of businesses was simply referred to as the “oil and gas industry” in Louisiana. Thanks to our natural oil and gas resources and strategic coastal position straddling the Mississippi River, Louisiana was an early leader in oil and gas production and has become a major hub for chemical manufacturing, which continues to rely heavily on oil and natural gas as feedstocks.

At the Blanco Center, we have been forecasting oil and gas activity in the Gulf of Mexico to support our research on the Gulf of Mexico Energy Security Act, which shares a portion of offshore oil and gas revenues with states along the Gulf. That research has supported state planning as well as Louisiana’s efforts to push changes at the federal level to bring more dollars to Louisiana—most recently including Senator Cassidy’s efforts to advance the RISEE Act. This revenue stream is seen as one of the few long-term funding sources for our state’s $50 billion Coastal Master Plan. So, the outlook for Louisiana’s oil and gas industry is not only important to near-term economic activity, but also our plans to protect and restore our coast.

As important as these activities are to today’s economy, global market forces are

leading many of these oil and gas companies to invest in renewable energy and even adopt carbon emissions targets. As the oil and gas industry expands to focus more broadly on energy, so too will the chemical industry adapt to use a greater variety of feedstocks. Market pressures will accelerate efforts across the chemical industry to improve energy efficiency in production and develop new processes or products to meet the demands of an emerging low-carbon economy. Louisiana’s chemical industry is working through the later stages of a massive wave of capital investment with tens of billions of dollars in construction over the last decade. These investments have given Louisiana a modernized and more competitive mix of businesses that will continue to re-invest as the industry evolves.

Moving forward, the focus will be providing the energy that our economy needs, but changing public sentiment is pushing a transition toward a mix of energy sources that meets global demand and a new regulatory environment. As the market begins to move more quickly to increase renewable energy generation, Louisiana manufacturers and service companies that have supported oil and gas development must also find ways to transfer their technical expertise to new applications.

The rapid pace of change in the energy sector can also be seen in other parts of the economy and there is a growing need for workers to have access to mid-career training and education to stay engaged in the workforce. The recently passed MJ Foster Promise Program will offer financial support to help adult learners in Louisiana access much needed training and education.

BROADBAND INTERNET’S IMPORTANT ROLE

Another major underlying trend is the increasingly important role that broadband internet plays as a fundamental part of doing business. After emerging from the early pandemic lockdown, remote work remained nearly twice as common in 2020 compared 2019 (42% in 2020 vs 22% in 2019 according to the American Time Use Survey). While that rate of remote work may fall off some, much higher rates of remote work are surely here to stay.

At the Blanco Center, we recently collaborated with the Acadiana Planning Commission in drafting a report on broadband infrastructure and services to provide an assessment of the current state of broadband and lay out priorities for broadband investments that can position the region for future growth. The report highlights the critical role of broadband in education, job and population growth, and access to critical services.

Improved broadband access is particularly important in rural areas. With increases in remote work, there are also new opportunities for rural areas to retain and attract population now that workers have more flexibility to choose where they live while keeping jobs that may have historically been concentrated in big cities. However, reliable high-quality broadband is critical to success in this area.

INVESTING IN OUR FUTURE

Related to increases in remote work is a broader need for investments that improve quality of life and make our communities attractive places to live. In an economy where workers have more latitude than ever to pick a place to live, we must get serious about cultivating the rich cultural assets of Louisiana and making smart investments in our public spaces. These can help grow our population and the economy with potential spillover benefits to tourism. We are supporting One Acadiana’s efforts to move in this direction following the Vibrant Community Summit and will launch a data driven strategy to measure and improve quality of life in the Acadiana region. Similar strategies can be pursued throughout the state.

Not only at the community level, but this type of collective visioning is happening at a state level as well. At the Blanco Center, we’ve recently launched an agency-wide collaboration with the Department of Child and Family Services that will use rigorous research and evaluation to improve program delivery and outcomes for those the agency serves. We’re evaluating a new initiative convened by the Board of Regents to support adult learners as part of their state goal to increase educational attainment to 60% of working-age adults by 2030 (60 by 30). We’re also supporting the Louisiana Department of Education’s efforts to reimagine how the Child Care Assistance Program can provide the childcare support that Louisiana families need to more fully engage in the economy.

People and businesses have used this pandemic as a reset. As we reflect on a new path forward for Louisiana, we must collectively refocus our efforts on opportunities most likely to pay dividends down the road. Our top priorities should include leading the way forward in reshaping the energy sector and chemical industry; accelerating the expansion and quality of broadband in Louisiana; and investing in education and quality of life. This fourth wave of the pandemic will pass, and when the economy is ready to move, let’s be sure we’re pushing in the right direction to make Louisiana a better place to live and work.

STEPHEN R. BARNES, Ph.D, is the founding director of the Kathleen Babineaux Blanco Public Policy Center of the University of Louisiana at Lafayette and serves as the independent economist on the state’s Revenue Estimating Conference. He has collaborated with federal and state agencies, industry partners and advocacy groups as well as scholars in more than a dozen disciplines on research addressing many aspects of the economy and population of Louisiana. The Blanco Center is an independent, interdisciplinary research center committed to serving the public interest through leadership in state and local policy with a focus on education, poverty and economic opportunity, criminal justice reform, health and healthcare, the coast and environment, and government ethics. Prior to this role, Barnes directed LSU’s Economics and Policy Research Group.