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May 2009

This article is the fourth in a series of reports on the Texas economic climate. View the series.

the Storm

Where Do We Go From Here?


Market economies are cyclical in nature, however much we might wish otherwise. Despite the current drumbeat of gloomy business news, an upturn will come sooner or later, and it’s not too early to start thinking about how Texas should position itself to thrive in the recovery – whenever it arrives.

At the Comptroller’s January economic summit, and in subsequent conversations with Fiscal Notes, three of the nation’s top economists discuss the road ahead.

Short-Term Pain…

There’s no denying that “the short-term outlook is extremely painful,” says Nigel Gault, chief U.S. economist for IHS Global Insight. “We’re witnessing the unwinding of the biggest housing and credit bubble ever, and on the global stage, the worst recession since the Second World War.

The worldwide slowdown has hit energy producers particularly hard.

“Pretty much every region around the world is contracting pretty sharply,” Gault says, noting that South Korea’s economy contracted by 5 percent in the fourth quarter of 2008 alone, while Japan suffered a 35 percent year-over-year drop in exports in December. Gault expects the U.S. economy to contract by 2.5 percent in 2009, in the steepest decline seen in about six decades.

Unique Perspectives

In January, the Texas Comptroller hosted some of the brightest minds in business, economics and academia at the Texas to the Power of Tomorrow Summit (T2), a one-day conference of unprecedented analysis of the Texas economy. Stories in this issue feature T2 speakers and their powerful analysis and insight. To view video of the day’s speakers, or to download their presentations, visit

Nigel Gault, left, group managing director of North American macro-economics services at Global Insight. Keith R. Phillips, middle, senior economist and policy advisor for the Federal Reserve Bank of Dallas, San Antonio. Steven Cochrane, right, managing director of Moody’s

In Texas, “the fact that there was no housing bubble meant that, in the early stages of the downturn, there was no direct fallout from what was going on in the rest of the country,” Gault says. “But this crisis is now so broad, affecting so many sectors, and it’s so global, that Texas can no longer stay immune.”

The recession will have varying effects around the state, says Keith Phillips, a senior economist and policy advisor at the San Antonio branch of the Federal Reserve Bank of Dallas.

“Dallas has a 50 percent higher share of jobs in financial activities than the national average,” Phillips says. “That means the city is very susceptible to the decline in the financial sector.” A downturn in demand for high-technology exports, in turn, is likely to hit Austin. By contrast, “San Antonio has a lot of jobs in health care and the military – it’s not very affected by business cycles,” he says.

…and Long-Term Gains

Yet “Texas still has good long-term potential,” says Phillips. “We have a low cost of living, and this is still a low-cost place to do business. Recessions happen. We’ll get through this one.”

Steven Cochrane, senior managing director at Moody’s, shares Phillips’ optimism. “The problems in Texas are so much less severe than elsewhere,” Cochrane says. While other states “are scrambling just to keep their heads above water, in Texas, it’s just not that bad. This is a great time to be thinking long term.”

In Perspective: Texas and the New Global Economy

Globally, there are 180 emerging markets. Four of these are especially significant – Brazil, Russia, India and China (BRIC). Social and economic growth in these countries is having a big impact on business, to say the least.

“At the end of the Gulf War in 1991, 55 percent of the top 20 energy companies were American and 45 percent were European,” says Patricia Dinneen, managing director of Siguler Gulf and one of the featured speakers at the Comptroller’s T2 Summit in January. “The BRICs have now taken a huge role in that – 35 percent. It’s not just oil and natural gas – it’s wind and solar and it’s ethanol. There’s a crying need for energy to fuel these economies.”

Texas, with strong roots in energy, semiconductors and agriculture, remains a major player in the world trade scene. But how has global growth impacted Texas? Dinneen points to agriculture as an example:

“India, Brazil and China now have the largest cattle herds worldwide – Patricia Dineen 607 million animals versus 97 million in the US, most of which is in Texas.” FN

–Michael Castellon

Patricia M. Dinneen, managing director of Siguler Gulf

Take It Interactive

Learn more about the evolution of the global economy by viewing Patricia Dinneen’s T2 Summit video online at

And in that longer term, Cochrane sees four “driving” industries assuming prime importance in the Texas economy.

Medical services will benefit from “good, strong demand as our population grows and ages,” Cochrane says. Banking can expect slow short-term growth because of a tighter regulatory environment, but the state’s banks have avoided most of the problems plaguing major national financial companies, and Texas will benefit from its position as banking center for the Southwest.

Companies involved in freight, logistics and domestic and global trade will do well over the long term. And technology-related industries are due for an expansion “once research and development spending gets back on its feet,” Cochrane says, noting that investments in this area have lagged in recent years.

Exports One Key…

The worldwide slowdown has hit energy producers such as Texas particularly hard. “The states that were doing well [in 2008] were energy states, but they’re all likely to turn downward this year,” says Phillips. “The rig count is falling off a cliff.”

And since petroleum products and chemicals, particularly petrochemicals, account for a full third of the state’s goods sold internationally, “Texas exports show quite a sharp decline, even sharper than the U.S. average,” Phillips says.

To Cochrane, this shows that Texas must “diversify its exports and export destinations, across the global economy” – an important mission for the nation’s leading exporting state. Unsurprisingly, Mexico is by far our most significant trading partner at present, accounting for nearly a third of the state’s exports, and Canada represents another 10 percent.

But Gault sees the most room for expansion in Asia. “Ten years from now, the Asia-Pacific region excluding Japan will account for 26.7 percent of the world economy,” Gault says. “China alone will account for almost 15 percent. That’s where the market growth will be.”

Ultimately, “the U.S. is going to have to adjust to be less of a consuming economy and more of a producing economy,” Gault says. “And correspondingly, we see Asia transforming itself into more of a consuming region than in the past. We’ll have to shift more of our activity into exports.”

…and Work Force Quality Another

But the kind of exports that can fuel renewed prosperity in Texas and the U.S. will require a well-trained work force.

“The sort of jobs and opportunities we’ll create will be different from those in the past,” Gault says. “We can’t compete with the rest of the world purely on cost – there are lots of places that have lower wages. So our growth has to be concentrated in things that require more intellectual capital to produce.

“And that leads us to the importance of education,” he says. “We will need a highly skilled work force to produce goods and services that can compete in the global economy. We have to compete in the areas that need brainpower.”

”We have to compete in the areas that need brainpower.”

– Nigel Gault, chief economist, IHS Global Insight

“For example, the U.S. is a leader in aircraft production and in many areas of pharmaceuticals,” says Gault, “and in the development stages of many types of computers and software. Now, the mass production phase gets moved off-shore, because you can do it more cheaply elsewhere. But the U.S. is much better equipped for initial development.

“I don’t think there’s a lack of areas to expand into, and many of them probably don’t even exist right now,” Gault says. “But we do know that we’re going to need intellectual skills and education.”

Texas workers are among the nation’s most productive, but Steven Cochrane sounds a cautionary note. While the average educational level of Texas workers has improved, he says, “everyone is improving. The competition is relentless and fierce.”

Work force quality, says Cochrane, “threatens the productivity growth that Texas has had for quite some time. If Texas doesn’t always strive not just to be better, but to be better than all the other states in the international markets, it could fall behind. And this is what it’s all about. Productivity means rising incomes and a more vibrant economy. This is really the bottom line.” FN

A Productive State

Texas’ continuing economic success will depend heavily on the quality of its workers, who are among the nation’s most productive.

Worker Productivity in the 10 Largest States, 2007
StateGross Product (millions)Gross Product per Worker
New York$1,103,024
Texas $1,141,965

Source: U.S. Bureau of Labor Statistics and U.S. Bureau of Economic Analysis

Read the entire “Weathering the Storm” series:

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