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Economic Furnace Cooling
The Texas economy is slowing, as it has been for most of the past three years. This slowdown, paralleling the deceleration in the U.S. economy, shows the state economy performing as expected by the Comptroller’s office. The Federal Reserve Bank’s Open Market Committee (FOMC) has opted to slow inflation by raising short-term interest rates six times (from 4.75% to 6.5%) since rates hit bottom in November 1998. Fortunately, Texas’ employment and income numbers, at least for now, show the state continuing to prosper. Inflation fears sparking the Federal Reserve Bank to hike interest rates were caused in part by rising oil and gas prices. Higher fuel prices have put a dent in consumers’ pocketbooks, but they have a moderately positive impact on the state’s sizable energy industry. The positive impact is substantially less than in earlier years, however, because the percentage of Texas’ economy tied to the oil and gas industry has shrunk to only 8.5 percent, less than one-third of the oil/gas peak proportion in the early 1980s. Overall, with the contributions of strengthening energy and communications sectors, Texas’ nonfarm employment is now growing at a year-over-year rate of 2.7 percent. Construction and transportation/communications/utilities, with annual growth rates of 5.0 percent and 4.3 percent, respectively, have been leading the pack.

According to the U.S. Bureau of Economic Analysis, Texas ranked fourth among the states in the rate of personal income growth, averaging over 7.9 percent per year from 1996 through 1999 (see Table 1). The state ranked second to California in the dollar increase in personal income. For the most recently available period for metropolitan areas, 1997 to 1998, the Austin-San Marcos MSA ranked first among all 318 U.S. metros in the rate of total personal income growth and also ranked first in the rate of per capita personal income growth. In addition to Austin-San Marcos, Bryan-College Station, Houston, and Dallas all ranked in the top 10 percent of U.S. metropolitan statistical areas in the rate of per capita personal income growth. While the nation’s personal income growth was 5.9 percent for the year, Texas’ was 7.7 percent, and Austin-San Marcos topped the nation at a potent 15.1 percent. Dallas, with personal income growth of 9.3 percent, ranked tenth in the nation (see Table 2).

Areas with economies more tightly linked to high technology industries have had a head start in the comparison game. The U.S. Department of Commerce reported that technology industries have accounted for a full one-third of economic growth in the U.S. over the past five years, while representing just 8 percent of total economic production, as measured by gross product.1 The same report notes a hundred-fold increase in the number of Internet users since 1994, with access having risen 78 percent in the last year alone. In Texas today, high technology industries slightly exceed oil and gas as a percentage of the economy, reaching 8.9 percent of total gross state product, versus 8.5 percent for oil and gas (see Tables 3a and 3b).

Although the Texas economy remains vigorous, certain trends suggest that a mild slowdown is underway, as expected. Consumer confidence in the West South Central states reached a record high in 2000, but higher mortgage and interest rates, increased transportation costs, and a jittery stock market began to suppress consumers’ confidence, and therefore their purchases of houses, automobiles, and appliances in the future. If the market remains vibrant, the tight market for workers could eventually lead to rising wages, the downside being that the nascent ember of inflation could heat up. The Comptroller forecasts that Texas’ real gross state product, the most complete measure of state economic activity, will rise by 4.3 percent in 2001 and about an average of 4.2 percent annually in 2002 and 2003, compared to actual growth rates of 7.1, 5.0, and 6.1 percent annually for the last three years (see Table 4).

Productivity Growth is the Key
A question often posed about today’s Texas economy is how it has been able to continue rolling along with low inflation, in light of very low unemployment and rapid income growth. The answer lies partly in strong productivity growth, enhanced in part by easier communication and information sharing rooted in technological improvements. The "New Economy," roughly meaning an economy tied more to information and electronic usage than in the past, is making radical changes in the service sector, where an increasing number of services is being offered on-line. For many, mobile telephones allow continuous links to offices and customers. Paying bills and sending messages take less time. Ordering products, researching information, and receiving reports can be done quickly and more easily than in the recent past. People spend less time standing in line or waiting for supplies or services, leaving more time for productive work. The Comptroller’s Office itself, with its e-Texas project, is focusing on making state government services more readily available on-line. Texas has seen annual per-worker productivity increases of 3.1 percent over the past four years, partially spurred on by rapid technological increases in computers and communications.

Have these productivity improvements nearly run their course, or are they just getting up to speed? In 1999 the Internet economy grew by 62 percent, reaching about $40 billion in Texas, according to a University of Texas at Austin study.2 According to this research, the Internet economy is growing at fifteen times the growth rate of the national economy and in 2000 became larger in dollar terms than the life insurance or automobile sales industries. Productivity requires an ongoing flow of new discoveries and applications, and the Federal Reserve Bank and the WEFA Group anticipate that the rate of productivity growth will continue or even increase over the next three years.3

The rationale for at least three more years of bounding productivity growth, at a time when businesses and consumers are scaling back their economic optimism, is that investment will continue to be spawned by falling technology prices. Also, the lag time between cost reductions and corporate restructuring has shortened, allowing technological advancements already available to keep contributing to productivity growth. Consequently, the near-term outlook remains positive for low inflation and growing employment.

Texas already has a greater rate of productivity than the national average. Texas’ gross product per worker has exceeded that of the nation for at least 30 years (save 1987, a Texas recession year). This is largely because Texas has a higher concentration of oil and gas, refining, and petrochemical industries, and the heavy investment in these capital-intensive industries results in a relatively small number of workers. Since Texas has four times the oil and gas concentration as the national average, this benefits our state’s productivity relative to that for the nation as a whole. Over the past four years, Texas’ productivity growth per worker has also exceeded that of the nation by 1 percent annually (3.1 percent, compared to 2.1 percent). As a result of this pace, Texas productivity per employee, roughly equal to the U.S. in 1992, has risen to a level 7 percent greater that the U.S. today–$76,000 in Texas and $71,000 nationwide, in 1996 dollars (see Figure 1a).

Part of Texas’ economic strength may be traced to the almost indefinable entrepreneurial spirit of its workforce, whereby gross state product growth consistently exceeds what would be expected by employment growth alone. That is, Texas elicits proportionately more economic production from an additional job than the national average (see Figure 1b). While Texas’ employment growth rate has outpaced the U.S. by 0.9 percentage points over the past four years, the state’s gross product has grown even faster, leading the national gross domestic product growth rate on average by 1.9 percentage points.

Oil and Gas Industry:
Higher Fuel Prices Are Slow to Help
Because of falling oil prices from February 1998 through the end of 1999, the state’s mining industry lost 27,900 jobs. From its low point of 142,900 mining jobs statewide in December 1999, only 2,100 of the state’s mining jobs have been recovered during this period of higher oil prices, indicating the industry’s reluctance to believe that today’s higher prices are here to stay.

The price of oil and gas over the past 20 years has been volatile economically, causing potential investors to be wary about investments in exploration. While the number of operating drilling rigs has more than doubled, from 180 in April 1999 to 388 in November 2000, this only returns the count to its early 1998 level. Capital for oil investment remains tight. On top of this, the time delay between investment and production, increasing production quotas for OPEC nations, and the risk of drilling an unsuccessful well have kept investors skittish. This lack of investment capital, combined with a labor shortage caused by the strong national economy, has held mining employment statewide at 145,000, up less than 1 percent over the past year. Slow erosion, down to a total of 140,000 jobs by 2005, is forecast.

Although oil and gas employment has been lukewarm in response to higher prices, this is a marked improvement from year-to-year job declines of more than 14 percent in the summer of 1999. Much of the recent run-up in natural gas prices was prompted by a low inventory of available reserves, but the situation is seasonal and temporary. Declines in mining employment are expected over the next three years, but the losses should be slight, based on the assumption that oil and gas prices will stabilize at a higher level (see Table 5a, Table 5b and Table 5c).

Job declines in oil and gas, ironically, have a silver lining for the industry, since technological improvements allow fewer workers and lower costs for new exploration. From the perspective of workers, the oil and gas industry doesn’t offer high hopes for new jobs: Texas oil production is less than half of its 1982 level and has declined by 4.5 percent annually over the past five years. Natural gas production, likewise, is now only 53 percent of its 1982 level, declining about 2 percent per year over the past five years. Consequently, the overall oil and gas industry–including refining, petrochemicals and oil field machinery–fell below ten percent of the Texas economy in 1998 (see Figure 2).

Construction Employment:
Up More Than 50 Percent Since 1993
The Texas construction industry has been the fastest growing sector of the Texas economy over the past three years, bustling along at a job growth rate of 7.7 percent in 1998, 6.4 percent in 1999, and a predicted 5.2 percent in 2000. Comparatively low building costs, in combination with steady net migration spawned by the state’s consistent outperformance of the national economy, have kept up the demand for new construction. With 560,400 employees, the Texas construction industry now employs 26,000 more Texans than it did a year ago and accounts for 5.9 percent of the state’s nonfarm workers, its highest proportion since the mid-1980s.

Job growth slowed down to just over a 5 percent rate in 2000, responding to higher mortgage rates. Although local markets vary, aggregate housing supply statewide has been catching up with demand, causing residential and nonresidential construction activity to slip back a bit. Statewide housing starts shrank 6.3 percent in two years, from a thirteen-year high of 160,000 starts in 1998 to 150,000 in 2000; nonresidential construction dropped 2 percent, from 162 million to 159 million square feet.

Still, construction activity has remained relatively robust in the year 2000. Although falling back from the heated pace of the previous two years, Texas per-capita housing starts still exceed the national rate by 27 percent, reflecting the continuing effects of strong positive migration. The value of nonresidential construction in Texas, at $14.2 billion in 1999, was three times larger (in real terms) than it was during its recent low in 1990, but was still less than half the 1981 inflation-adjusted peak.

The total value of single-family residential permits more than tripled in the Houston and Dallas metropolitan areas in the 1990s, while rising more than six times in the Austin-San Marcos metropolitan area. Construction permit values are affected largely by vacancy rates, rates of overbuilding, the demand for housing in the area, and the particular stage of a building cycle in which a local area finds itself. The value of nonresidential permits rose 152 percent in Houston and an astounding 260 percent in Austin over the 1990-1999 period, while areas at a different stage of their growth cycle, such as Dallas (up 23 percent) and El Paso (up 21 percent), grew much more slowly.

The state’s construction industry will cool in 2001 and 2002. Monetary actions by the Federal Reserve Bank’s Open Market Committee had been braking economic growth to curtail budding inflation, and these moves had prompted average mortgage rates for new construction in 2000 to rise to over 8 percent for the first time since 1992. Inflation fears have abated since mid-year, the rates have begun to drop, and the cost of cement and lumber has declined, but a slowing economy is still expected to reduce the demand for new construction in Texas. Thirty-year fixed mortgage rates averaged 7.1 percent in 1998, 7.3 percent in 1999, and 8.1 percent in 2000. Although interest rates are notoriously difficult to predict, the Comptroller’s forecast for rising interest rates through most of 1999 and 2000 proved correct. This forecast (based on national forecasts from the WEFA Group) expects mortgage rates to average 7.6 percent in 2001 and 2002 and 7.4 percent in 2003.

The demand for single-family housing construction could be crimped a bit more than the market for multi-family housing, such as apartments. Single-family starts should tally 111,200 in 2000, a modest one-half percent increase from 1999’s 110,500 starts. Multi-family construction will fall a bit, from 40,900 to 38,400, but an expected dip in wage growth could shift more potential buyers away from houses and to apartments, making the outlook for multi-family construction more robust than the outlook for single-family construction. In sum, total statewide housing starts are expected to drop back a bit (by 1.5 percent) in 2001, but the demand for housing construction should increase again in 2002 and 2003.

The slowdown in Texas construction has been inching downward just enough to alleviate a labor shortage that suppressed the industry over the past couple of years. The Federal Reserve Bank of Dallas reports the strong building activity in recent years is softening the market for new properties in many areas. The Comptroller forecasts continuing construction employment growth, albeit at much slower rates, over the next five years.

Construction job growth rate will diminish to 1.7 percent in 2001, 1.3 percent in 2002, and 1.6 percent in 2003. After seven years of growth rates averaging 6.6 percent annually, these rates may appear anemic to some. Even so, the number of construction jobs will grow over the next three years by about 26,000.

For Manufacturing, It's High-Tech Again
With a national economic slowdown braking demand, year-to-year manufacturing employment inched up a scant 0.3 percent in October 2000, with the gains in some sectors counterbalanced by losses in others. Propping up manufacturing over this period has been solid growth in building materials, driven by the construction industry. Companies producing concrete for rigs and buildings, gypsum, and plaster saw 4.3 percent year-to-year job growth, while oil and gas field machinery jobs mushroomed by 6.8 percent, due to higher drilling activity. Electronics manufacturing, particularly communications equipment, has also re-emerged as a high-flying industry, with 3.6 percent job growth over the past year.

Fresh back from downturns, computers and electronics are once again tallying marked increases and will be the focus of Texas’ manufacturing growth over the next three years. Layoffs among high technology manufacturers, resulting from a flood of semiconductors in the market, was the primary reason behind the state’s 1999 loss of manufacturing jobs, when for the first time since 1992 the total number of Texas manufacturing jobs declined. Largely because of high technology jobs, overall Texas manufacturing employment increased 14.2 percent from 1992 through 1998, eclipsing the nation’s 3.7 percent increase over the same period. More dramatically, real gross state product in the manufacturing sector exploded over those six years. Riding the high technology productivity boom and expansions of high technology firms, manufacturing’s real gross product had risen 73 percent, from less than $62 billion in 1992 (in 2000 dollars) to over $107 billion in 1998.

This explosive pace was unsustainable with the glut of computer and electronic components on the market. Rapid technological advances led computer prices to plummet 26 percent a year over the past five years. Computer manufacturing employment in Texas declined by 7.9 percent in 1999, accompanied by a 2.5 percent decline in electronics manufacturing employment.

Since 1999, computer and electronics firms have been on the upswing again. Industrial machinery manufacturing (including computers and oil-field machinery) added 5,700 jobs (4.2 percent) over the past year, and electronics manufacturing added 4,700 (3.6 percent), including 3.8 percent in communications and cellular equipment. Texas electronics manufacturing rolled up 5 percent annual job gains between 1992 and 1998, growing from 98,100 in 1992 to 131,600 in 1998, before taking a breather and falling back to 128,400 in 1999. Growth has resumed in the year 2000, rising to 133,800 jobs. Two-thirds of these workers are employed producing semiconductors, circuit boards, or telephone and communications equipment.

Foreign investment has aided Texas manufacturing. Over the last few years there have been large increases in foreign investor spending in America. Through 1997, foreign investors had never put more than $80 billion a year into the U.S. economy. However, when the U.S. became the only large developed economy in the world with sustained growth, foreign investment shot up to $216 billion in 1998. In 1999, it grew another 31 percent, to $283 billion.

The outlook for Texas manufacturing over the next three years is for job growth to resume, based on the assumption that international markets will continue to strengthen, given that exports are now a crucial variable in Texas’ manufacturing growth. Based on national export market forecasts, the Comptroller’s Office expects 10 percent average annual increases in Texas exports from 2000 through 2003. Exports will take up much of the slack in the demand for manufactured goods, even if the domestic market for manufactured goods weakens. The Purchasing Managers’ Index, which indicates expansions and contractions in the nation’s manufacturing sector, is hovering just below 50, indicating that the nation’s manufacturing production is more likely to shrink than expand over the near-term. An outright recession, suggested when the index drops to 40 or less, is not expected.

Overall, durable goods manufacturing accounts for over 60 percent of Texas’ manufacturing employment. In large part due to electronics and computers, overall durable goods manufacturing jobs will grow by about 2.2 percent annually over the next three years, from 666,000 in 2000 to 710,000 in 2003.

Nondurable goods manufacturing has seen five years of declining employment, dropping from 440,500 jobs in 1995 to 419,600 jobs in 2000. The decline was due to job losses in the apparel and textile industries, which lost about one-third of their total jobs, dropping from 67,900 in 1995 to 46,000 in 2000. Most of these losses, chalked up to international competition, have run their course, so nondurable goods manufacturers are forecast to see net job growth in 2001 (up 0.4 percent) and an average annual growth of 0.9 percent in 2002 and 2003. Most of this growth will be the expanding range of plastics products fabricated in Texas.

For Transportation and Communications, It’s Also High Technology
Transportation, Communications and Public Utilities (TCPU) will continue to be one of the fastest growing Texas industries. The fastest growth will be in the communications sector, where job growth will roll along at 6.1 percent annually through 2003. This will be driven in part by the unrelenting growth of cellular and Internet communications, with particularly active growth in high-speed Internet access connections such as digital subscriber lines (DSL). New telecommunications devices and services are far from saturating the Texas market, but intense competition has brought down prices and reduced profit margins for the industry. As a result, gross state product growth in the industry is stepping back a bit from its 10 percent annual growth during the last three years of the 1990s.

Transportation jobs, now up by 4.2 percent from a year ago, will advance another 4 percent annually because of expanding air travel and growing domestic and export markets requiring more shipments of manufactured goods. Utilities employment, on the other hand, is expected to be flat in 2001 and shrink in the next two years. Even though there will be expansions in electrical capacity fueled largely by the recent deregulation of the industry, job opportunities in utilities will be held back because of the capital-intensive, rather than jobs-oriented, nature of this sector. In sum, TCPU, now employing 6 percent of all Texas nonfarm workers, will account for over 11 percent of net new Texas jobs through 2003.

Trade Boosted by Auto Sales
Through the first three-quarters of calendar 2000, Texas retail sales were up 8.7 percent, far outstripping the rate of inflation. During that period the highest interest rates in nine years did not drive Texas consumers away from big-ticket items–instead, they were driving away with new automobiles. Motor vehicle sales tax revenues increased 12.9 percent during state fiscal 2000, following an already remarkable 8.9 percent increase in fiscal 1999. Growth has been continuing in recent months, although at a slower pace.

The extraordinary growth in retail sales of automobiles, housing, appliances, and electronics reveals another characteristic of consumers: a continued tolerance for high debt levels. Unabated consumer optimism, pervading the economy for eight years, kept personal finances healthy and culminated in retail sales growth averaging 8.1 percent per year–5.5 percentage points above inflation–over the past three years. Consumer confidence, in reaching an all-time record in January 2000 of 150.7 (1985=100), boosted purchases of big-ticket items.

Even though the vibrant growth rates of Internet sales receive press coverage, the online retailing industry, at an estimated $61 billion nationwide in 2000, still represents only 2 percent of national retail trade. This leaves an abundant opportunity for continued growth. Because of continued job and income growth, the outlook for retail sales also remains healthy. However, a more volatile stock market will suppress consumer optimism, which eventually will affect consumers’ willingness to spend. This factor is one of the reasons that the Comptroller’s forecast anticipates retail sales growth declining through 2003.

Wholesalers and retailers will add jobs over the next three years, particularly those supplying export markets. The rate will slow somewhat, with indications of flagging consumer optimism in recent months. Retail trade is laboring harder for gains during recent months, corporate debt is at high levels, and the stock market turned more bearish in 2000. Employment growth in trade will slide from 3.2 percent in 2000 to slightly over two percent per year through 2003. Nearly one quarter of Texas’ nonfarm jobs are in trade, and this proportion is expected to remain relatively stable over the next few years.

Finance, Insurance and Real Estate (FIRE):
Backed by Investments and Housing
Banks have taken advantage of consumer optimism and sustained low inflation to substantially increase their loan portfolios. Over the last three years, Texas banks and savings institutions have been expanding their employment at rates not seen since the boom of the early 1980s. The solid growth is beginning to soften, as increased numbers of loan defaults have occurred over the past year. Lenders are searching for diversity across industries in their loan portfolios, making loans often harder to get in areas dominated by a single industry. Fee and loan income should keep banking employment opportunities robust in 2001, at a growth rate of 3.7 percent, before stepping back in 2002 and 2003 in response to a generally quieter economy.

The insurance industry, too, has experienced three very strong years in Texas, with annual employment growth rates averaging 3.4 percent. Statewide personal income growth, averaging 7.4 percent annually since 1996, has provided the fuel for this increase. Full consumer coffers not only left consumers with more money to purchase insurance, they have added to the stock of big-ticket items such as housing and automobiles, which generally are insured. With personal income growth slowing, inflation rising, and debt levels up, the Texas insurance industry will see employment growth slip, dropping to about 1.6 percent annually from 2000 to 2003.

Texas real estate values rose much faster than the rate of inflation over the past ten years. According to the Texas A&M Real Estate Center, the median sale price of homes in Texas was $144,900 in 2000, based on Multiple Listing Service (MLS) data for the first three-quarters of the year, compared to $104,400 in 1995.4 This represents a robust 6.8 percent increase in the average MLS house’s value per year, considerably outstripping the rate of inflation. If housing prices had increased at the rate of the consumer price index, which rose only 2.4 percent a year over the period, the value of the average Texas residential house would have increased by only $12,800 in five years, rather than the $40,500 shown in the MLS data (see Figure 3). The importance of location and cycles to real estate value is certainly true of Texas real estate; while some geographic pockets experienced colossal increases in total value, others barely budged.

The real estate and finance sector, which includes stockbrokers, will experience the economic cooling that is suppressing insurance employment growth over the next two years, only more so. Leveraged (or margin) debt is at a near-record high, forcing the sale of stock shares when margin calls occur, and adding to stock and commodity market volatility. Stock price volatility and fickle consumer confidence have already cooled employment growth in investment finance. Although the real estate/other finance sector will add jobs through 2003, the toll of a more shaky economy is to limit job growth to 0.3 percent in 2001 and just over 1 percent annually in 2002 and 2003. Real estate/other finance was one of the fastest growing Texas sectors in 1998, with 8.4 percent job growth, before slowing to 5.3 percent in 1999 and 4.4 percent in 2000.

Overall employment growth in Texas’ finance, insurance and real estate industry should step back from 3.4 percent in 2000 to about 1 to 1.5 percent annually over the 2000-2003 period.

Services to Continue 3.2 Percent Annual Growth
Whether we have entered a "new economy" operating under a new set of electronic commerce rules, or one grounded in old conventional economic forces, service jobs will continue to provide the bulk of job growth to the Texas economy. Most of these jobs will be in traditional occupations. About 14 percent of the total job growth in the Texas economy over the next three years will be in business services, with 8 percent in health services and 8 percent more in engineering, accounting, and research. Another 9 percent will be in miscellaneous services such as repair, amusements, membership organizations, and personal services. All combined, services will account for 39 percent of the new jobs over the next three years. An additional 48 percent of the new jobs are in other service-producing industries, such as trade, transportation, utilities, finance, real estate, and government, leaving only about one out of eight nonfarm jobs to be generated in goods-producing industries.

The most rapid growth in the service industry will be in sectors most closely tied to new technological improvements, with engineering/accounting/research services showing the fastest growth of any sector of the Texas economy, rising 6 percent per year through 2003. The business services sector, including temporary and consulting services, is expected to add 4 percent more jobs annually. Repair services will grow faster than the overall economy, at about 3.2 percent per year, but health services, which boomed in the early and mid-1990s, will just slightly eclipse the economy’s overall rate of job growth. While the aging of the population favors rapid growth in health care services, efforts to control costs in the face of rising pharmaceutical prices will hold health services employment growth to about 2.5 percent annually. Overall, services employment will account for about 84,000 new jobs per year through 2003, with average annual job growth rates of about 3 percent.

Government will once again have the slowest job growth rate among the five major service-producing industries. Federal government employment shrank in response to defense cutbacks, but most of this has run its course. Because of the "hiccup" created in 2000 as workers were hired to conduct the decennial population census, federal jobs in Texas increased for the first year since the 1990 census. Federal employment will decline again in 2001, and in 2002 it will be about where it was in 1999, just shy of 185,000 jobs.

Most government jobs in Texas are not at the federal level. State government employment should rise at about half the rate of population growth, as it has over the past five years, adding about 0.8 percent job growth annually. Local government, with job growth rates of just under 2 percent annually, will account for 90 percent of new government jobs in Texas and continue to reflect the ongoing shift of government services to local areas.

Exports Take More of Texas Around the Globe
Texas international exports totaled $91 billion in 1999, aided by a very strong fourth quarter to rise nearly 5 percent for the year. Texas exports will account for 14 percent of the state’s 2000 gross product, up from 11 percent 10 years ago, despite the economic pummeling and later recovery of the important Mexican and Asian markets over the past decade. The increasing role of international trade in Texas’ economy means it will be shaped by international events more than ever, and the Comptroller’s economic forecast is not expecting exports to retreat anytime soon. As the recovering economies of developing nations, specifically Mexico, take off, exports are expected to account for an even greater share of the state economy, rising nearly a half percentage point per year. Twenty years from now, the proportion of Texas’ economy owing to exports will be 22 percent.

Exports are relatively more important to the Texas economy than is the case nationwide. Although Texas has only a bit over 7 percent of the nation’s population, for every dollar of U.S. exports 13 cents are generated from exports originating in Texas. Texas ranks third among the states in both per capita exports and the proportion of total gross state product from exports (exceeded in each case by Vermont and Washington). In 2000, the state economy produced about $5,000 in exports for every Texan, and that amount has more than doubled since 1990.

Underlying this export-intensity is the state’s proximity to Mexico, which receives the lion’s share of Texas exports. According to 1999 data, 45 percent of Texas exports are destined for Mexico, and 48 percent of U.S. exports to Mexico originate in Texas. The relative importance of the international economy to Texas became even more pronounced in 1999, when total Texas exports grew by 4.8 percent, compared to 1.4 percent in the nation overall. Four industries account for two-thirds of total Texas exports: electronics, industrial machinery (including computers), chemicals, and transportation equipment.

Texas export growth slowed its pace in 1998 and 1999, but an acceleration occurred in 2000 and will continue as the economies of Mexico and many developing nations take off, following the global economic sluggishness that peaked in late 1998. Vicente Fox’s election to the presidency of Mexico shows signs of stimulating increased economic activity across the border. Recent U.S. moves to resume normal trading relations with China, as evidenced by granting China "most favored nation" status, should be particularly beneficial for the state’s technology-based exports. In sum, annual Texas export growth over the next three years will more than double the growth rate of the 1998-99 biennium.

International Migration Exceeds Domestic Migration
From 1990 through 1999, Texas added an average of 139,000 people per year from net migration. About 77,000 of these (or 56 percent) were international migrants, a large share of them from Mexico. The great majority of international migrants, including both legal and, to the extent the Census Bureau can measure, illegal immigrants, take up residence in one of the state’s large cities, according to the Bureau of the Census. The Houston metropolitan area has received the most net international migration (about 23,000 annually), while Dallas is second at about 14,000. El Paso, McAllen-Edinburg-Mission, and Ft. Worth-Arlington round out the top five Texas metros for international migrants.

With continued net domestic migration, as well as a birth rate exceeding the national average, Texas is expected to increase its representation in the U.S. House of Representatives from 30 to 32 following the 2000 census.

Overall, the state’s population is expected to increase from 20.4 million in 2000 to 21.5 million in 2003.

Where Are the New Texans From?
During the 1990s, Texas’ population increased by a record 3.3 million, reaching a total of 20.4 million by the end of the decade. Over this period, 1.9 million, or the majority of the state’s population growth, was due to natural increase, i.e. births minus deaths. But another 1.4 million, or nearly 45 percent of the increase, reflected the net in-migration of persons from other states and other parts of the world. Since Texas’ birth rate is only somewhat above the national average, net migration is the major factor that allows Texas’ population to grow faster than the national average.

Net migration, however, is the difference between two huge flows into or out of a given geographic area. For two reasons, we usually concentrate on net migration in analyzing and projecting Texas’ population growth. First, because of the availability of the Census Bureau’s annual population estimates, we can easily calculate updated net migration figures by taking the annual population change and then subtracting natural increase (births minus deaths) during the period. Second, as noted above, although net migration reflects only the difference between two large flows into and out of a state, it is the net difference between these two flows that is the primary determinant of state population growth relative to the U.S.

Even with our reliance on net migration figures, however, it is also instructive to see where the new Texans are coming from and where the departing Texans are going. As expected, net migration into the state is indeed the difference between two large flows in both directions. According to data from the Internal Revenue Service, from 1996 through 1999, a total of 1.6 million new residents moved into the state (see Table 6). During the same period, however, 1.4 million people left Texas, leaving a net in-migration into Texas of only 186,000.5

The majority of the 1.6 million persons who moved into the state during this period are from nine states–California, Florida, Louisiana, Oklahoma, Illinois, New Mexico, Colorado, Georgia, and Arkansas–plus international migration. As many Texans would expect, California, with 176,000 in-migrants, leads the list of states. But a much larger 345,000 of the new Texas residents come from the four surrounding states of Louisiana, Oklahoma, New Mexico, and Arkansas, plus our near-neighbor Colorado. Another 149,000 of the new Texans during this period originated from the two large Sunbelt states of Florida and Georgia. Finally, reflecting national trends, in-migration from foreign countries is playing an increasing role in migration into Texas. A total of 113,000 persons from other parts of the world, a large share coming from Mexico, moved into Texas during this period.

This pattern of migration is generally consistent with the measurement of migration trends across the world using the "gravity model" of population attraction. The gravity model predicts that migration between any two areas is positively related to the product of the areas’ populations and inversely related to the distance between the two areas. Thus, given the relatively close proximity, the large migration flows between Texas and surrounding states as well as Colorado and Mexico are expected. In addition, even though they are relatively far away, both California and Florida contain large populations that facilitate migrant flows between Texas and the other two most populated Sunbelt states.

As predicted by the gravity model, the destination of out-migrants from the state looks almost identical to where in-migrants originate. Over 125,000 of the 1.4 million Texas out-migrants during 1996-99 moved to California. Another 322,000 moved to the four surrounding states plus Colorado, and 149,000 went to Florida and Georgia. Finally, 81,000 of the out-migrants moved to foreign countries, again a large share going to Mexico, during this period. Even with this large outflow, however, Texas remained a net importer of new residents during this period because of its relatively healthy economy.

2000 Census Population Revision Notice

On December 28, 2000, the U.S. Bureau of the Census released preliminary figures, indicating that Texas' population on April 1, 2000 was 20.85 million rather than the July 1 populaiton of 20.4 million, based on earlier Census Bureau estimates, anticipated in this report. The Census Bureau will subsequently revise its annual state population estimates and components of changes, which will then be incorporated in upcoming TEU state economic forecasts. These revised population estimates, however, should not significantly change the short-term outlook for the Texas economy reported here for the next three years.

1 Digital Economy 2000. U.S. Department of Commerce
2"The Internet Economy Supported an Additional 650,000 Jobs During 1999", Center for Research in Electronic Commerce, University of Texas at Austin.
3"Further Gains in Productivity Predicted," Wall Street Journal, August 1, 2000.
4Multiple Listing Service price data from the Texas A&M Real Estate Center.
5 Because not all households file income tax returns, the IRS data do not capture the total universe of migrants. For example, Census Bureau population estimates indicate that from 1996 through 1999, 590,000 more persons moved into Texas than moved out, considerably more than the IRS estimate of 186,000. Still other than the decennial Census of Population, these iRS statistics are the major source of interstate migration data for the U.S.