DownshiftingTexas has mostly avoided being infected by a national economic malaise. Still, the state’s resistance is down, as indicated by the slowdown in statewide employment growth. In the Comptroller’s leading economic indicator index, eight of the ten economic indicators found to lead the economy have deteriorated since January. Furthermore, the three most predictive components—the help wanted index, the consumer confidence index, and the number of initial claims for unemployment compensation—are all pointing towards more subdued economic growth over the next few months. The Texas economy will remain moderately vigorous, but after years of better-than-average growth, it will seem a bit anemic.
The Texas and national economies flourished in recent years for several reasons. The biggest reason has been galloping productivity growth. The large “Baby Boomer” population has been in its peak productive years, globalization continued to open worldwide markets to competition, the Internet seriously enhanced access to decision-making information, and all this happened in the midst of rapid improvements in computer and robotic technology. Deregulation—first in transportation and energy, then in financial services, and recently in telecommunications and electric utilities—has removed more production roadblocks. Combining all these with a well-honed fiscal and monetary policy and the slashing away of federal debt has helped keep interest rates low and encourage investment. Strong investment, in turn, has sped up the development of new technologies.
In sum, the U.S. economy has been operating like a well-oiled machine for almost a decade. While sharing in these advantages, Texas had even more, including an available workforce, lower costs of doing business, comparatively reliable and inexpensive energy, quality infrastructure, and a geographic location favorable for expanding national and international business.
Even under excellent conditions, however, a flower’s bloom withers with time. Economic fundamentals remain strong today, but signs of weaker than expected growth dovetailed with a sliding stock market to take consumer confidence downward. Although the consumer confidence index in the West South Central states remains 23 percent above its 1985 baseline level, this is considerably below where it was in January 2000, when it was nearly 50 points above the baseline (see Figure 1). With further unraveling, U.S. productivity growth in the first quarter of 2001 fell at an annual rate of -1.2 percent, for its first drop in six years and its sharpest fall in eight years. Key overseas economies are expected to have only half the growth in 2001 that they had in 2000, which translates into a shrinking market outlook for Texas exports.
SOURCE: The Conference Board
Technology producers in particular—for example, manufacturers of electronics and computers, and software makers—have restrained their production in an effort to work off inventories that have swelled as demand has weakened. Years of high investment had producers adding capacity and improving production methods, particularly in technology products and automobiles, while demand for their products has waned in recent quarters. As the economy began to look weak, investors have reigned in their long-term investment commitments. The capacity utilization rate, which measures the amount of manufacturing capacity actually being used, fell markedly nationwide in the first quarter, from about 82 percent a year ago to 76 percent. Gradually, the effect of falling demand is slower net employment growth, layoffs in some sectors, and rising initial claims for unemployment compensation (see Figure 2).
SOURCE: The Conference Board
The impact of a slower national economy on Texas, although not taking Texas underwater, is real. Now more than ever, the diversified Texas economy is inextricably linked to national economic health. Moving average annual statewide employment growth is down from 3.3 percent at the beginning of summer 2000 to 2.6 percent in April 2001. And Texas’ motor vehicle sales revenues, which are heavily driven by consumer confidence, had been cruising along with heady annual growth rates of about 9 percent over the past five years, but has bogged down to -0.5 percent year-to-year over the past six months (see Figure 3).
SOURCE: Carole Keeton Rylander, Texas Comptroller
The largest sector of our state’s economic base, high technology, is enduring slower-than-expected sales and mounting over-capacity and inventories. At least 20,000 workers in computers, electronics, communications, and other high-tech industries have been laid off statewide since January. High-tech now comprises a larger part of the Texas economy than oil and gas, which as little as twenty years ago was five times larger than high technology.
In sum, our forecast is for somewhat slower growth in the Texas economy over the next two years (see Table 1). A Texas recession is not forecast, but growth rates will drop back about two percentage points from the 6.1 percent increase in real gross state product in calendar year 2000. Even though the Federal Reserve Board has cut the federal funds interest rate by two and three-quarters percentage points over the last half year, the resulting economic positives will take some time to unfold. Eventually, lower rates help by making loans cheaper and encourage housing construction and business investment, but with lower consumer and business confidence, it will not be a cure-all for the economic shakiness in the short term. After growing at 3.1 percent in 2000, Texas’ nonfarm job growth is expected to rise about 2.5 percent per year in 2001 and 2002.
Over the past quarter century, the oil and gas industry has a history of hoisting the Texas economy when other sectors are weak and dragging it down when other sectors are strong. The higher energy prices that feed the oil and gas industry also bleed profits from the more consumption-oriented sectors. Today, while the growth of most Texas industries has been slowing, the oil and gas sector is adding jobs faster than at anytime since a similar price run-up in late 1996. Because of the recent escalation in oil and natural gas prices, the number of operating oil and gas rigs has exceeded 500 for the first time since its plummet during an oil price crash in January 1986 (see Figure 4). At the current level of economic diversification in Texas, the oil and gas industry serves as a buttress to keep the Texas economy outperforming that of the nation when energy prices rise. During 2001, while much of the nation mulls over a weak economy, the Texas oil and gas sector will add about 5,000 jobs to state payrolls, with nearly 3,000 of these in mining exploration and the remainder in manufacturing related to oil and gas production.
The forecast is for mining cycles to continue over the next two years. Job losses will resume in the oil and gas industry in 2002 and 2003, as the sector’s job gains of 2000 and 2001 slip away again. (See Appendix Tables 10a, 10b and 10c.) The underlying reasons for an expected down cycle in the sector are declining domestic reserves, falling prices resulting from increasing oil production in Venezuela and other non-OPEC nations, and a muted worldwide demand for energy products in the face of relatively slow world economies over the next two years. After rising 2 percent annually in 2000 and 2001, Texas’ mining employment is expected to fall 3 percent per year in 2002 and 2003.
Texas Economic History and Outlook, for Calendar Years: 1998 to 2004
Spring 2001 Forecast
Texas Forecasts 1998 1999 2000 2001* 2002* 2003* 2004* Gross State Product (Billion 1996$) 640.3 672.4 713.1 742.2 770.5 804.6 849.9 Annual % Change 7.1 5.0 6.1 4.1 3.8 4.4 5.6 Personal Income (Billion $) 508.6 538.3 578.2 612.2 650.4 691.7 735.4 Annual % Change 8.4 5.8 7.4 5.9 6.2 6.4 6.3 Nonfarm Employment (Thousands) 8,940.7 9,159.0 9,442.8 9,681.8 9,911.7 10,145.0 10,401.2 Annual % Change 3.9 2.4 3.1 2.5 2.4 2.4 2.5 Resident Population (Thousands) 20,277.0 20,636.9 20,977.4 21,320.5 21,707.9 22,090.9 22,457.8 Annual % Change 1.9 1.8 1.6 1.6 1.8 1.8 1.7 Unemployment Rate (%) 4.8 4.6 4.2 4.4 4.6 4.6 4.7 Oil Price ($ per Barrel) $12.35 $17.36 $28.84 $26.83 $23.76 $24.01 $24.45 Natural Gas Price ($ per MCF) $1.78 $2.03 $3.61 $3.86 $3.32 $2.99 $2.93 U. S. Economy Gross Domestic Product (Billion 1996$) 8,515.7 8,875.8 9,318.6 9,485.8 9,778.7 10,129.0 10,461.8 Annual % Change 4.4 4.2 5.0 1.8 3.1 3.6 3.3 Consumer Price Index (1982-84=100) 163.1 166.7 172.3 177.3 181.9 186.8 191.7 Annual % Change 1.5 2.2 3.4 2.9 2.6 2.7 2.6 Prime Interest Rate (%) 8.4 8.0 9.2 7.4 6.8 7.7 8.7 *Projected SOURCES: Carole Keeton Rylander, Texas Comptroller; and DRI-WEFA.
SOURCES: Baker Hughes, Inc; Carole Keeton Rylander, Texas Comptroller
Natural gas, which ended the year 2000 with prices 250 percent higher than at the beginning of the year, has the more optimistic outlook. The U.S. market has found natural gas to be a reliable source for power generation, and there is long-term development potential in world markets.
Construction is expected to endure a rather marked slowdown, following eight years as the state’s Texas’ first or second most rapidly expanding major industry. After adding 238,000 jobs since 1991, there are five construction jobs for every three in Texas ten years ago. Housing starts, which totaled 58,000 statewide in 1991, ballooned to a peak of 160,000 in 1998. About 140,000 housing starts per year are expected in 2001 and 2002.
Jobs in construction grew by an average annual of 6.5 percent between 1995 and 2000, and are forecast to grow 1.3 percent in 2001 and only about a half percentage point in 2002, before turning up again. One of the factors underlying this expected slowdown is a level of consumer confidence that lacks the buoyancy it had over record-breaking years from 1997 through 2000. Consumer confidence, along with hard fundamental factors like slower job growth, affects customer demand for housing and business construction, and the job growth that depends on it.
The years 2001 and 2002 will be weaker than average for Texas manufacturing, with both durable goods and nondurable goods advancing more slowly than usual. Large infusions of investment and venture capital have kept Texas manufacturers producing. In the high technology industries, in particular, they have been producing beyond market demand. Consequently, inventories have risen and prices have declined.
The demand for computers and office machinery has slowed dramatically. The year 2000 saw sharply declining prices and continued increases in computer horsepower. Technological products have joined other consumer durables under the buyers’ microscopes, as they are scoured for value. Business investment in computers is down recently, in light of a weak earnings outlook, and consumers are less likely to upgrade computer capacity and speed than in the past. Job growth in 2001 and 2002 will continue, but at a comparatively weak 1.2 percent annually for industrial machinery, before accelerating again in 2003 and 2004.
Electronics employment has been volatile. Statewide, it dropped over 5 percent in 1992, rose over 6 percent in both 1995 and 1996, fell almost 3 percent in 1999, and rose 6.4 percent in 2000. 2001 has already started as a slower year, as forecast. According to DRI-WEFA, the quality-adjusted value of electronic components is slated to increase by 17.6 percent in 2001, which looks quite impressive until it is compared with the 74.4 percent increase in 2000. Proportionately slower quality increases, growing saturation of the market, and international competition will brake job growth for electronics manufacturing to rates of about 2 percent annually over the next two years, slightly below the job growth rate of the overall economy.
A few manufacturing industries, notably transportation equipment manufacturing and instruments, are expected to have better years in 2001 and 2002, compared to the previous two years. These two industries lost substantial employment in 1999 and 2000, with nearly 5,000 jobs lost in transportation equipment and over 6,000 lost in instruments manufacturing. In Texas, the transportation segment’s biggest losses were in aircraft components and shipbuilding. Although the outlook remains relatively weak in 2001, transportation equipment at least looks better than it did last year.
Lumber and wood processing, as well as furniture manufacturing, are forecast to experience some of their weakest times in ten years over the next several months. Fading consumer confidence is diminishing the demand for new homes and renovations, so wood and furniture demand will grow more slowly, if at all. In 2001, furniture employment is forecast to be flat, while the number of lumber and wood jobs is expected to fall by 1.7 percent. Both sectors are primed for new growth in 2002, with furniture adding new jobs at the rate of 1.6 percent and lumber/wood at 2.8 percent.
Nondurable Goods Still the Weaker Manufacturing Sister
Texas’ nondurable manufacturing employment has declined every year since 1995, losing nearly 20,000 jobs. However, owing to productivity gains, real gross state product from nondurable manufacturing is almost identical to its 1994 level, at $32.4 billion. The outlook is for nondurable goods’ jobs to be mostly flat in 2001, followed by about 1 percent employment growth in 2002.
The state’s leather and apparel industries, which have hemorrhaged nearly 40 percent of their 1994 workforce over the past seven years, will continue to lose jobs, but the worst bloodletting is over. On the heels of several years of 7 percent annual job losses, apparel and leather job losses will average about 2.5 percent per year in 2001 and 2002, and may likely begin to tick upward again sometime in 2002. The majority of jobs most susceptible to being undercut by international competition have already been lost.
The Texas textile industry has been on a different growth path in the last few years than in the early and middle 1990s, with average annual growth rates of 4.5 percent since 1996. The industry is small, with only 4,600 jobs statewide and includes carpet manufacturing as well as fabrics manufacturing, which leads it to track closely behind Texas housing starts. As such, its growth over the next two years will likely follow housing starts, and as housing starts and office construction rates are forecasted to be stable, employment growth will settle back to 0.7 percent in 2002.
The outlook for petrochemicals and petroleum refining is marginally less dismal than it has been, but neither sector can expect notable job growth over the next two years. Petrochemical exports will be dampened by restrained global economic growth occurring at the same time that new capacity for ethylene, propylene, and most major commodity plastic resins is increasing in other parts of the world. While particularly rapid increases in productivity per worker help the bottom line of this industry, it reduces the need for manpower, so the job outlook in both industries remains weak. Petroleum refining can expect flat employment growth over the next two years. The petrochemical industry, additionally affected by worldwide mergers, can expect employment in Texas to be flat over the next two years.
Once again, plastics manufacturing will have the most favorable outlook among nondurable manufacturing industries, and will be the only one that can expect job growth rates exceeding the rate of the overall economy. Plastics and other nondurables, which have added 18,000 jobs over the past ten years, can expect another 4,500 over the next two years, fueled in part by exports and in part from Texas’ petrochemical capacity, which provides the raw materials for plastics.
Transportation, Communications, and Utilities
Transportation, communications, and utilities are staying the course of rapid growth, and will be affected little by the moderately slower state and national economies. Transportation services racked up 3.7 percent average annual employment gains in 1999 and 2000, and is expected to continue this pace during 2001 and 2002. Communications, including cellular and Internet communications, can take advantage of a still-expanding market and buzz along at about 5.5 percent job growth, following 7.7 percent annual growth rates since 1994. Talk of a recession is far removed from the communications services industry, although its heady days of booming growth are expected to settle back into what might be termed strong growth.
The staid utility industry also will see job growth. The Wall Street Journal recently reported that Texas’ electricity-production capacity this summer is expected to exceed its peak power demand by 11,000 megawatts—enough to power about eleven million homes. These are numbers that could engender envy on the nation’s east and west coasts, where insufficient supply is more in the news than excess capacity. Texas now has 27 new generating plants under construction, more than any other state. With exporting electricity not currently an option—Texas’ grid has no interstate connections—overbuilding could send Texas’ wholesale electricity prices into a tailspin. The outlook for public utilities employment is that it will expand between 1 and 2 percent annually, at a rate somewhat slower than the rate of the state’s population growth.
Trade Tracks the Overall Economy
The forecast for Texas’ trade employment, true to its long-term history, is that it will mimic the growth rates of the overall economy, at a rate only a touch slower.
As is also common, national sales of big-ticket products—such as luxury items, large appliances, and furnishings—are experiencing the greatest erosion in the recent downturn. Grocery stores and drug stores are the least affected. Although complete Comptroller retail sales tax data are not yet available for Texas for the first half of 2001, these national trends will once again play in Texas, as they have during past economic cycles.
Trade job growth will soften somewhat in 2001 and 2002, falling from growth rate above 3 percent annually over the 1998-2000 period to rates slightly below 2.5 percent.
Finance, Insurance, and Real Estate
Today, the financial services industry is bearing more of the brunt of the economic slowdown than other sectors. More extensive layoffs could be looming in the financial services industry, as stock investments are viewed with a jaundiced eye and loan portfolios are riskier.
In general, the industry had refrained from layoffs out of caution that markets may suddenly rebound. Banks and savings institutions have enjoyed three years of healthy growth before slowing almost in lockstep with state economic growth. The charge-off rate for commercial and industrial loans has risen. Securitized lending (pooling loans and then selling this loan pool as a product to investors) now accounts for one-fifth of lending nationwide. This practice spreads investment risk more widely among the investing public, causing the fate of the banking industry to extend beyond the industry to the overall economy. Banks and savings institutions averaged job growth of about 4.5 percent in 1998 and 1999, before dropping to 1.3 percent in 2000. With stressed profit margins and more problem loans, job growth is expected to be 0.6 percent in 2001 and 1.0 percent in 2002.
The state’s insurance industry had no net job growth in 2000, downshifting after three years of 3-plus percent annual employment growth. The outlook for insurance is marginally slow, with job growth rates of about 1 percent annually.
Real estate and other finance, including investment finance, continues to add jobs, but at a greatly contracted rate. After growing at an average of 5.3 percent per year from 1995 through 2000, year-to-year job growth has fallen below three percent today. The forecast for the next two years is that growth in this sector will further subside, as marginally lower mortgage rates are outweighed by income factors slowing home sales and construction activity, to about one percent per year over the next couple of years.
Engineering, accounting and research services will be the state’s fastest growing sector, in terms of job growth over the next two years. Hardly touched by the recent economic slowdown nationwide, engineering and research services grew by 6.6 percent between April 2000 and April 2001. This sector of the economy, which includes surveying, accounting, testing laboratories, architectural services, engineering, consulting services, and management services, has more than doubled its number of Texas employees since 1988, and now employs 267,200. It will brake slightly, but still is expected to grow by more than 6 percent annually through the rest of 2001 and in 2002. Although architectural and accounting services tend to cycle with the economy, energy-related engineering has kept the overall sector resilient to economic slowdowns.
Close behind, in terms of expected growth, is the sector labeled business services.1 This broadly defined sector has some components that have grown slowly, if at all, in recent years, and these include data processing, detective and armored car services, building maintenance, and equipment rental. Other parts, such as call centers, temporary help-supply services, employment agencies, information retrieval, and computer-related services, have at least doubled their number of employees over the past ten years. Business services employment is expected to increase between 5 and 6 percent annually over the next two years.
Repair services will add between 3.5 and 4 percent annually, while other service categories, including health services, are expected to expand at close to the state average. Overall, services is the state’s largest “one-digit SIC” industry. It is expected to grow by 3.5 to 4 percent annually over the next two years, to surpass 3 million workers statewide in 2003.
Job growth in the federal and state governments has consistently grown more slowly than the overall economy. Local government employment has grown as fast as the economy over the past ten years, mainly because of public school hiring, and is expected to continue this pattern over the next two years. State government employment has grown only about half as fast as total nonfarm job growth over the past decade, but it will increase a bit.
The federal government sector, which gradually saw its Texas jobs erode away in every non-Census year since the 1980s, is expected to continue seeing job losses of 3.3 percent in 2001. At 179,000 jobs, federal government employment in Texas is down over 25,000 jobs since its 1990 peak. The outlook, however, is for a mild turnaround in federal government employment. It was long battered by defense cutbacks, but as defense contracts have slowly expired, the federal government workforce may now operate with more stability. Civilian federal government employment in 2002 and 2003 is expected to increase by 0.5 to 1 percent annually.
The Census: A More metropolitan Texas
The 2000 census shows that the state’s nonmetropolitan counties, on the whole, grew only half as fast as the metropolitan counties. While the state’s overall population growth was 22.8 percent between 1990 and 2000, metropolitan counties grew 24.9 percent, while the nonmetropolitan counties grew by 12.0 percent. The fastest growing nonmetropolitan rates have been in counties with recreational amenities or retirement desirability. Bordering on a metropolitan area also helps these environmentally attractive counties, as the fastest growing nonmetro counties were Bandera (up 67 percent) and Kendall (up 63 percent).
Nearly 35 percent of nonmetropolitan counties actually lost population during the decade, and only half of them had populations that grew over 7 percent since the 1990 census. In metropolitan counties, on the other hand, all 58 of the state’s metropolitan counties gained population, and nine out of ten grew by over 7 percent. As a result of these different aggregate growth patterns, metropolitan counties now comprise 84.8 percent of the state’s population, up from 83.4 percent in 1990. The fastest growing metropolitan counties were all suburban counties, and included Collin, Williamson, Rockwall, Montgomery, Denton, Fort Bend, Bastrop, and Comal. Each of these grew by at least 50 percent from 1990 to 2000.
Texas' Economic Snippets are Mostly Bright
Texas continues to rank high in measures of economic performance. According to the U.S. Bureau of Labor Statistics, the Bryan/College Station area tied for having the nation’s lowest unemployment rate among the nation’s 331 defined metropolitan areas. For April 2001, Bryan/College Station had an unemployment rate of 1.4 percent.
Of 38 metropolitan areas with over 750,000 workers, Dallas tied for the second fastest rate of employment growth (behind Las Vegas) over the past year, with a growth rate of 4.4 percent. The U.S. Bureau of Economic Analysis recently released personal income data for all the nation’s metropolitan areas in 1999. Of the nation’s ten fastest growing metropolitan areas, Austin ranked second to San Jose, California, with total personal income growth of 11.8 percent. The numbers reflected a particularly strong high technology industry in 1999. On the flip side, the state also had one of only four metropolitan areas in the nation to experience a net loss in total personal income in 1999 (Midland/Odessa), largely because 1999’s bottom-scraping oil prices made for a bad year in the energy industry. Since 1999, high technology has cycled downward and energy has cycled upward, so more recent data would likely reveal a very different pattern.
Texas now ranks eighth among the 50 states in the rate of job growth over the past year, and in the top five in transportation, communications, and public utilities. In terms of job growth by industry over the past year, Texas ranked in the top half of states in all major industries.
1 Business Services includes building maintenance services, employment agencies, temporary help supply services, advertising, detective and armored car services, collection services, credit reporting, court reporting, copying, direct mail, software, data processing, information retrieval, and computer-related services.