For the last few years, there was much discussion about a "soft landing" for the nation's high-flying economy. Inherent in this view was the belief that the U.S. economy was stronger than it should be, based on traditional economic standards. Economic growth continued well above what many economists considered a sustainable real gross domestic product growth rate of 2 to 2.5 percent per year, while the unemployment rate fell well below the "full employment" level of 5.5 to 6 percent. Under the soft landing scenario, the economy would contract slowly and eventually settle at a slower, sustainable rate of growth. Instead, the economy soared even higher, as employment growth and productivity continued to improve, while inflation fell. Under those conditions-substantial economic expansion accompanied by very low unemployment levels-traditional economists would expect inflation to be a major problem, but it remains tame. While the national economy has experienced eight years of continuous expansion, talk of a soft landing is relevant again. Economic growth in the U.S. was slightly slower in 1998 than in 1997, and the drag of weak export markets has made the first half of 1999 slightly slower than the first half of 1998.Texas Economic History and Outlook, for Calendar Years, 1995 to 2001
The Texas economy is following the same script, although it consistently remains a stride ahead of the national economy. Texas nonfarm employment in 1997 advanced at a barn-burning pace of 4.3 percent, with 352,000 more jobs than in 1996. For 1998, the growth rate edged back slightly, to a still impressive 3.8 percent. For the first half of 1999, Texas' employment growth has averaged just under 3 percent, exceeding the U.S. rate of 2.2 percent by about three-quarters of a percentage point (Figure 1). Total exports from Texas, responding to economic weakness in East Asia, Europe and South America, declined over 7 percent in the first quarter of 1999, compared to a year earlier.
Despite the pullback, the Texas economy remains relatively strong. Recently released gross product information from the U.S. Bureau of Economic Analysis (BEA) highlighted Texas' outstripping of the U.S. economy, which has itself been expanding for eight years. Five of the nation's ten fastest growing metropolitan areas (MSAs) from 1996 to 1997, based on total personal income growth, were in Texas, with the Austin-San Marcos MSA ranked first in the nation. Overall, Texas' total per capita personal income growth from 1997 to 1998 ranked fourth among the states, and the rate of total personal income growth exceeded all states except Colorado over the 1996-1998 period. On the downside, Texas still has some of the poorest areas of the nation. Four of the nation's five poorest MSAs are in Texas, all along the Texas/Mexico border. Texas' real gross state product growth reached 6.2 percent in 1997, for its best year-to-year advance since 1988, when the state scrappily resuscitated itself after a severe oil-shock recession in 1986. Only two states (Oregon and New Hampshire) exceeded Texas in the growth rate of economic production in 1997, according to the BEA. While a step behind 1997, Texas' 1998 real gross state product growth was estimated at 5.5 percent, still well above its annual average growth of 4 percent over the past ten years. Although the energy industry is weak, the overall state unemployment rate, at 4.6 percent, is at it lowest level since 1980. Inflation is at its lowest-on a sustained basis-since the 1960s, and technological advances have allowed unusually large leaps in worker productivity. As a result, the current mild slowdown in Texas job growth is not braking gross state product growth very much. Although job growth has dipped from 3.8 percent in 1998 to under 3 percent this year, the state's real gross product is still expected to advance at nearly 1998's pace, with an estimated 5.4 percent increase for 1999 (Table 1).
What Happened to Oil?Texas Forecasts 1995 1996 1997 1998 1999* 2000* 2001* Gross State Product (Billion 1992$) 486.8 504.3 535.7 565.3 595.9 617.7 642.7 Annual % Change 4.4 3.6 6.2 5.5 5.4 3.7 4.0 Personal Income (Billion $) 398.6 425.3 459.6 493.1 526.3 559.1 595.4 Annual % Change 7.0 6.7 8.1 7.3 6.7 6.2 6.5 Nonfarm Employment (Thousands) 8,022.6 8,257.8 8,609.5 8,940.9 9,189.4 9,382.0 9,629.4 Annual % Change 3.5 2.9 4.3 3.8 2.8 2.1 2.6 Resident Population (Thousands) 18,735.5 19,077.4 19,433.1 19,806.0 20,179.1 20,546.8 20,931.1 Annual % Change 1.9 1.8 1.9 1.9 1.9 1.8 1.9 Unemployment Rate (%) 6.0 5.6 5.4 4.8 4.6 5.2 5.4 Oil Price ($ per Barrel) $16.45 $20.44 $18.79 $12.35 $14.47 $15.44 $15.64 Natural Gas Price ($ per MCF) $1.39 $2.00 $2.20 $1.78 $1.89 $1.99 $2.11 U. S. Economy Gross Domestic Product (Billion 199 6,761.7 6,994.7 7,269.7 7,552.1 7,813.8 7,927.1 8,077.7 Annual % Change 2.0 3.4 3.9 3.9 3.5 1.4 1.9 Consumer Price Index (1982-84=100) 152.5 156.9 160.6 163.1 165.9 168.8 172.6 Annual % Change 2.8 2.9 2.3 1.6 1.7 1.8 2.3 Prime Interest Rate (%) 8.8 8.3 8.4 8.4 7.9 7.6 7.8 *Projected SOURCES: Carole Keeton Rylander, Texas Comptroller of Public Accounts (Spring 1999 Forecast), and WEFA Group.
It was not long ago that anyone attempting to forecast the Texas economy necessarily needed to know the price of oil. Higher oil prices meant more economic growth in Texas, since the state was a substantial net exporter of oil and gas, as well as drilling equipment (Figure 2 and Figure 3).Construction To Take a Breather?
For example, a sudden drop in the price of oil in 1986 was instrumental in causing the state economy to buckle and fall into recession. During this decade, however, the story has changed. As Texas' oil and gas production has continued to fall, the overall growth rate of the Texas economy in the 1990s has been relatively unaffected by the status of the oil industry. Taxable oil prices dropped below $10 per barrel in December 1998 for the first time since the 1970s, yet real gross state product was advancing at the same time at nearly two percentage points above its twenty-five year average.
The link has not totally disappeared, as the strength of the overall Texas economy in 1997 was partly tied to rising oil prices in 1996, while the downturn of prices in 1998 contributed to the recent slowdown in statewide employment growth. However, a large drop in oil prices has only a mild impact today on nonfarm employment, with oil and gas variables becoming increasingly insignificant predictors of Texas economic activity in the Comptroller's state econometric model. As evidence, a recovery in oil prices in 1999 has yet to have a noticeable effect on total Texas nonfarm employment growth. The increased number of transportation and service industries which benefit from lower oil prices, combined with a continuing downtrend in statewide oil production, are why changes in oil prices no longer drive overall economic activity statewide. Over the next 20 years, the contribution of oil and gas to the state's gross economic product is expected to erode even more, from 12 percent today to around 8 percent (Figure 4).
Texas employment in mining reversed four years of losses in 1996 with a slight increase. In 1997, a revival in prices and profits led mining employment to grow faster than all other Texas industries, with the exception of business, health, and miscellaneous services. Job gains continued in early 1998, but price declines took a toll during the latter half of the year. The outlook is that mining, which is 95 percent oil and gas in Texas, will have a net loss of jobs for 1999. Over the next couple of years, oil and gas prices are likely to see mild rises, since the OPEC nations are sticking closer to their production quotas. On the other hand, a mega-merger such as that of Exxon and Mobil will likely result in some job losses, although mostly outside Texas. Job increases resulting from price increases will most likely be moderate and the lukewarm long-term outlook for the industry has reduced optimism, so the forecast is for flat or anemic employment growth in 2000 and 2001 (Tables 2a, 2b and 2c).
Jobs in Texas construction have increased at double the rate of overall Texas job growth over the past five years, with growth rates averaging 6.8 percent annually. In April 1994, there were 376,000 construction workers in Texas, according to the Texas Workforce Commission. By April 1999, there were 524,000, an increase of nearly 40 percent in five years. Low mortgage rates, rapid net migration, high consumer confidence, and strong growth in personal income have inspired housing starts to surpass 164,000 in 1998, the busiest year since 1985. Nonresidential construction exceeded 157 million square feet in 1998, the highest level since 1985.Manufacturing--A Larger Share of GSP and a Smaller Share of Employees
The Comptroller's Spring 1999 forecast expects a breather around the corner for the Texas construction industry. Strong levels of construction activity will continue, but the stellar growth rates of recent years will ease, as national and state economic growth contracts. The employment-to-population ratio in Texas, which has grown rapidly, appears to be settling back. The Texas ratio of workers to total population has risen from 40 percent to 45 percent over the past ten years, fueling demand for new residential and business construction. This ratio is not forecast to change much over the next few years, so construction is likely to see somewhat slower growth in 2000 and 2001, particularly if any economic contraction occurs in the nation. Also, a smaller segment of the population is entering its most active house-buying years than in the recent past, which could further reduce housing demand. Construction will continue to add jobs over the next two years, but the growth rate is expected to slow to below 2 percent a year.
The majority (55 percent) of respondents to the latest survey of the National Association of Purchasing Management expects an improved business environment in the second half of 1999. In Texas, the manufacturing industry will continue to increase as a share of the state's total economy.
Texas manufacturing industries now account for over 18 percent of the state's gross product, up from 15 percent in 1991. Durable goods have been almost exclusively responsible for the rise, leaping from 7 percent of real gross product in 1991 to 10 percent today, while nondurables have remained steady at 8 percent of GSP. The growing importance of durable goods has mostly been due to the role of computer and electronics manufacturing and to strong demand for building materials. Manufacturing has increased its share of total GSP without an increasing share of Texas employees. Quite the opposite: manufacturing accounted for 13.7 percent of Texas' nonfarm employees in 1991 and 12.1 percent today. Increasing productivity per worker has allowed manufacturing gross product to increase in the face of a declining share of statewide employment. Relative to the nation, however, manufacturing employment in Texas has been rising. As a share of U.S. manufacturing jobs, Texas employment has grown from 5.3 percent in 1991 to 6.0 percent today.
Durable goods manufacturing will continue to lead Texas' manufacturing sector over the short term. For the next two years, the most rapid employment growth is expected to be in fabricated metals (3.7 percent annually), as well as electronics and miscellaneous durables such as advertising materials, musical instruments and jewelry. Employment in fabricated metals manufacturing in Texas primarily includes the production of pipes and fittings, valves, plate work, and sheet metal products, products used in the state's active construction industry. Computer manufacturing-among the stronger sectors in the long-term forecast-runs the risk of uncharacteristically slow growth over the next couple of years, as domestic and international competition have cut prices and reduced corporate profits necessary for expansion. A slight buildup this year, with purchases in anticipation of Y2K concerns, may result in a small inventory hangover in 2000. Non-computer industrial equipment may also be slower than usual, held back by weak near-term farm and energy income, causing slow demand for agricultural and oil/gas equipment and rigs. Unlike computers and industrial equipment, the year 2000 will be fairly strong for the manufacturing of semiconductors and other electronic components. Market disruptions in 1998 and 1999, caused by the Asian recession, have held back electronics, but improving conditions in Asian and Latin export markets should help growth in 2000.
The nondurable manufacturing industry in Texas will continue to be held back, at least this year, by job losses in apparel, leather, textiles, petroleum refining, and petrochemicals. Many of these sectors may continue to undergo job losses over the next couple of years, but total nondurable manufacturing is expected to see slight employment growth in 2000 and 2001. The weakest industry will be apparel, although its job hemorrhaging of recent years may have largely run its course. The situation for leather is similar, marked by market losses to other materials and to imports, so a few more job losses are on the near-term horizon. The only segment of nondurable manufacturing which is likely to grow faster than the state average is miscellaneous nondurables, such as plastic products, including plastic foams, sheets, pipes, toys, and bottles. The market for plastics remains strong, particularly as international export markets recover, and Texas plastics manufacturers have the benefit of readily available raw materials from the state's extensive petrochemical industry.