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National Recession Slows Texas Economic Growth

This edition of TEU presents the results of the Comptroller's Fall 2001 state economic forecast. After this forecast was completed, the Texas Workforce Commission (TWC) released its regular annual revision of state and metropolitan area monthly nonagricultural wage and salary employment estimates for the past two years. In general, these new figures indicate that in 2001 Texas' economic performance was weaker that the previous estimates indicated. TWC's revised employment estimates are currently being incorporated into the Spring 2002 state economic forecast, which will be presented in the upcoming Summer 2002 TEU.

The economy in Texas has been adversely affected by the national recession. From February 2001 to February 2002, overall nonfarm employment in the state fell by nearly 0.9 percent, as compared to 2.3 percent growth a year earlier and an average annual growth rate of 4 percent during the economic boom of 1997 and 1998.

More than ever, Texas has become tied to the health of the national economy. This is evidenced by the nearly identical job loss rates of 0.9 percent in Texas and 1.0 percent in the U. S. from February 2001 to February 2002. Demonstrating the breadth of the national downturn, 37 states lost jobs. Although relatively high energy prices allowed the oil and gas industry to benefit during most of 2001, other sectors of the Texas economy directly affected by the national economy—especially manufacturing and, to a lesser extent, consumer spending—suffered.

Unlike the U.S., however, the Texas economy did not fall into recession. This is largely attributable to strong productivity growth, and enhanced by a central Sunbelt location, relatively low business and housing costs, and the continued flood of new residents into the state.

Wary of the threat of a national recession, the Federal Reserve Board reduced short-term interest rates 11 times in 2001. Despite lower borrowing costs, the National Bureau of Economic Research declared that the national economy had fallen into recession in March. The downturn accelerated after the September 11 terrorist attacks on our country. The national economy now appears to have bottomed out and has begun a slow upswing.

The Texas economy continued to display moderate growth during the first half of 2001. Real (inflation-adjusted) gross state product increased by an estimated 3.4 percent, personal income increased more than three percentage points faster than the inflation rate, and almost 150,000 more residents moved into the state than left. Even with slowing employment growth, the statewide unemployment rate averaged less than 5 percent for the fourth straight year, for its lowest rates since the late 1970s. Perhaps most importantly, Texas continued to outpace national economic growth.

The outlook for the Texas economy in 2002 and 2003 is mixed (see Table below). On the average, real gross state product growth will be lower in 2002 than in 2001, slipping from 3.4 percent to a projected 2.8 percent. In 2003, however, following a strong national economic recovery fueled by low interest rates, federal tax cuts, and stimulative federal spending in response to September 11, Texas’ economic growth will rebound at a relatively robust 4.4 percent rate. Nonfarm employment and personal income growth should follow a similar trend.

Still, with continued population and labor force growth accompanied by fewer job opportunities than in recent years, the statewide unemployment rate will rise from an average of 4.6 percent in 2001 to 5.5 percent—the highest rate in six years—in 2002. As the national and state economies rebound, however, the state jobless rate will drop slightly to 5.2 percent in 2003, falling below 5 percent again by the middle of 2004.

Fall 2001 State Economic Forecast
Texas Economic Outlook, for Calendar Years: 2002 to 2008

TEXAS ECONOMY 2002 2003 2004 2005 2006 2007 2008
Gross State Product (Billion 1996$) 755.4 788.7 825.3 858.6 890.4 925.8 970.5
  Annual % Change 2.8 4.4 4.6 4.0 3.7 4.0 4.8
Personal Income (Billion $) 652.2 699.7 747.1 796.3 848.2 893.8 944.7
  Annual % Change 5.4 7.3 6.8 6.6 6.5 5.4 5.7
Nonfarm Employment (Thousands) 9,813.9 10,042.1 10,330.1 10,599.6 10,825.5 11,044.8 11,277.9
  Annual % Change 1.6 2.3 2.9 2.6 2.1 2.0 2.1
Resident Population (Thousands) 21,685.9 22,056.4 22,409.4 22,756.1 23,093.0 23,414.1 23,739.7
  Annual % Change 1.8 1.7 1.6 1.5 1.5 1.4 1.4
Unemployment Rate (%) 5.5 5.2 5.0 4.8 4.7 4.6 4.8
Oil Price, Taxable ($ per Barrel) $23.52 $22.73 $23.24 $23.74 $24.28 $24.67 $24.91
Natural Gas Price, Taxable ($ per MCF) $2.65 $2.55 $2.61 $2.66 $2.72 $2.77 $2.79
U. S. ECONOMY
Gross Domestic Product (Billion 1996$) 9,473.0 9,854.5 10,132.0 10,459.7 10,780.9 11,420.5 11,819.9
  Annual % Change 1.6 4.0 2.8 3.2 3.1 5.9 3.5
Consumer Price Index (1982-84=100) 181.7 186.1 190.7 195.5 200.5 205.6 210.7
  Annual % Change 2.3 2.4 2.5 2.5 2.6 2.5 2.5
Prime Interest Rate (%) 6.0 7.4 8.0 8.0 8.0 7.9 7.8
SOURCES: Carole Keeton Rylander, Texas Comptroller; and DRI-WEFA.

Manufacturing Hits the Wall

2001 was a year that most Texas’ manufacturers will want to forget. Faced with weighty inventories and faltering personal computer sales worldwide, Dell and Compaq both announced extensive job layoffs during the year. Largely because of the weak personal computer market, the state’s semiconductor and electronic component producers also fared poorly.

Outside of high-tech, the news was not much happier. Apparel manufacturers, largely concentrated along the Texas-Mexico border, continued to be hit hard by international competition, and they significantly reduced their workforces in response. Even so, the news could have been much worse had consumers not remained willing to spend, often in response to promotional offers. From February 2001 to February 2002, statewide manufacturing employment declined by 6.2 percent, or 67,800 jobs, which was still relatively better than the 7.2 percent loss in manufacturing employment nationwide.

Productivity was hurt temporarily by the terrorist attacks, partly because of increased security at airports and border checkpoints. The increased travel and waiting times and the unpredictability of delays have hindered trade at the border and increased transportation costs. Productivity growth typically slows in a national recession in any event, because output falls faster than companies’ ability to adjust their workforce. In 2001, however, strong drivers of productivity growth have kept the productivity of American workers rising at a 2 percent annual rate. If the recovery follows historical patterns, productivity will shoot up even more with renewed demand for services and goods.

Over the next two years, the state’s manufacturing sector should improve as national and worldwide demand for computers, semiconductors and other high-tech products rebuilds, while excess inventories diminish. In 2002, manufacturing employment will increase by only 0.6 percent, because manufacturers will be hesitant to hire new employees until they are sure that the increased demand for their products will last. But in 2003, the Comptroller’s forecast expects 1.8 percent job growth, which would be Texas’ best manufacturing growth year since 1998.

Oil and Gas Counters the Trend

Last year, the resurgence of the state’s long-suffering oil and gas sector partially countered the losses borne by the state’s battered manufacturers. Because of tight worldwide markets, Texas wellhead oil prices moved above $30 per barrel in the fall of 2000, and a cold winter in the Northeast and Midwest pushed the taxable price of natural gas to a record $8 per thousand cubic feet (mcf) in January 2001. Although oil and gas prices subsequently declined, they remained relatively high, spurring statewide and national drilling activity. By the spring of 2001, the Texas rotary rig count surged past 500, to its highest level in 15 years.

By summer 2001, however, the slowing world economy and excess supplies began to push energy prices downward, slowing drilling activity in Texas. By November 2001, the drilling rig count (407) had fallen to the November 2000 level; by March 2002, the rig count of 316 was down nearly 32 percent from its March 2001 level. Nevertheless, because of the lag between drilling activity and hiring plans, February 2002 mining employment was still up by 4,900, or 3.1 percent, over February of 2001.

Over the next two years, the outlook for the state’s oil and gas sector is not favorable. As worldwide energy prices flatten again over the next two to three years, Texas mining employment will fall by 5.7 percent in 2002 and another 0.7 percent in 2003.

Construction Points Downward

From an historical perspective, Texas’ construction sector benefited in past years more than most industries from the national and state economic boom. Rapid job and income growth, combined with the influx of new residents, kept home sales and new housing construction brisk, while strong industrial and commercial growth spurred nonresidential construction activity.

Compared to the gains in 1997 and 1998, statewide construction growth clearly has been slowing over the past few years, culminating in small job losses in the early months of 2002. Construction growth continued through most of 2001 because of the backlog of active projects, but ended the year with a year-to-year loss of jobs. Growth slowed from an eye-popping 9.2 percent annual rate at the end of 1998, to 5.2 percent at the end of 1999, to 3.8 percent at the end of 2000, and to a loss of 1.6 percent, or 8,900 jobs, from February 2001 to February 2002.

Even considering relatively low mortgage rates, the state’s weaker economy and higher office vacancy rates point to a further deceleration in statewide construction employment growth over the short term, thereby dampening the demand for new construction projects. In 2002, statewide construction employment is expected to decline by 2.2 percent and then stabilize, with essentially no growth in 2003.

Transportation, Communications, and Public Utilities: 9/11 Hits Hard

Perhaps more than any other sector, transportation, communications, and public utilities (TPU) has been adversely affected by the events of September 11. After the September 11 attacks, U.S. air traffic dropped and layoffs were announced at most major U.S. air carriers, including Texas-based American and Continental Airlines. Over a period of just six months, job growth in the state’s air transportation industry fell from a year-over-year gain of 4,100 in February 2001 to a year-over-year loss of 9,500, or 7.6 percent, in February 2002. Largely because of these losses, TPU lost 25,000 jobs over the year ending in February 2002, a 4.2 percent drop.

Although national air-traffic is showing some signs of recovery, it will take a long time for it recover to pre-9/11 levels. After peaking at 695 million U.S. passenger enplanements in fiscal 2000, enplanements are expected to reach only 600 million in 2002.

In recent years, Texas’ trucking, warehousing and a number of other transportation services have benefited from the expanding national and state economies, as well as from ballooning trade with Mexico. In 2001, while the U.S. and Texas economies were stumbling, trade with Mexico remained fairly resilient through much of the year. But the U.S. recession eventually started taking a toll out of this industry as well, and employment in trucking and warehousing was down by 2.4 percent by February 2002.

With the rapidly growing popularity of the Internet and cellular communications, Texas communications employment boomed at a 7 percent average annual rate over the period 1999 - 2001. The weakened economy and national recession took hold and intensified here as well, so that by February 2002, employment in this sector had fallen by 7,700 jobs statewide, or 5.0 percent, as high-tech woes spread to the state’s telecommunications firms.

Finally, utilities employment—until the collapse of Enron—had enjoyed a trend-bucking year, growing by 4,000 jobs, or 5.4 percent, from October 2000 to October 2001, largely because of the deregulation of the state’s electric utility sector. The construction of gas-fired electricity generation facilities in Texas has boomed in recent years, as the prospect of selling power at a reasonable return to the state’s rapidly growing residential, industrial, and commercial sectors emerged. However, with Enron’s bankruptcy and ensuing layoffs, the utilities sector quickly lost the 4,000 jobs it had gained the previous year. Even with job gains in electric utilities, by February 2002 the overall utilities sector closed a roller-coaster year with 1,700 fewer employees than it had in February 2001, a loss of 2.2 percent.

Over the next two years, Texas TPU employment will gain strength as the air transportation sector shows renewed vigor and the U.S. and Mexican economies improve. Overall in 2002, net TPU job growth of 2.6 percent is expected. As the share of the TPU industry represented by sectors such as Internet communications, air transportation, and trucking has increased, the industry has become more sensitive to economic upturns than in previous decades. Industry growth will accelerate to 4 percent in 2003.

Finance, Insurance and Real Estate Ekes out a Gain

Finance, insurance, and real estate (FIRE) turned in a relatively flat year, with a small loss of 200 jobs from February 2001 to February 2002. Although employment in banks and other financial institutions increased by 1.5 percent, in keeping with the state’s growing population and moderate demand for new home financing, jobs fell by 0.4 percent among the state’s insurance providers. Finally, real estate and investment industries, which were boosted by firming home sales but hurt by weaknesses in the U.S. stock market and Texas nonresidential construction, experienced a job loss of 1.4 percent from February 2001 to February 2002.

As business loan demand remains weak and real estate demand remains fragmented, the outlook for the state’s FIRE sector does not appear all that promising. Statewide FIRE employment will fall by 2.1 percent in 2002 followed by a more modest 0.9 percent drop in 2003.

Trade Softens

Despite a rocky manufacturing sector, relatively strong consumer expenditures have managed, until recently, to keep the U.S. and Texas economies afloat. Throughout most of 2001, however, a steady stream of major job layoff announcements eroded consumer confidence and took a bite out of incomes, eventually causing consumer spending to falter. Consumer confidence and spending plunged further following the September 11 attacks, but U.S. and Texas confidence started to rebound at the end of the year.

During the first six months of fiscal 2002 (September through February), state sales tax receipts—of which just over 50 percent come from household expenditures—increased by only 0.2 percent, compared to a 4.9 percent gain during the same period in fiscal 2001. Spurred by dealer incentives, motor vehicle sales tax collections increased by 8.9 percent from the same period in the previous year. This trend, however, is not expected to last through the remainder of fiscal 2002.

With flagging consumer spending, the wholesale and retail trade job count fell by 0.8 percent from February 2001 to February 2002, compared to annual average gains of more than 3 percent in fiscal 1999 - 2001. Most of the loss was in wholesale trade, which has been particularly hurt by lukewarm demand for manufactured products. Net job losses in wholesale trade totaled 11,400 over the past year, a 2.1 percent loss. Retail trade—including building materials; restaurants; automobile dealers and service stations; food, furniture, clothing, general merchandise stores; and other miscellaneous retailers—weathered the downturn somewhat better, but still cut back 6,100 jobs, for a 0.4 percent decline. Bucking the trend, a few sectors—sellers of building materials, automobile dealers/service stations, and eating and drinking places—added jobs.

Over the next two years, statewide trade employment growth should slowly improve as consumer confidence and spending is buoyed by renewed state and national economic growth. In 2002, employment is expected to rise by 1.5 percent, as the national economic recovery gains strength in the second half of the year. In 2003, a more robust 2.4 percent job gain is likely.

Services Also Suffer

Because of the breadth of the national recession, in 2001 the Texas service sector lost jobs for the first time in over 30 years. From February 2001 to February 2002, services lost 10,300 jobs, a shrinkage of 0.4 percent.

Not all service sector industries lost jobs. Most notably, health services employment rose by 27,400 jobs, a 3.9 percent increase. This growth was influenced by the aging of the population, the availability and use of new medical procedures, and the rapidly increasing cost of prescription drugs and other medical services. Jobs at establishments providing social and rehabilitation services increased by 3.5 percent and accounted for 6,900 new jobs. Private educational services added 2,500 jobs, a 2.1 percent increase, and agricultural services took advantage of a particularly strong demand for veterinary and landscape/horticultural services to add 2,100 jobs (a 3.9 percent increase).

Most of the state’s service sectors added jobs over the past year—with three notable exceptions. First, hotels and other lodging places lost 1,900 jobs (2 percent), as terrorism concerns and economic weakness cut into leisure and business travel. Second, amusements and recreation lost 2,200 jobs (1.8 percent), entirely due to job losses in the motion picture sector. And, third, business services, owing mostly to a disturbingly large 15 percent loss in the once-booming personnel supply sector, lost 49,000 jobs over the year, a 6.7 percent cut in its workforce and over half of all jobs lost statewide from February 2001 to February 2002. The silver lining, in this otherwise bleak statistic, is that these were largely part-time jobs, so the state’s loss of full-time jobs was a smaller share of the losses than the bottom-line number might indicate.

Service jobs are sometimes mis-characterized as requiring relatively low skills, being poorly paid, and contributing little to overall economic growth. Many jobs in business, health, engineering and other professional services require extensive advanced education and training, with significant economic returns to the community and the state. Some of these high-wage sectors are the ones faring the best; and over the long term, much of the growth of the Texas economy will continue to be generated by this sector.

Over the next two years, the outlook for the state’s service sector should greatly improve as the demand for business-related services returns with the improving overall economy. In 2002, service sector employment will increase by 3.7 percent, and in 2003, growth is expected to rise to 4 percent.

Local Public Schools Propel Government Sector Job Growth

Federal, state, and local government employment growth continued at a slow but steady rate in 2001. Overall, from February 2001 to February 2002, public sector employment was up by 2.5 percent, or 39,500 jobs, with most of these gains coming from increased hiring at local public schools.

Texas’ civilian federal government employment rose by 1.2 percent in this period. Jobs in state government increased by 6,800, or 2.1 percent. Federal and state jobs typically grow faster than other industries when the economy is weak and grow more slowly when the economy is strong. When the economy slows, there is increased demand for government services, such as public assistance, health care, and other economic support programs assisting the unemployed. Local government employment, about half of which is fueled by public schools, increased by 30,600 jobs, or 2.9 percent, over the past year. Other than public schools, the remaining local government growth is for various other programs at the city, county and special district level. A relatively high birth rate and influx of new students from other states continues to keep the state’s school-age population growing.

As the economy picks up, the outlook calls for a gradual slowdown of Texas’ public sector job growth over the next two years. In 2002, government employment growth is expected to continue at a moderate 1.8 percent rate, but in 2003, growth will slow to 0.9 percent as tight budgets prevail and as school hiring needs at local public schools become, at least temporarily, satisfied.

Even With the Economic Slowdown, People Keep Moving to Texas

Despite the economic doldrums, new residents continue to move to Texas. Because the Texas economy slowed less quickly than the U.S. economy, net migration to Texas has increased. Migration, in general, responds less to economic growth than to the economic opportunities in one region relative to the opportunities in other parts of the U.S. and the world. In 2000, an estimated 134,000 more people moved into the state than moved out. The number will likely increase to 175,000 this year before falling back to 168,000 in 2003. With natural increase (Texas births minus deaths) averaging a little over 200,000 per year, the state’s population is expected to increase at an average rate of 1.7 percent annually, from 21.0 million in July 2000 to 22.1 million in July 2003. Because population growth helps support the demand for retail trade, services, and government output, Texas’ continued population gains will help to stabilize the state economy over the next two years.