This Economic Update discusses the Texas economy using Standard Industrial Classification codes (SICs). For 2003 onward, the Texas Workforce Commission is collecting and categorizing its employment data with the new North American Industry Classification System (NAICS). For information on the updated NAICS system for classifying industries, please go to this page of the U.S. Census Bureau's Internet site: www.census.gov/epcd/www/naics.html
After adding jobs every year from 1988 through 2001, during which nonfarm employment rose by nearly 50 percent, Texas employment fell by 26,400, or 0.3 percent, during 2002. Most of this loss happened early in the first half of 2002, as the total loss was only 1,700 jobs from June to December. The lion’s share of the lost jobs was in the manufacturing sector (33,900), and the majority of these were in only a few industries. Electronic equipment, computers, and apparel (clustered mainly along the Texas-Mexico border) accounted for most of the jobs lost in 2002.
Texas continues to struggle with the economic slowdown that has plagued the entire U.S. economy for two years. The nation underwent a mild recession during the first three quarters of calendar 2001, and recovery has been on a rocky road since. Until recently, relatively strong consumer spending was the major factor helping the nation avoid a deeper recession, but this was mostly held afloat by vigorous automobile sales in response to low loan rates and other incentives. In recent months, consumer spending has surrendered to the general climate of slow wage and income growth. One exception is housing construction, which has benefited from the lowest mortgage rates in nearly forty years (see Figure 1).
Still Texas fared better than much of the nation in the downturn of 2001 and 2002. Nine of the ten largest states lost jobs over the past year. Based on the rate of job change over the past year, Texas ranks third best among the ten largest states. Among these large states, Florida was the only one to add jobs, with a small gain of only 0.9 percent.
A rising tide of consumer confidence has failed to materialize so far. Occasional optimistic blips have been followed by declines in the face of a job market that has yet to blossom. Through much of 2002, the economic slowdown did not stop consumer spending. Residential construction, in particular, was boosted by low mortgage rates to its best year since 1998. The real problems were, and are, a weak stock market, a plethora of corporate bookkeeping scandals, and a lack of business investment, which was clobbered by huge purchases of information processing and other equipment during the late 1990s. In Texas, the business investment downturn particularly hurt the state’s once-booming firms producing computers, electronic components, telecommunications, and other high tech products.
During most of 2002, Texans established at least 6,000 new incorporations per month. New business incorporations during 2002 averaged 6,234 per month, up over 25 percent from a level of 4,975 per month during 2001. New business incorporations do not necessarily indicate a strong economy, as the number says nothing about the impetus for the new incorporations (which may have been layoffs or problems with a previous business), and it also does not address the number of new startups that fail. Still, the ongoing entrepreneurial spirit of Texans is reflected in the large numbers of Texans taking on the challenges of a new business.
Consumer Confidence Fades
Since it is a major factor driving housing, automobile and other major purchases, consumer confidence is a key to economic health, but it has been trending downward for over two years and is now at its lowest level in nine years. The general malaise among consumers has been jolted and made worse by terrorist attacks, a depressed stock market after the bursting of the dot-com bubble, news of corporate accounting scandals, and the weak job market. According to the Conference Board, the consumer confidence index for the four-state West South Central (WSC) region, dominated by Texas, recovered for several months following the September 2001 terrorist attacks, but then zigzagged its way downward again. In early 2003, the index stands 36 percent below its level a year earlier, and 44 percent below its level before September 11th. It is likely that the confidence index was dragged down in recent surveys by concerns over war in Iraq (see Figure 2).
The Silver Lining is Productivity Growth
Since the productivity of Texas workers has increased at a faster rate than the loss of jobs, Texas avoided joining the nation in recession, but just barely. Texas skirted along with negligible output growth. The state’s employment growth fell to an annualized rate of just below one percent in the second and third quarters of 2002, but, according to the Comptroller’s econometric model of the Texas economy, productivity growth was sufficient to counterbalance the net loss of jobs in every quarter. Combined with the stronger quarters in 2001 and 2002, overall real gross state product growth was 2.8 percent in 2001 and 2.5 percent 2002.
Unemployment Topping Out
Texas’ average unemployment rate in 2002 was higher than in 2001, but after rising steadily for nearly a year and a half, its monthly levels remained stable, at around 6.4 percent, over the last nine months of 2002. Texas’ unemployment rate had fallen for eight years, from 7.7 percent in 1992 to 4.2 percent in 2000. After reaching a monthly low of 3.9 percent in December 2000, a weakening economy was exacerbated by terrorist attacks, and the rate soared upward precipitously, reaching 6.3 percent in the spring of 2002. Since then, however, the unemployment rate has mostly stabilized. With the worst of major job layoffs over, the statewide jobless rate may have peaked for this cycle, barring major unpredictable negative events (see Figure 3).
Outlook for 2003 and 2004
During the next two years, the Texas economy will gradually improve, but given the depth of the national and international slump and the characteristics of the markets, the process will be more gradual than is typical after economic downturns. The state comptroller predicts that real gross state product growth will edge upwards toward a more moderate 3.5 percent in 2003 and 4.2 percent in 2004. National growth will average 3.5 percent annually during this period. With Texas’ central Sunbelt location, relatively low costs, and sustained migration into the state, the state’s gross product growth will continue to outperform the U.S. by nearly a half percentage point annually through 2005 (see Table 1).
Texas Economic History Outlook for Calendar Years: 1999 to 2005
Fall 2002 Forecast
Texas Economy 1999 2000 2001 2002* 2003* 2004* 2005* Gross State Product (Billion 1996$) 665.0 684.3 703.4 720.8 746.1 777.1 811.2 Annual % Change 5.3 2.9** 2.8 2.5 3.5 4.2 4.4 Personal Income (Billion $) 539.4 587.2 609.5 629.4 662.2 701.7 746.9 Annual % Change 5.3 8.9 3.8 3.3 5.2 6.0 6.4 Nonfarm Employment (Thousands) 9,158.8 9,432.3 9,513.7 9,457.2 9,568.0 9,772.1 10,029.1 Annual % Change 2.4 3.0 0.9 -0.6 1.2 2.1 2.6 Resident Population (Thousands) 20606.7 20,994.1 21,374.5 21,755.4 22,115.7 22,455.8 22,822.4 Annual % Change 2.0 1.9 1.8 1.8 1.7 1.5 1.6 Unemployment Rate (%) 4.6 4.2 4.9 6.0 5.8 5.6 5.1 Oil Price, Taxable ($ per Barrel) 17.46 28.78 23.74 23.83 20.94 20.27 20.62 Natural Gas Price, Taxable ($ per MCF) 1.98 3.50 3.70 2.80 2.85 2.74 2.64 U. S. Economy Gross Domestic Product (Billion 1996$) 8,858.9 9,191.4 9,214.5 9,431.2 9,709.7 10,099.5 10,429.2 Annual % Change 4.1 3.8 0.3 2.4 3.0 4.0 3.3 Consumer Price Index (1982-84=100) 166.6 172.2 177.1 179.9 184.9 190.3 195.7 Annual % Change 2.2 3.4 2.8 1.6 2.8 2.9 2.8 Prime Interest Rate (%) 8.0 9.2 6.9 4.8 5.0 6.4 7.2
** Texas' real Gross State product was revised substantially for 2000 by the U.S. Bureau of Economic Analysis.
SOURCES: Carole Keeton Strayhorn, Texas Comptroller; and Global Insight (formerly DRI-WEFA).
Looking Below the Surface at Individual Industries
Six of the state’s eight major sectors lost jobs in 2002, with only government showing notable employment increases. Government added 34,700 jobs (a 2.2 percent increase), primarily because of greater hiring in local governments and in public schools. Services gained a net 500 jobs (a rather paltry 0.02 percent), with some subsectors growing and some declining. Each of the other industries of the Texas economy lost jobs in 2002, with the greatest rates of loss in mining (3.8 percent) and manufacturing (3.3 percent).
Oil and Gas (Mining) Had a Topsy-Turvy Year
Oil and gas prices rose during most of 2002, but employment in the industry declined during the year. Tensions regarding Iraq provided a premium to oil prices, as did political unrest in Venezuela, and both these countries are major sources for imported oil for the U.S. Losses in the Texas rig count in the first half of 2002 were offset by gains in the second half; the year began and ended with about 370 operating rigs, although the average number of operating rigs had dropped to 306 in April. There is typically a lag time of several months between an increase in oil prices and a re-igniting of oil and gas job hiring. Most of the job losses in mining, which is predominantly oil and gas in Texas, were in the first half of 2002. During the second half of the year, mining employment was flat.
However, energy prices not only have to rise for employment growth to occur, but there needs to be a perception that the higher prices will be sustained. Oil and gas prices stayed high in the face of political question marks in the Mideast and Venezuela; but based on economic fundamentals, the Comptroller’s outlook for oil prices is that they will remain flat, if not decline from their recent annual averages, over the next few years.
Mining employment in 2002 was down 6,200 jobs, or 3.8 percent, compared to 2001, although it has been mostly stable over the past five months. A price-driven recovery in the oil and gas extraction sector was stymied somewhat by the concern that prices will slide down again with the eventual easing of political tensions in Iraq and Venezuela. Over the next two years, the outlook for the industry is rather lackluster. Texas’ mining employment will fall another 1.2 percent in 2003, followed by a continuing 2.2 percent decline in 2004 (see Figure 4).
Construction Now Seeing a Loss of Jobs
Texas construction had its first loss of jobs, on an annual basis, since 1989. This may seem surprising, since the number of Texas housing starts, at about 152,000 in 2002, was at its second highest level since the unsustainable boom in 1984. Even with the weak economy, historically low mortgage rates have kept up residential sales activity, to the degree that during October to December 2002 the average price of a Texas house (at $157,300) was up 6.4 percent from a year before.
But nonresidential construction activity remains extremely feeble, and this has held back the overall construction sector. Texas commercial construction peaked in 2000 and has been dropping since, as businesses have substantially cut back their investment in structures. Office, retail and other commercial vacancy rates remain high throughout Texas. Nonresidential construction activity has declined nearly 18 percent from a peak of 162.6 million square feet in 2000 to a forecasted 133.9 million square feet in 2003.
Now it appears that housing starts also have responded to the general economic malaise, and have begun to slump. One-time refinancing gains to disposable income are disappearing, and the relatively lower wage growth has pressured incomes enough that residential building began to drop off. Slow income growth is ongoing and mortgage rates are forecast to rise, so residential activity is retrenching somewhat in 2003. Commercial building activity will slide back further. Public construction, except for schools, has subsided. Overall, the short-term outlook for construction is weak.
The rate of construction job growth has been shrinking, from nearly 8 percent in calendar 1998, to 6.5 percent in 1999, to 5.5 percent in 2000, and to just over 1 percent in 2001, before a 1 percent decline in 2002. For 2003, Texas’ construction employment is expected to fall by a substantial 3.3 percent, before recovering to a tenuous growth rate of 1 percent in 2004.
Manufacturing Accounts for Most of Texas’ Lost Jobs in 2002
As in most of the country, Texas has experienced the largest number of its job losses over the past year in manufacturing. Outside of the manufacturing sector, the Texas economy actually gained jobs during 2002, as the 33,900 manufacturing jobs lost exceeded the 26,400 jobs lost in all industries. In 2002, manufacturing employment fell by 3.3 percent, with most of these losses concentrated in computers and electronics, primary and fabricated metals, transportation equipment, and in apparel. Although the hemorrhaging of job losses has slowed in recent months, manufacturing has lost jobs every month since November 2000. Manufacturing employment at the end of 2002 dropped below one million for the first time since 1994, to total of 991,100.
The outlook for manufacturing is tied to whether businesses bolster the industry with a stronger level of investment in new plants and manufacturing equipment. Spending on communications equipment rebounded in the second half of 2002, but the long boom in the demand for building materials appears to be winding down. As in the past, the outlook for some manufacturing sectors will brighten, while for others it will dim. The Institute for Supply Management’s purchasing managers’ index, which measures manufacturers’ intentions to purchase new equipment and services, spent the latter half of 2002 hovering around a level of 50, a level straddling between expansion and decline in the manufacturing sector.
Interest rates and inflation remain low, and the war with Iraq did not disrupt oil supplies or cause energy prices to rise dramatically. It is likely that as the Iraqi war winds down, energy prices will drop, which could be a plus for Texas manufacturers. In sum, the Comptroller’s forecast expects manufacturing employment to rebound, but not quickly. Texas manufacturing job growth should be 0.7 percent in 2003 and a marginally more robust 1.5 percent in 2004. The strongest rebound is expected in primary and fabricated metals, furniture and fixtures, paper products, and plastics products.
Wholesale and Retail Trade Affected by the Weaker Economy
Despite the mostly weak economy, consumers continued to spend relatively freely during much of 2002, especially on housing and automobile-related purchases. Although propping up the economy, the downside was that household budgets were stretched thin, credit problems rose, and consumer spending trends dropped off toward the end of 2002. State sales tax collections, of which just more than 50 percent come from households, were down 0.8 percent during calendar 2002 compared to a year earlier. This compares to almost 5 percent growth in 2001 and 7.3 percent growth in 2000.
Texas consumer purchases primarily focused on buying new vehicles in late 2001 and the first half of 2002, but during the last four months of 2002 motor vehicle tax collections were down 9.9 percent from those a year earlier. Because of special financing offers that caused motor vehicle sales to overcome economic weakness, total vehicle sales tax collections reached $2.85 billion during 2002, a strong showing, although down 5 percent from 2001. This compares to a 6 percent increase in 2001 and about a 10 percent average growth rate over the three previous years.
Among the high points of retail trade was eating and drinking places, which added a solid 9,300 jobs in 2002 and bucked the generally downward trend in most of the retail trade sectors. Because of strong home sales, building materials (up 2,400 jobs) had the fastest rate of growth among the retail trade sectors, at 3.6 percent. Most of the retail trade sectors lost jobs. Overall, during calendar 2002, Texas’ wholesale trade employment fell by 4,600 jobs (0.9 percent) and retail trade fell by 5,700 jobs (0.3 percent).
Over the next two years, the fastest rates of growth in retail sales are expected in general merchandise—largely warehouse and discount—stores and miscellaneous/novelty retailers, including bookstores, drug stores, liquor stores, and internet mail order. The slowest rates of growth will be in building materials, garden supplies, and food stores, but even here improving growth will continue over the next two years. Both wholesale and retail trade will add jobs over the next few years, with retail trade growing slightly faster. Overall trade employment should increase by 1.5 percent (33,000 jobs) in 2003 and 2.1 percent (about 48,000 jobs) in 2004.
Transportation, Communications and Public Utilities Has its Worst Year Since 1983
Because of depressed airline travel, combined with the downturn in the state’s once booming telecommunication industry and the collapse of Enron, transportation, communications and public utilities (TCPU) experienced a weak year in 2002. While some segments of the transportation industry, such as transportation services and freight transportation, have begun to turn the corner, passenger-service transportation (primarily airlines) remain in a near-crisis situation. During 2002, airline passenger miles were down nearly 10 percent nationwide from 2001, which itself was down 7 percent from a year earlier. And although the year-over-year loss in Texas air transportation employment peaked shortly after the 9/11 attack—at 11,800 in December 2001—sector employment was down by another 700 (0.6 percent) in 2002.
Communications employment shrank by 4.8 percent in 2002, a loss of 7,100 jobs. All segments of telecommunications—local, long distance, and wireless—have been suffering from falling prices and revenues. Investments in high bandwidth technologies have driven down costs, and bandwidth contract prices have slumped in the face of severe competition and resulting price wars. Utilities also failed to recover jobs lost in 2001, with an additional employment loss of 1.2 percent (900 jobs).
During 2002, TCPU employment fell by 9,400 jobs, for a loss of 1.6 percent. Again, the recovery may be slow, especially in the telecommunications sector. Employment is expected to increase by 1.3 percent in 2003 and 2.3 percent in 2004.
Finance, Insurance and Real Estate Down Because of Stock Market
More than any other factor, poor stock market performance hurt finance, insurance and real estate (FIRE) in 2002. Real estate, banks, and insurance shared a mostly flat year, which was positive only in the sense that it outperformed the overall economy. Security and commodity dealers, however, lost over 8 percent of their statewide employment since the 9/11 attack, while holding and investment companies lost over 6 percent. The continued struggles in the stock and other investment markets led to the slide in the sector, while word of corporate accounting scandals only exacerbated the problems.
Overall, FIRE lost 1,900 jobs during 2002 (0.4 percent), and the outlook is that recovery will not come to the sector until the end of 2003. FIRE employment losses in 2003 are expected to be 2.0 percent, with just a hint of growth above zero in 2004. According to the Comptroller’s forecast model, insurance may see small gains in both years, but higher interest rates and a weaker housing market will be a drag on banking, real estate and investment finance.
Services Eked Out a Small Gain in 2002
The services industry lost jobs for the first time (since at least 1970) in 2001, but got back in the black in 2002—just barely. In all, health, business, legal, engineering, and other services added 500 jobs (0.02 percent) in 2002. On the plus side, health services added 14,300 jobs and social services added 4,500, in addition to smaller gains in sectors such as agricultural services (1,700), engineering and management services (2,400) and private educational services (2,100).
On the other hand, business services employment, including previously booming personnel supply businesses, dropped 3.8 percent, a net 25,900 lost jobs over the year. The silver lining in this bad news is that many of these were part-time, temporary jobs. The services industry has already witnessed a bottoming out in job losses, and is expected to come back in 2003, with an increase of 66,000 jobs, or 2.4 percent, largely in response to renewed growth in business services and continued relative strength in health services. As business services employment gets back up to speed in 2004, the services industry is expected to grow even faster, at over 3.4 percent.
Government is the Largest Locomotive
Although services posted a small gain in 2002, government was the largest locomotive pulling Texas’ employment growth engine during the year. Local government employment, including mainly jobs in public schools, grew by a vital 25,600 jobs. The federal government (up 4,600) and state government (up 4,500) also added jobs in response to higher service demands.
Not surprisingly, total government employment is likely to grow more slowly in 2003 and 2004 than in 2002, as the long-awaited recovery in the national economy occurs and ripples beneficially through the Texas economy. Government added 34,700 jobs in 2002, up 2.2 percent from 2001, and is expected to grow by about 1.8 percent annually in 2003 and 2004. The fastest growth rates are expected, for a change, in the federal government sector and will be related in large part to increased security measures.
Economic Indicators Appendix (PDF, 2.2 MB)This appendix presents tables and figures of current economic and demograhic statistics for the nation, the states, and Texas' metropolitan statistical areas and counties. This is a PDF file. If you do not already have Adobe Acrobat Reader, you will need to download the latest version to view and print it.