The Necessary Ingredient is Jobs
The Economic Indicators Appendix
(PDF, 6.7 MB) presents tables and figures of current economic and demograhic statistics for the nation, the states, and Texas' metropolitan statistical areas and counties.
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The number of nonfarm jobs in Texas has changed little in three years. In July 2003, there were 9,424,000 nonfarm jobs in Texas, the same number as in the beginning of summer 2000. During the 1990s, Texas’ job count increased by nearly 20,000 every month, an average annual increase of 2.9 percent over the decade (see Figure 1). Actually, Texas added jobs until March 2001, when nonfarm employment peaked at 9,562,000, before sliding back. Texas may have turned the corner this year, having added 4,100 jobs since December 2002, but statewide employment remains 138,000, or 1.4 percent, below its pre-9/11 peak in March 2001. Even though some sectors—including education and health services and government—are expanding at a healthy clip, manufacturing, telecommunications and other information services, and transportation, warehousing, and utilities remained mired in an environment of lukewarm customer demand and low levels of business investment.
Even with its sluggish economy, Texas continues to do marginally better than the U.S. economy. In terms of employment, the U.S. is in its third year of contraction and has lost 0.3 percent of its nonfarm jobs over the past year. Texas, in contrast, has eked out at least some job growth since July of 2002, although the budding growth remains at a lackluster annual rate of 0.1 percent. Pointing towards future job growth gains, the annual change in the state’s economic indicator index stands at 1.0 percent, which appears lofty compared to the 0.5 percent increase for the same month in the nation’s leading index.
Although the national economy witnessed several false dawns of renewed economic growth over the past year, there are concrete reasons to expect improvement during the remainder of 2003 and particularly in 2004. The federal government’s Jobs and Growth Tax Relief Reconciliation Act lowered marginal tax rates, yielding a reduction in income tax withholding, while the increased child tax credit allows more dollars to remain in the wallets of families with children—putting an additional $1.1 billion in spending power into the hands of 1.8 million Texas families in 2003 alone. The dollar has weakened by 10 percent against global currencies since early 2002 (and about 25 percent against the euro over the past year). More affordable Texas products abroad will trigger additional export trade; already, in the first quarter of 2003, Texas exports jumped 10.2 percent over the previous year. Even with tighter purse strings among state and local governments, federal military, social security, and Medicare spending will continue to be brisk, boosted by a $20 billion fiscal relief package (from which Texas will receive $1.3 billion in fiscal 2003 and 2004). To top this off, interest rates and mortgage rates remain near their lowest levels in 50 years, despite having risen somewhat in recent months.
Incorporating the latest economic changes in the Comptroller’s time-tested econometric model, the Spring 2003 state economic forecast expects renewed growth in the Texas economy.
But it will not happen overnight.
Growth rates through the remainder of 2003 will be muted, since a muddle of equally solid problems remains in the Texas and national economies. Consumer confidence spiked after announcements that the Iraq war was successful, only to fall back as new doubts arose, and the index for the West South Central states remains 36.6 percent below its pre-9/11 level in August 2001. Among manufacturers, excess capacity and generally weak demand for increased output continue to put a lid on new investment. Housing starts, which have been torrid in response to low mortgage rates, may slacken as mortgage rates rise. With most of the global economy suffering, a weaker dollar will not necessarily bring about a boom in export sales. Finally, U.S. nonfarm business productivity (output per worker) continues to increase—by an amazing 5.7 percent annual rate in the second quarter—largely because of technological improvements. The dark side of strong productivity gains, however, is that employers are less likely to add new workers as output increases.
Although these constraints will linger through this year, the Comptroller’s economic forecast foresees some growth in nonfarm employment and personal income during the rest of 2003. A bigger boost is on the horizon for 2004 (see Table 1), as growing federal expenditures coupled with lower taxes, increasing exports, and renewed investment in high tech and other capital equipment are expected to propel the national economy into a period of higher growth.
Texas Economic History and Outlook for Calendar Years, 2000-2005
Spring 2003 State Economic Forecast
2000 2001 2002 2003* 2004* 2005* Texas Economy Real Gross State Product (Billion 1996$)** 687.7 695.0 712.3 731.6 762.6 794.9 Annual % Change 3.3 1.0 2.5 2.7 4.2 4.2 Gross State Product (Billion $) 742.3 777.1 791.3 818.9 869.5 924.5 Annual % Change 8.4 4.7 1.8 3.5 6.2 6.3 Personal Income (Billion $) 587.2 608.5 621.8 648.1 686.2 729.2 Annual % Change 8.9 3.6 2.2 4.2 5.9 6.3 Nonfarm Employment (Thousands) 9,432.3 9,513.7 9,427.2 9,482.0 9,664.2 9,923.3 Annual % Change 3.0 0.9 -0.9 0.6 1.9 2.7 Resident Population (Thousands) 21,007.8 21,421.9 21,832.3 22,245.8 22,650.5 23,072.2 Annual % Change 1.9 2.0 1.9 1.9 1.8 1.9 Unemployment Rate (%) 4.2 4.8 6.4 6.5 6.2 5.9 Oil Price, Taxable ($ per Barrel) $28.71 $23.72 $24.32 $27.36 $21.58 $21.99 Natural Gas Price, Taxable ($ per MCF) $3.51 $3.57 $2.83 $4.12 $3.14 $2.84 U.S. Economy Real Gross Domestic Product (Billion 1996$)** 9,191.4 9,214.5 9,439.9 9,657.9 10,060.7 10,390.0 Annual % Change 3.8 0.3 2.4 2.3 4.2 3.3 Consumer Price Index (1982-84=100) 172.2 177.1 179.9 184.1 187.1 191.0 Annual % Change 3.4 2.8 1.6 2.3 1.6 2.1 Prime Interest Rate (%) 9.2 6.9 4.7 4.5 6.1 7.2
** Adjusted for inflation.
SOURCES: Carole Keeton Strayhorn, Texas Comptroller; and Global Insight, Inc.
Oil and Gas Industry’s Ups and Downs
Several factors coalesced to cause a run up of oil and gas prices in 2002 and early 2003. A cold winter caused a rapid draw down of gas inventories; the war in Iraq led to uncertainty about Mideast oil; and a general strike in Venezuela translated into lower production levels. These factors gave a temporary spurt to domestic oil exploration, pushing Texas drilling levels in July 2003 to 42 percent higher than a year earlier. Still, most of the bottlenecks that led to higher energy prices are receding. With a replenishment of energy stocks over the summer and the end of most hostilities in Iraq, oil prices are expected to fall during the remainder of 2003. Natural gas prices also should become weaker, but, with limited North American supplies, they likely will fall at a slower pace.
Firmer prices caused mining to add jobs in 2000 and 2001, but the lack of holding power for these price spikes means that mining employment (which is predominantly oil and gas employment in Texas) will continue to decline in the state, dropping another 2.9 percent in 2004 and an additional 2.1 percent in 2005 (see Appendix Tables 7a, 7b, and 7c).
Construction—A High Flyer Descending
From 1994 through 2000, Texas construction employment grew by more than 5 percent each year, mushrooming from 355,500 jobs in 1993 to 567,200 jobs in 2000. Although statewide nonresidential construction nose-dived by more than 25 percent over the last three years, strong housing activity has allowed employment to register some growth, to 577,500 this summer. While most sectors of the Texas economy will see a resurgence over the next year or two, Texas construction likely will endure a slower year in 2004 than it had in 2003. The lowest mortgage rates witnessed in the lifetimes of most adult Texans have kept Texas residential construction vigorous during a period of job losses and relatively subdued income growth, but this has left little pent-up demand for residential construction in the near future, especially as mortgage rates move back up. Although real per capita income in Texas dropped by 2.5 percent from 2000 to 2003, statewide single-family housing starts increased by 19.5 percent, from 111,600 in 2000 to an annualized 133,400 during the first six months of 2003 (see Figure 2).
With mortgage rates predicted to rise through 2005, Texas housing starts will decline in 2004 and again in 2005 before turning up. Still, the bottom will not drop out of the market, with single-family starts of 110,000 in 2004 and 105,400 in 2005. Nonresidential construction has been the Achilles heel of the Texas construction sector, having fallen from 162.5 million square feet put into place in 2000 to an estimated 120.8 million square feet to be completed this year. High vacancy rates in many markets, along with a tepid economy, have put a lid on the nonresidential construction market. According to real estate services firm Cushman & Wakefield, the Dallas-Fort Worth Metroplex had an office vacancy rate of 26.8 percent in the second quarter of 2003, while the rate in the Houston Metropolitan Area reached almost 20 percent.
Somewhat paradoxically, construction employment, which has been relatively stable, will decline initially as the economy heats up. Nonresidential construction will continue to fall, while statewide housing starts will begin to decline in response to higher mortgage rates. Construction job losses of 2.4 percent are expected in 2003, followed by a 3.1 percent loss in 2004. Although the number of housing starts will again fall in 2005, some renewed strength in nonresidential and nonbuilding construction (such as roads and bridges), will keep Texas construction employment from sliding further. Overall job growth in this industry will be in the black again in 2005, with a gain of 1.4 percent.
Manufacturing—Texas High Tech Is Not Dead
Texas manufacturers have been suffering, mostly in electronics, transportation equipment, apparel, leather, and computers. According to the University of Michigan’s consumer sentiment index, nationwide buying attitudes toward housing remain high, but buying intentions regarding durable manufactured items are near the lowest levels recorded in ten years. In addition, business investment in new plants and equipment remains weak.
Consequently, it is not surprising that durable goods employment endured larger job losses than the nondurable goods sectors. In 2002, the durable goods sector lost 5.9 percent of its jobs, while nondurables lost 3.6 percent. Many components of durable goods, such as electronics and computers, are subject to cyclical swings and rapidly shifting market demand. These sectors have fallen the farthest, but they also are expected to experience the best rebound. Both durable goods and nondurable goods manufacturing are forecast to experience net job losses in 2003, with durable goods losing 2.2 percent and nondurables losing a half-percentage point of employment. Overall, however, manufacturing’s 1.5 percent loss of jobs in 2003 is a marked improvement following the 2.8 percent loss in 2001 and the 5 percent loss in 2002.
Texas electronics employment staggered under a 12 percent loss in 2002 and is enduring an additional 9 percent loss this year. Momentum is picking up, however, as high tech business equipment spending is starting to bounce back. Many businesses now have to replace aging equipment put in place in the late 1990s in preparation for the Y2K transition. Thus, in the first quarter of this year, nationwide investment in computers and peripheral equipment grew at a 23 percent annualized rate and rocketed to an even better 54 percent annualized gain during the second quarter. However, since productivity growth remains strong, the forecast is for no net job growth for electronics or computers in 2004. By 2005, with investment returning with vigor and a markedly stronger export market, electronics should prove to be one of the fastest growing employment sectors in the state, at a forecasted 2005 growth rate of 7.3 percent. Computer fabrication is expected to follow a similar pattern, perhaps with a slight lag; its job losses were not as severe as those in electronics in 2002 and 2003, and its rate of improvement in 2004 and 2005 will be proportionately less robust.
Another turnaround story is also likely for the miscellaneous durables industry, which is now in its fifth year of job losses. This sector, which includes jewelry, silverware, toys, sporting goods, office supplies, floor coverings, musical instruments, and a bevy of household products, has been hit particularly hard by the state and national economic slump. However, a weakened dollar combined with an expected recharging of the economy will allow this small sector to make a comeback, with over 5 percent employment growth per year in 2004 and 2005.
Continued job losses are expected in petrochemicals, given the capital-intensive nature of the business, and in apparel, textiles, and leather, which continue to be stressed by businesses shifting jobs abroad to conduct operations more efficiently.
Overall, with workforces pared, aging equipment, improving profits, and federal tax changes such as bonus depreciation and small-business expensing, increased investment in manufacturing is just around the corner. Texas manufacturing employment is forecast to expand by 1.2 percent in 2004. If the ingredients already in the economic recipe turn out as forecast, manufacturing employment will have its best year in 2005 since the late 1980s, growing by 3 percent, mostly due to the resurrection of the state’s long-suffering high tech sector.
Transportation, Communications and Public Utilities (TCPU) Seeing Light—in the Distance
A dark economic cloud has overshadowed transportation, communications, and public utilities (TCPU) in Texas and the nation for the past two years. This sector is only now beginning to recover from the 2001 national recession, as magnified by the tragedy of 9/11. As the national economic malaise lingered, the loss of TCPU jobs in 2001 was followed by an additional loss of 3.2 percent in 2002.
Almost all segments of passenger transportation continue to suffer in 2003, particularly airlines, where Texas employment is down 9.9 percent from its level a year ago. Nationwide, airline revenue passenger miles fell 6.3 percent in 2001 and another 2.5 percent in 2002. The state’s airline job losses over the past year mostly reflect massive cutbacks by American Airlines at its DFW hub. All airlines have borne the costs of increased security and insurance premiums, although terrorist concerns have abated somewhat after the end of the worst hostilities in the Iraq war. Aggressive cuts in capacity have allowed load factors on airlines to improve, but the most optimistic arena for airlines in the short term is in the air cargo business.
There appears to be light at the end of a very long tunnel for the state’s transportation industry, however. The 1.4 percent loss in trucking jobs over the past year is only a fraction of the year-to-year loss in 2002. Truck and rail freight volumes depend in large part on manufacturing activity, which will be boosted next year by a weaker dollar abroad and new growth at home. In sum, Texas transportation employment is suffering now, but it is expected to inch upward in the latter part of 2003 after two years of declines, followed by a sure-to-be-welcomed 3.6 percent growth rate in 2004 and even stronger growth in 2005.
Communications, particularly telecommunications, may have to wait a bit longer, with 2003 turning out to be another year of job losses. Telecommunications employment in July was 10.1 percent lower than a year earlier. The industry is expected to cycle up somewhat in 2004, and already new investments in the national telecommunications sector are underway. For now, price competition makes it difficult for telecommunication providers to show profits, so Texas’ communications services employment will have a rough road to travel before improving in 2004 as the economy grows.
Wireless and broadband services are likely to lead the telecommunications recovery, while long distance and traditional telephone service continue to suffer from price erosion. High-speed Internet connections such as DSL have softened the demand for new telephone lines, as DSL and cable consumers do not necessarily need separate lines for voice and data transmission. Data services for businesses will still be at the center of growth for the communications industry. As business services employment is projected to rise by 5.5 percent in 2004, communications will grow nearly as fast, at 4.8 percent. Even with this growth, the job count in this sector will remain below its 2001 level until 2005.
The weakest TCPU industry is public utilities, which is expected to lose jobs indefinitely, albeit at a slow pace of about 1 to 2 percent annually. The reason is that privatization and service changes in the traditional utilities market result in a sector that will shrink its workforce in the face of competition.
After TCPU gets through its near-term problems, the industry will have one of the brightest outlooks among Texas industries in 2004 and 2005. Overall TCPU employment is expected to rise by just 0.2 percent in 2003, but grow by more impressive rates of 3.4 percent in 2004 and 4.3 percent in 2005 (see Figure 3).
Wholesale and Retail Trade: Some Improvement is Coming
Consumer spending is affected by consumer confidence, income growth, and debt levels. Consumer and business confidence is the initial catalyst to jump-start growth in the trade sectors, but measures of confidence have yet to show sustained improvement. It is not surprising, then, that both wholesale and retail trade are slogging through a lackluster year in 2003. Yet, after both sectors lost jobs in 2002, emerging fractional growth rates this year are welcome. Texas’ gross retail sales fell by 4.5 percent in 2002, so the 1.1 percent increase expected in 2003 is a marked improvement. Real (inflation adjusted) retail sales growth, however, continues to be negative, as consumer prices will increase an average 2.3 percent over the year. Border trade has often helped sustain retail trade in Texas, but even though the Mexican economy is now growing, the value of the peso relative to the dollar is falling, making U.S. goods more expensive to Mexican shoppers.
Weakened consumer confidence has been a drag on the state economy, and on retail trade in particular. The Conference Board’s consumer confidence index for the West South Central states, which Texas dominates, began declining in fall 2000 (see Figure 4) and stumbled badly in early 2003 with concerns about a potential war in Iraq. As mentioned above, consumer confidence had a promising jump after the major part of the war ended, but recent surveys show that it has dropped back again. With investors uncomfortable about the future economy, the biggest engine of retail sales—the consumer—is unwilling or unable to increase spending.
Many Texas consumers received tax rebate checks in 2003, and tax savings will be even larger in 2004. The stock market now appears to showing solid improvement and this should boost consumer confidence somewhat in the future. Statewide job cuts, perhaps the greatest hindrance to renewed consumer expenditures, are ending, and the national economy showed solid 2.4 percent growth in the second quarter of 2003. As the national economy continues to improve, the Comptroller’s Spring 2003 economic forecast projects Texas retail sales growth to improve from 1.1 percent in 2003 to 7.9 percent in 2004, followed by a 6.6 percent gain in 2005. Overall, statewide wholesale and retail trade employment is expected to increase by only 0.4 percent in 2003, but will rise by 2 to 2.5 percent annually in 2004 and 2005.
Finance, Insurance, and Real Estate (FIRE) Bracing for a Rough Year
Texas banks mostly avoided major layoffs in 2002. Wide margins between mortgage, auto, and business borrowing rates and historically low costs of acquiring new funds have helped the lending industry remain comparatively healthy, especially with the strong home refinancing activity. Housing and credit card profits may have reached a plateau, since the refinancing market has shown signs of having run its course. Consumer debt, judging from national data, is on the rise. On the commercial and industrial side, potential borrowers still seem reluctant to take on new loans. Likewise, although economic fundamentals appear poised for business lending to bounce back, the housing market is cooling. After the run of corporate financial scandals and a long period of falling stock prices, the jury is still out as to whether recent stock market improvements will have a long-term effect on consumer and business loan demand. In sum, the banking sector’s employment will likely decline by 1.3 percent in 2003 and another 1.4 percent in 2004 before the pendulum swings back.
The state’s insurance industry is part of a national industry that is on hold. Employment this year has been stable at about 165,700 jobs, the same number as in 2001. The outlook is equally smooth, with gains of about 1 percent employment per year over the next two years.
Real estate, as usual, is more volatile. Texas lost real estate jobs in 2002 for the first time since 1995. From 1995 through 2001, employment increased by one-third, adding 56,000 new jobs, for a 4 percent annual growth rate. Like construction, the real estate sector benefits from low mortgage rates, and over the past year employment has been quite stable. However, the expected interest rate increases in 2004 will brake the residential housing market. While most of the state economy will improve in 2004, the upcoming year should be markedly less positive for the real estate industry than was 2003. Real estate employment is expected to fall by 6.8 percent in 2004, with a loss of 1.1 percent in 2005.
Overall, FIRE employment in Texas is expected to grow by 0.2 percent in 2003, followed by a decline of 3.1 percent in 2004, as rising interest and mortgage rates take their toll. In 2005, the declines in industry employment will level out.
Business services, repair services, health services, and engineering/research services will all have a better 2004 than 2003. While services employment will grow by 1.6 percent in 2003, the growth rate will be a much stronger 4.0 percent in 2004 and 4.4 percent in 2005.
Business services, including personnel services, suffered the most in 2001 and 2002, losing nearly 59,000 jobs (or 8 percent) of its statewide workforce, mainly due to the loss of temporary help jobs. It is a particularly volatile sector of the economy, falling the fastest and rising the most explosively when the economy springs back. Business services, similar to electronics, will see growth rates averaging about 6.5 percent through 2005.
As manufacturing growth resumes, new growth will be spawned in a number of peripheral service industries, such as accounting and data services, computer support, legal services, personnel supply, engineering and management services, and research and development.
While the business services sector is tempestuous in its cycles, magnifying the ebbs and flows in the overall economy, the health services sector has been racking up moderate levels of growth of 2 to 3 percent annually, seemingly impervious to the vicissitudes of the rest of the economy (see Figure 5). This pattern of growth should continue, reflecting trends in population growth and the “graying of America.” Health services employment will continue growing by about 3 percent per year in 2004 and 2005. Overall, as business services spring back and health services continue to experience strong growth, overall statewide services employment is expected to escalate by 1.6 percent in 2003, 4.0 percent in 2004, and 4.4 percent in 2005.
Every government sector is expected to undergo slower growth in 2004 than it experienced in 2003. Due to a tightened budget, state government, in particular, will experience job losses in both 2004 and 2005. The federal government, which had weak—or negative—job growth through most of the 1990s when defense expenditures slowed, is likely to be the fastest growing public sector in 2003 and 2004, as the emphasis has shifted to increasing worldwide and domestic security in the fight against terrorism. Local government, like state government, is experiencing revenue shortfalls that will crimp employment growth in the remainder of 2003 and in 2004. After annual growth rates topping 2 percent over the past six years, local government employment will increase by 2.1 percent in 2003 and about 1.5 percent annually in 2004 and 2005.
Overall, government employment is expected to grow by 2.1 percent in 2003, slowing down to 1.1 percent annually in 2004 and 2005.
The Bottom Line
2004 should be the best year for the Texas economy since 2000. The leading economic indices have been slow to improve, but they are now predicting renewed growth. Job gains in the remainder of 2003 may be agonizingly small, but there are solid reasons for optimism that 2004 and 2005 will show a return to normal economic growth. While employment growth may not be recovering as quickly as many would like, it is a necessary ingredient for having a truly strong economy. Underlying the expected economic improvements are gradual increases in consumer and business confidence, a weakened U.S. dollar to spur Texas exports, and the stimulative nature of the nation’s fiscal and monetary policy. These improvements gradually will translate into more jobs.