This Biennial Revenue Estimate forecasts the continuation of modest economic growth for fiscal 2001 and the 2002-03 biennium.The national economy is now in its longest expansion since the end of World War II. During this expansion, Texas’ central Sunbelt location, proximity to Mexico, and high-technology sector have allowed the state economy to outpace national economic growth.The High-Technology and Oil & Gas Sectors
Although by general measures healthy, Texas’ economic growth has slowed down, consistent with recent national trends, as the Federal Reserve has raised interest rates to keep inflation at bay. After increasing at rates of over 7 percent annually in fiscal 1997 and 1998, the growth in real gross state product (GSP) slowed to just under 6 percent per year in fiscal 1999 and 2000. Continued deceleration in the national economy will force GSP growth to decline to just under 5 percent in fiscal 2001 and to an average annual rate of approximately 4 percent during the 2002-03 biennium. Even at this slower pace, however, state economic growth will outpace national growth by 0.5 percent to 1.0 percent annually over the three-year period. (See Table 1 and Figure 2.)
Non-farm employment growth will follow a similar trend. The state’s job creation rate will fall from 2.5 percent in fiscal 2000 to 2.1 percent in fiscal 2003. Even with slowing job growth, Texas personal income will continue to expand at a relatively steady 6.5 percent annually through fiscal 2003.
The majority of Texas’ population growth is attributable to natural increase (i.e., births minus deaths) rather than the more economically sensitive migration component. The rate of increase in the state’s population will slow only slightly through the end of the 2002-03 biennium. From fiscal 2000 through fiscal 2003, Texas’ population is expected to increase by 1.1 million, reaching 21.4 million.
Rising interest rates have had their most profound effect on new housing construction, not just in Texas, but for the nation as a whole. After a 15-year high of 157,000 new units in fiscal 1999, single- and multi-family housing starts in Texas will average 150,000 units annually over the next three years. Consequently, statewide construction employment growth will slow dramatically–from more than 7 percent in fiscal 1999 to just over 1 percent in fiscal 2002–before a slow rebound begins in fiscal 2003. Because many builder and consumer purchases (e.g., building materials, appliances, and home furnishings) are tied to the health of the housing industry, this slowdown will put a brake on taxable sales through the end of the 2002-03 biennium.
Depending on how they are measured, Texas’ largest industries are high technology and oil & gas. Their respective outlooks, however, appear to be headed in opposite directions.Forecast ConcernsThe state’s $66 billion (in terms of gross state product) high-technology sector, now the largest industry in Texas, is poised for strong output and employment growth during the next three years. Electronic components are finding a wide range of applications, including rapidly expanding wireless and broadband communications, data networking, and Internet markets. After pausing in fiscal 1999 and 2000 to shed excess inventories of computers and electronic components, the worldwide electronics industry has rebounded. The bellwether semiconductor book-to-bill ratio remains strong; and Fall 2000 component shipments are up by almost 75 percent over the shipments in Fall 1999.
Another major segment of the state’s high technology sector–communications services–has continued to expand at an unabated pace in recent years, in contrast to the interrupted growth in computer and electronic products. Although traditional telephone services remain the core business, the growth of Texas’ communications industry–largely concentrated in Richardson’s "Telecom Corridor" north of Dallas–is spearheaded by cellular and other wireless communications, business networks, and other high-tech applications.
Unlike the high-tech sector, Texas’ oil & gas industry, including oil and gas exploration and production, the manufacture of oil-field machinery, refinery operations, and petrochemicals, is expected to remain relatively flat through the 2002-03 biennium. After accounting for more than 25 percent of Texas’ economic output in the early 1980s, the oil & gas sector’s share of the economy has fallen to 8.5 percent. Following a limited recovery in 2000-01, the production of oil and gas will resume its historical downward trend.
Texas drilling activity rose substantially in fiscal 2000 in response to record-high natural gas prices and near record-high oil prices. By late fiscal 2000, the number of drilling rigs operating in the state had reached a level last seen late in fiscal 1997. However, because of concerns about price instability, the lack of available rigs and manpower, and the availability of major reserves overseas, Texas drilling activity is expected to remain relatively tepid throughout the projection period. Consequently, oil & gas economic output and employment should stay virtually flat through the end of the next biennium.
Although the outlook for the Texas economy is fairly positive, at least three factors could adversely affect the state economic outlook during the next biennium. One concern, which cuts both ways, is high worldwide oil prices. Although Texas remains a major energy producer, it is also a major importer of crude oil and refined products. While higher prices obviously benefit in-state exploration and production, the same higher prices hurt the state’s air transportation, railroads, trucking, and other energy-intensive industries, as well as the driving public. In addition, to the extent that a protracted period of high oil and gas prices impedes national economic growth, Texas could suffer from a weaker domestic market.The problem is further complicated by the weakness of the European Community’s euro, which has driven up the effective price of imported oil in Europe even more. Since its introduction in early 1999, the euro has fallen by nearly 30 percent relative to the U.S. dollar. In addition, because the relative price of U.S. products has risen, U.S. and Texas companies are having a difficult time selling their products to European markets. With Western Europe accounting for almost 25 percent of the nation’s and 10 percent of Texas’ exports, any faltering in this market could hurt the national and state economies.
Finally, the growth of the U.S. and Texas economies could suffer if the Federal Reserve Board miscalculates the inflation threat. Given the Board’s success in engineering previous economic "soft-landings," such an event appears relatively unlikely. Rising interest rates combined with a protracted stock market downturn, however, could undermine consumer confidence. This, in turn, could dampen automobile sales, housing sales, and other big-ticket expenditures, which have driven much of nation’s–and Texas’–economic growth in recent years.
While the above concerns all represent potential problems, the probability of any of them seriously impairing state economic growth over the next three fiscal years remains fairly low.