Economic OutlookDuring the 2004-05 biennium, the Texas economy will gradually improve, but given the depth of the 2001 national slump, business conditions will likely not improve significantly until fiscal 2005. Year-over-year economic growth should average 4.2 percent in 2004-05, somewhat better than the 2.7 percent average annual growth rate during 2002-03, but well below the healthy 5.4 percent average annual gains enjoyed during the economic boom of 1995-2000. (See Table 1 and Figure 2.)
Following the succession of job layoffs that occurred throughout 2002-03, statewide employment growth is expected to pick up steam in 2004-05 as economic output gradually accelerates. After remaining virtually static from 2001 through 2003, statewide non-farm employment is expected to increase at a 2.3 percent average annual rate in 2004-05. As wage growth accelerates, personal income growth can be expected to climb at a respectable 6 percent average annual rate. As a consequence, unemployment should fall from 5.9 percent in 2003 to 5.2 percent in 2005.
The majority of Texas' population growth will continue to be driven by natural increase (i.e., births minus deaths), as opposed to migration, which is more sensitive to economic factors. The rate of increase in the state's population growth rate is expected to remain relatively steady throughout 2004-05. From fiscal 2003 through fiscal 2005, Texas' population should increase by 696,000--about 3 percent--to reach 22.7 million.
Because the productivity of Texas workers has increased at a faster rate than the loss of jobs in the state, Texas has been able to avoid the national recession so far. Although Texas registered negligible economic growth in the Spring and Summer of 2001, productivity gains compensated sufficiently for the job losses to allow the state economy to remain in the black. Largely because of Texas' central Sunbelt location, relatively low costs, and overall attractive business climate, annual gross state product growth in Texas should continue to outperform the national growth rate by nearly half a percentage point annually through fiscal 2005, continuing a trend that traces back to the beginning of the 1990s.
TABLE 1
Texas Economic History and Outlook for Fiscal Years 1999-2005
Fall 2002 Forecast*Projected.
1999 2000 2001 2002* 2003* 2004* 2005* TEXAS ECONOMY Gross State Product (Billions, 1996$) 656.9 680.0** 700.3 716.1 738.9 769.0 801.9 Annual % Change 5.4 3.5** 3.0 2.2 3.2 4.1 4.3 Gross State Product (Billions, Current $) 673.3 728.2 771.3 798.1 841.1 894.5 952.8 Annual % Change 6.2 8.2 5.9 3.5 5.4 6.3 6.5 Personal Income (Billions, Current $) 532.1 575.3 607.1 622.0 653.4 691.4 734.8 Annual % Change 6.0 8.1 5.5 2.4 5.1 5.8 6.3 Nonfarm Employment (Thousands) 9,109.9 9,366.3 9,529.2 9,448.8 9,526.8 9,716.7 9,961.1 Annual % Change 2.7 2.8 1.7 -0.8 0.8 2.0 2.5 Resident Population (Thousands) 20,507.6 20,898.8 21,278.6 21,661.2 22,028.6 22,370.7 22,725.0 Annual % Change 2.0 1.9 1.8 1.8 1.7 1.6 1.6 Unemployment Rate (%) 4.7 4.4 4.5 5.8 5.9 5.7 5.2 Oil Price ($ per Barrel) 12.93 25.20 27.75 21.80 23.50 19.99 20.82 Natural Gas Price ($ per MCF) 1.65 2.51 4.63 2.43 2.91 2.80 2.69 U.S. ECONOMY Gross Domestic Product (Billions, 1996$) 8,761.0 9,140.5 9,213.3 9,364.8 9,624.0 10,006.3 10,353.1 Annual % Change 4.2 4.3 0.8 1.6 2.8 4.0 3.5 Consumer Price Index (1982-84=100) 165.5 170.8 176.3 178.9 183.6 188.9 194.4 Annual % Change 1.9 3.2 3.2 1.5 2.6 2.9 2.9 Prime Interest Rate (%) 7.9 9.0 8.0 4.9 4.8 6.1 7.0
**Texas real Gross State Product was revised for fiscal 2000 and fiscal 2001 by the U. S. Bureau of Economic Analysis.
(Real Gross State Product adjusts out the effects of price changes, including those of oil and gas.) SOURCES: Carole Keeton Strayhorn, Texas Comptroller; and Global Insight (formerly DRI-WEFA).
Weak Business Investment Hurts Tax RevenuesAlthough the overall economy is expected to improve in 2004-05, weak business investment in several major economic sectors will adversely affect state and local sales tax revenues well into fiscal 2005.
Business investment, driven by strong purchases of information processing equipment, boomed in the 1990s. Economic capacity, however, eventually outpaced demand, precipitating a cascading collapse in the technology bubble, new investment, and the overall equity market. While consumer spending remains relatively steady at 70 percent of the economy, the resulting decline in nonresidential fixed investment, which in fiscal 2000 accounted for nearly 15 percent of real U.S. economic output, has become a key source of our current economic weakness.
The bulk--almost three-quarters--of U.S. nonresidential fixed investment is in equipment and software. In Texas, major producers of taxable high-tech products--including computers, electronic and communications equipment, and software--have been severely wounded by the investment bust. In 1990, information processing accounted for 33 percent of real investment in equipment and software. By 2001, information processing's share had soared to 56 percent; and the high-tech sector in general accounted for 9 percent of total state economic output. But when the information highway hit a speed-bump, Texas high-tech output and employment bore the brunt of the effect. From its peak in 2000, high-tech employment in Texas is expected to fall by 38,500--almost 7 percent--to 543,600 jobs in 2003.
During 2004-05, however, Texas high-tech employment should gradually increase, reaching 583,200 in fiscal 2005 as national information processing investment responds to higher business demands and needs for the replacement of aging capital stock. But even with the expected rebound, Texas high-tech employment in 2005 will barely exceed its level of five years earlier.
While high-tech investment is expected to slowly recover and eventually match its pre-bust peak, the growth in statewide investment in nonresidential structures, including the taxable materials component, promises to be more anemic in 2004-05. Although much smaller than equipment and software, accounting for approximately one-quarter of nonresidential fixed investment, Texas nonresidential construction put-in-place annually more than tripled during the office, retail, and other commercial building boom between 1990 and 2001, jumping to 167.9 million square feet from 52.1 million square feet. As vacancy rates soared and rents fell in 2002, however, nonresidential construction began to fall sharply; and it is expected to reach a low of 132.1 million square feet in 2003.
In 2004 and 2005, Texas nonresidential construction activity should gradually increase as excess inventories of office and other commercial space decline. Despite the anticipated gains, nonresidential construction put-in-place is expected to reach only 145.4 million square feet in fiscal 2005--13 percent below the 2001 peak.
Oil and Gas Trends Downward
In 2000, the oil and gas industry's share of gross state product spiked to 9.6 percent. Since then, however, the role of oil and gas has gradually trended downwards. Currently, oil and gas prices have temporarily risen with fears of war in the Middle East, concern about the long-term stability of supply from Venezuela, and higher natural gas demands from a colder than usual winter. Prices should drop upon the successful resolution of the Iraq-U.S. conflict, especially if, as often turns out, winter natural gas demands prove weaker than originally predicted. By the end of 2004-05, oil and gas output is expected to account for 8.4 percent of Texas economy, and energy--related employment--including oil and gas extraction, chemicals, petroleum refining, oil-field machinery and related instruments--should bottom out at 297,000.
Forecast Concerns
At least two potential developments could adversely affect the generally positive forecast for Texas. First, because of faltering demand for their products, weak profits, and apparently low business confidence, businesses may attempt to improve their bottom line by further delaying investments and hiring decisions. In Texas, such decisions may reduce and delay the economic revival expected in 2004-05.
Second, the most important concern is the willingness of consumers to keep on spending--a phenomenon that has virtually carried the national and Texas economies since the bust in business investment. A number of danger signals have emerged. Household budgets are stretched thinner than ever, and credit problems are on the rise. Consumer confidence remains relatively depressed. Buyers no longer appear to be responding as readily to low-interest rates and other automobile sale promotions. Moreover, home sales and new residential construction are expected to slow as mortgage rates begin to rise and refinancing opportunities decrease.
