Texas Economy Poised for Rebound
Texas continues to outpace national economic growth. Despite the slump in the national economy, Texas faired relatively well and is poised for a rebound. This is largely attributable to strong productivity growth, enhanced by the state’s central Sunbelt location, relatively low business and housing costs, and the continued flood of new residents into the state. The strength of productivity growth has kept Texas’ economic output increasing during the recent declines in nonfarm employment.Even with this resilience, like practically every other part of the country, the Texas economy has been affected by the national downturn. From July 2001 to July 2002, overall nonfarm employment in the state fell by 107,300 jobs, or 1.1 percent, compared with 0.7 percent growth during the same period a year earlier and an average annual growth rate of 4 percent during the economic boom of 1997 and 1998.
More than ever, the economy of Texas has become tied to the health of the national economy. This is evidenced by job loss rates of about 1 percent in both Texas and the U.S. over the past year. The breadth of the national downturn was such that 35 states lost jobs during this period, including all but one of the 10 largest states. Although relatively high energy prices allowed the oil and gas industry to benefit during most of 2001, other sectors of the Texas economy, such as manufacturing and, to a lesser extent, consumer spending, were affected by the national economy.
Wary of the threat of a national downturn, the Federal Reserve Board reduced short-term interest rates 11 times in 2001, dropping the federal funds rate from 6.5 percent to 1.75 percent. 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 2001 terrorist attacks. There are signs that the national economy has bottomed out and has begun a slow upswing.
The Texas economy continued to display growth during the first half of 2001. During the year, real (inflation-adjusted) gross state product increased an estimated 3.2 percent, and 167,000 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 state has gained jobs in five of the first seven months of 2002, although statewide nonfarm employment dropped to its lowest level since April 2000. From December 2001 to July 2002, Texas has lost an additional 26,300 jobs. During the first seven months of this year, three of the state’s eight major sectors added jobs, with construction (up 800 jobs), wholesale and retail trade (up 6,700) and government (up 3,200 jobs) all showing gains. Transportation, communications, and utilities (down 0.2 percent) and health, business, and other services (also down 0.2 percent) were mostly flat, but the job count in mining (oil and gas), manufacturing, and finance, insurance and real estate, however, continued to fall.
The outlook for the Texas economy for the remainder of 2002 and 2003 is looking up. Real gross state product growth is projected a moderate 2.1 percent in 2002 (see Table 1). In 2003, however, following a strong national economic recovery fueled by low interest rates and federal tax cuts, Texas’ economic growth will rebound at a relatively robust 4.6 percent rate. Nonfarm employment and personal income growth should follow a similar trend.
Table 1
Texas Economic History and Outlook for Calendar Years, 1999-2005
Spring 2002 Forecast
* Projected
1999 2000 2001 2002* 2003* 2004* 2005* TEXAS ECONOMY Gross State Product
(Billion 1996 Dollars)670.1 711.5 734.4 749.8 784.4 822.0 853.0 Annual % Change 5.1 6.2 3.2 2.1 4.6 4.8 3.8 Personal Income
(Billion Dollars)539.1 581.3 607.5 633.1 674.5 723.6 770.1 Annual % Change 5.3 7.8 4.5 4.2 6.5 7.3 6.4 Nonfarm Employment
(Thousands)9,158.9 9,432.2 9,515.9 9,517.5 9,709.4 10,013.1 10,270.9 Annual % Change 2.4 3.0 0.9 0.0 2.0 3.1 2.6 Resident Population
(Thousands)20,590.5 20,991.9 21,371.3 21,754.3 22,116.1 22,490.8 22,889.4 Annual % Change 2.5 1.9 1.8 1.8 1.7 1.7 1.8 Unemployment Rate (%) 4.6 4.2 4.9 5.7 5.4 4.7 4.6 Oil Price (Dollars per Barrel) $17.29 $28.82 $23.77 $22.69 $22.73 $23.24 $23.74 Natural Gas Price
(Dollars per MCF)$2.01 $3.50 $3.78 $2.65 $2.55 $2.61 $2.66 U.S. ECONOMY Gross Domestic Product
(Billion 1996 Dollars)8,856.5 9,224.0 9,332.3 9,484.0 9,848.5 10,218.9 10,524.4 Annual % Change 4.1 4.1 1.2 1.6 3.8 3.8 3.0 Consumer Price Index
(1982-84=100)166.6 172.2 177.1 180.2 184.9 189.8 194.8 Annual % Change 2.2 3.4 2.8 1.8 2.6 2.6 2.6 Prime Interest Rate (%) 8.0 9.2 6.9 5.0 7.0 8.0 8.0
SOURCES: Carole Keeton Rylander, Texas State Comptroller of Public Accounts and WEFA.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 4.9 percent in 2001 to 5.7 percent in 2002. As the national and state economies rebound, however, the state jobless rate will drop slightly to 5.4 percent in 2003.
Looking toward the future, the outlook for 2004 and 2005 is even more favorable, as the U.S. and Texas economies return to normal growth. During those two years, real gross state product growth will average 4.3 percent, nonfarm employment will rise by 2.9 percent annually, and personal income will increase by 6.8 per year. Texas’ statewide unemployment rate is expected to reach 4.6 percent by the end of the two years. Overall, despite the slowdown in 2002, from 2001 through 2005, Texas economic growth will outpace U.S. growth by approximately 0.75 percent per year, while the state’s population increases by 1.7 percent annually, reaching almost 23 million.
Manufacturing
Both 2001 and 2002 were years that most Texas manufacturers will not want to remember. Faced with weighty inventories and faltering personal computer sales worldwide, Dell Computer Corporation and Compaq Computer Corporation both announced job layoffs during this period. Largely because of the personal computer market, the state’s semiconductor and electronic component producers also felt the effects.
Outside of high-tech, the news was not much happier. Apparel manufacturers, largely concentrated along the Texas-Mexico border, continued to be affected by international competition, and they reduced their work forces 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 July 2001 to July 2002, statewide manufacturing employment declined by 4.7 percent, or 49,200 jobs —slightly better than the 5.1 percent loss in manufacturing employment nationwide.
Productivity was affected 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 work forces. In 2001, however, the productivity of American workers rose at almost a 2 percent annual rate. If the recovery follows historical patterns, productivity will shoot up even more with renewed demand for goods and services when the economy improves. For example, during the first half of 2002, U.S. productivity growth rose to nearly 5 percent.
Over the next two years, the state’s manufacturing sectors should improve as national and worldwide demand for computers, semiconductors and other high-tech products rebuilds, and excess inventories diminish. Overall, manufacturing employment will decline by 4.1 percent in 2002 as the high tech downturn and national recession play out. But in 2003, the Comptroller’s forecast expects 2.4 percent job growth, which would be Texas’ best manufacturing growth year since 1997.
Oil and Gas
In 2001, the resurgence of the state’s 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 in January 2001. Although oil and gas prices subsequently abated later in the year, they remained relatively high, spurring statewide and national drilling activity. In spring 2001, the Texas rotary rig count surged past 500, its highest level in 15 years.
By summer, however, the slowing world economy and excess supplies began to push energy prices downward, affecting drilling activity in Texas. By November 2001, the drilling rig count of 407 had fallen to its November 2000 level; by July 2002, the rig count of 329 was down 35 percent from its July 2001 level. Nevertheless, because of the lag between drilling activity and hiring plans, year-over-year mining employment was up as recently as March of this year. But by July, sector jobs were down by 7,000, or 4.3 percent, from the July 2001 level.
The economic outlook for the state’s oil and gas sector is challenging. As worldwide energy prices flatten again over the next two to three years, Texas mining employment will fall another 3.5 percent in 2003 before these trends slow in 2004.
Construction
From an historical perspective, Texas’ construction sector benefited more than most industries from the national and state economic boom in past years. 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 plateauing over the past couple of years. Sector employment continued to grow through the first quarter of 2001 because of the backlog of active projects, but ended the year with slightly lower employment, down 1.1 percent. Growth had slowed from a 9.2 percent annual rate at the end of 1998, to 5.2 percent at the end of 1999 and to 3.8 percent at the end of 2000. From July 2001 to July 2002, Texas construction has seen a job loss of 0.7 percent, or 4,000 jobs. In recent months, these losses could have been worse without a temporary bounce in special trades construction and unusually robust single-family housing construction.
Due to relatively low mortgage rates, both statewide home sales and housing permits are running at about their 1998 level, their respective post-1990 record highs. But even with the revival of residential construction, the state’s economic cycle 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, construction employment is expected to finish the year with a decline of 1 percent, followed by another drop of 1.7 percent in 2003, before rebounding in 2004.
Transportation Communications and Public Utilities
Perhaps more than any other sector, transportation, communications and public utilities (TPU) has been affected by the terrorist events of a year ago. After last September’s attacks, U.S. air traffic abated and layoffs were announced at most major U.S. air carriers, including Texas-based American and Continental Airlines. Consequently, job growth in the state’s air transportation industry fell from a year-to-year gain of 3,300 in July 2001 to a year-to-year loss of 8,400 in July 2002. Largely because of these losses, TPU lost 23,800 jobs from July 2001 to July 2002, a 4 percent drop.
Although national air traffic is recovering erratically, it will take some time for it to move past its pre-attack levels. According to the Federal Aviation Administration, nationwide passenger enplanements in both 2001 and 2002 are totaling well below the year 2000 record level.
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 increasing trade with Mexico. Through much of 2001, while the U.S. and Texas economies were retrenching, trade with Mexico remained fairly resilient. But the U.S. recession eventually affected this industry as well, such that trucking and warehousing employment was down by 1.6 percent, or 2,300 jobs, from July 2001 to July 2002.
With the rapidly growing popularity of the Internet and cellular communications, Texas communications employment boomed at a 7 percent average annual rate from 1999 to 2001. The national downturn took hold and intensified here as well, so that by July 2002, employment in the sector had fallen by 8,500 jobs statewide, or 5.6 percent, mostly because of job reductions at the state’s major telecommunications providers.
Finally, utilities employment—until the folding 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 gave back the 4,000 jobs it had gained the previous year. Even with job gains in electric utilities, by July 2002 the utilities sector overall had 2,600 fewer employees than in July 2001, a loss of 3.4 percent.
Texas TPU employment will gain strength as the air transportation sector rebounds and the U.S. and Mexican economies improve. Even with a recovery beginning in the latter part of this year, overall TPU employment is expected to fall by 1.5 percent in 2002, as a result of losses already experienced, and then rebound at a strong 4.6 percent rate in 2003.
Finance, Insurance and Real Estate
Finance, insurance and real estate (FIRE) turned in a relatively weak 12 months, with a 1.1 percent loss of 5,700 jobs from July 2001 to July 2002. During this period, all sectors of the FIRE industry lost jobs. Employment in banks and other financial institutions suffered only mild losses, being supported by the state’s growing population and healthy demand for new home financing. Likewise, jobs among the state’s insurance providers also fell slightly, down 0.6 percent. Thus, real estate, holding companies, and securities and investment industries, which were boosted by increasing home sales but hurt by weaknesses in the U.S. stock market and Texas nonresidential construction, accounted for over 60 percent of FIRE’s net employment decline during this period (down 3,500 jobs, or 2 percent).
As business loan demand remains weak and real estate demand remains fragmented, the outlook for the state’s FIRE sector is less than promising. Statewide FIRE employment will fall 0.7 percent in 2002, followed by a somewhat larger 1.1 percent drop in 2003, before turning upwards in 2004.
Trade
Consumer confidence and spending faltered as job layoffs mounted in 2001, and then fell further following the September 11th attacks. By the end of the year, however, both U.S. and Texas confidence began showing signs of recovery, as the U.S. economy began seeing renewed life.
During the first 11 months of fiscal 2002 (September through July), state sales tax receipts—of which just more than 50 percent come from household expenditures—fell by 1 percent, compared with a gain of almost 5 percent in all of fiscal 2001. Partially spurred by dealer incentives at the beginning of the fiscal year, motor vehicle sales tax collections increased 3.5 percent during the same period.
Even though Texas’ consumer confidence has recovered somewhat, it remains 17.3 percent below its August 2001, pre-attack level. Consequently, flagging consumer expenditures have reduced the wholesale and retail trade job count by 1.2 percent from July 2001 to July 2002, compared with annual average gains of more than 3 percent in fiscal 1999 through 2001. About one-third of this loss was in wholesale trade, which has been hurt by a decreased demand for manufactured products. Net job losses in wholesale trade totaled 8,700 over the past year, a 1.6 percent loss. Retail trade—including building materials, restaurants, automobile dealers and service stations, food, furniture, clothing, general merchandise stores, and other miscellaneous retailers—cut 19,200 jobs, a 1.1 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. For all of 2002, sector employment is expected to rise by only 0.1 percent, as the national economic recovery gains strength in the second half of the year. In 2003, a more robust 1.8 percent job gain is likely.
Services
Because of the breadth of the national downturn, in 2001 the Texas service sector lost jobs for the first time in more than 30 years. As of July of this year, total services employment remains down another 11,600 jobs, for a relatively small 0.4 percent drop from its July 2001 level.
Within this sector, employment in health services is up by 18,500 jobs, or 2.6 percent, due to the aging of the population, the availability and use of new medical procedures, and rapidly increasing spending on prescription drugs and other medical services. Jobs at establishments providing social and rehabilitation services increased 2.9 percent and accounted for 5,800 new jobs. Private educational services added 4,300 jobs, a 3.5 percent increase, and agricultural services took advantage of a particularly strong demand for veterinary and landscape/horticultural services to add 1,900 jobs, a 3 percent increase.
Most of the state’s service industries, in fact, added or lost a relatively small portion of their employment over the past year—with two notable exceptions. First, motion pictures lost 2,000 jobs, a 6.3 percent decrease, as terrorism concerns and economic weakness cut into discretionary consumer expenditures. Second, and much more significantly, business services, owing mostly to adjustments in the once-booming temporary help and personnel supply sector, lost 37,900 jobs over the year, a 5.4 percent decline and more than one-third of all the jobs lost statewide from July 2001 to July 2002. The silver lining in this otherwise troubling 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 mischaracterized 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 advanced education and generate significant economic returns to the community and the state. Some of these high-wage sectors are the ones faring the best; 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 improve greatly, as the demand for business-related services returns with the improving overall economy. In 2003, service sector employment will increase by an estimated 3.8 percent.
Local Public Schools Propel Government Sector Job Growth
Federal, state and local government employment growth continues at a moderate and steady rate. Overall, from July 2001 to July 2002, public sector employment was up 1.4 percent, or 21,900 jobs, with nearly half of these gains coming from increased hiring at public schools and other local governments.
Texas’ civilian federal government employment rose 0.8 percent, or by 1,400, during this period. The number of jobs in state government increased by a strong 3 percent, or by 10,100, with the increased demand for government services that typically accompanies a downturn in the economy and higher unemployment rates. Local government employment, almost two-thirds of which is fueled by public schools, increased by 10,400 jobs, or 1 percent, over the past year. The remaining local government job gains were in various other programs at the city, county and special district level. A relatively high birth rate and influx of new students from other states and countries 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 to increase at a moderate 1.6 percent rate, but in 2003, growth will slow to 1 percent, as tight budgets prevail and as school hiring needs at local public schools become, at least temporarily, satisfied.
People Keep Moving to Texas
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 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 in 2002 before falling back to 168,000 in 2003. With natural increases—Texas births minus deaths— averaging a little more than 200,000 per year, the state’s population is expected to increase at an average of 1.7 percent annually, from 21 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 stabilize the state economy over the next two years.