Through the years, the Lone Star State has been a leader in countless endeavors, due in large measure to the unique capabilities of Texans to accomplish and achieve. As a result, the state has enjoyed remarkable economic expansion over an extended time horizon. By all indications, this trend is likely to continue. In this week’s column, I want to share some of the highlights from my most recent forecast for the state.
In the spring of 2000, Texas began to experience a mild economic slowdown. Conditions causing the national economy to falter similarly affected the state’s business activity. As a center of both volatile technology industries and transportation, Texas saw significant job losses in the 2001 to 2002 period, although output continued to grow modestly.
More recently, the recovery pattern of the past two years appears tilted toward a more notable pace of growth. Of course, the degree will be related somewhat to the strength of the national recovery, since many of the state’s key sectors will benefit in large measure from stronger US and, indeed, global growth. In addition to these patterns, several trends in Texas business activity will shape the state’s economic fortunes.
During the recession/recovery period, thousands of Texans lost their jobs as numerous businesses downsized or eliminated various operations. Many individuals have had to change professions, and some have even foregone retirement when faced with declining equity values. In spite of the employment slump, the productivity of Texas workers expanded at a faster rate than the drop in employment. As a result, output growth maintained a positive status.
The opening of the electric utility industry to retail competition last year resulted in significant gains in business activity. Cost reductions exceeded the legislative mandate of 6% in many areas. These cost savings have freed up dollars for other purposes such as saving, investing, and spending.
Residential construction, a perennial economic support, has been boosted by low mortgage rates, and is maintaining a healthy tempo. Nonresidential construction activity, however, has not kept up the same pace; the competitiveness of the industry is restraining price increases. Construction-related manufacturers are beginning to see a slight rise in demand.
Orders for high-tech products continue to accelerate, although not at the rate of the last season. The sluggish technology sector is projected to gradually see enhanced expansion.
Health and education services employment have also remained strong during the downturn. The health services component of this sector comprises about 10% of total Texas workers or about one million people.
The education services segment employs approximately 150,000. Because of the state’s continuing population growth, this sector is projected to experience significant growth.
International trade has expanded, enabling Texas to become the nation’s export leader in 2002, surpassing California, the traditional leader. The dock strike on the West Coast certainly played an important role in the Golden State’s slippage. Even so, as larger numbers of Texas businesses embark on ways to create or increase trade opportunities with partners around the globe, the state’s export growth will be a major driver of future performance.
Texas exports to Canada, the US top trading partner, are up approximately 7.7% over last year. About 46% of the nation’s exports to Mexico pass through the Lone Star State, and nearly one-third of US products shipped to our southern neighbor are produced in Texas.
Necessary economic forces are now in place to allow the economy of the Lone Star State to yield expansion through the short term. Turning to some specific projections, the Lone Star State is expected to achieve broad-based economic growth in the years to come. Key economic indicators with predicted growth rates for the 2003 to 2004 timeframe are as follows.
Real Gross Product (RGP or output in constant 1996 dollars) is forecast to expand 4.00% next year and exceed $778.93 billion. Real Personal Income (RPI¯by place of residence) is anticipated to experience a 2.70% upward trend from 2003 to 2004. In 2004, RPI will likely reach about $563.34 billion.
Employment is anticipated to climb 1.70% over the 2003-2004 forecast horizon. Meanwhile, the Texas Industrial Production Index (1996=100) is expected to attain a level of 124.2 next year, reflecting a growth of approximately 3.90%. Housing Starts are predicted to continue to be remarkably stable, with about 152,300 being observed in 2004. The Population of Texas should experience 1.80% growth from 2003 to 2004 and reach nearly 22.50 million next year, an addition of some 400,000 people in 2004.
Retail Sales are expected to achieve a 5.80% growth rate from 2003 to 2004 and exceed $338.12 billion. Following convention, retail sales growth is reported nominally; a portion of this growth is due to inflation. The rate of increase in the Texas Consumer Price Index (CPI) is projected to be 2.20% in 2004.
While the interconnected nature of the economies of the nations around the world is an important factor in the level of business activity in the US and Texas, it is the American capacity to innovate that will enable our economy to achieve continued expansion.
Despite the numerous challenges the Lone Star State will face in the future, including generating adequate fiscal revenues to meet pressing needs, key economic forces are now in place to permit our economy to move forward at a moderate pace next year.