12/09/2005: "Economic Outlook for 2006 is Favorable"
December has always been my favorite month. The holiday hubbub is always a treat (even if I do mark my birthday in the process—at least this year there isn’t a zero at the end). As we look forward to the dawning of another year, it’s a highly appropriate time to review the economic health of our economy and to forecast its progress.
That’s something I’ve been doing for more than 25 years, and although it involves a lot of time and intricate analysis of mountains of data, it’s always enjoyable, especially when my predictions about our economy are favorable. And they are, for in spite of the numerous challenges our nation and our state have faced this year (and there certainly have been a handful), productivity continues to rise and job growth is widespread across most industries.
Even the combination of costly military activities in the Middle East, the devastation wrought by the sister hurricanes Katrina and Rita, and the ensuing run up in energy prices have not halted economic expansion. Growth was recorded at 4.3% for the third quarter, a very nice pace.
My firm, The Perryman Group, forecasts that the real gross product (RGP or output) growth rate for the nation will be about 4.0% next year. Over the five-year timeframe (2005-2010), the compound annual growth rate (CAGR) is projected to be 3.77%.
During the same period, the Lone Star State, which has emerged as a growth leader in the past couple of years, is projected to achieve a per annum output expansion rate of 4.24%, nearly a half percent in excess of the US rate. As a matter of fact, Texas is forecast to exceed the nation’s growth rate in all the major key indicators from 2005 to 2010.
Over this timeframe, the US population CAGR will likely be 1.02%, while the increase in the number of residents in Texas should be around 1.85%. The gain of some 3.2 million people will keep Texas the second most populous state.
The yearly rate of growth for wage and salary workers in the Lone Star State is predicted to be 1.70% from 2005 to 2010, a little above the US rate of 1.49%. Real personal income (by place of residence) in Texas is expected to experience an annual expansion rate of 3.81% over the forecast horizon, while that of the US is projected to be approximately 3.76%.
About two-thirds of Texans own their homes, a rate of homeownership slightly below the national average. To meet the growing demand over the past few years, new home construction has seen an upward swing. During the next few years, however, the number of new housing permits is forecast to drop modestly. Even so, this situation is not extreme, either by the state’s historical standards or by current conditions in other parts of the country.
The energy sector has long been a driver of the Texas economy. The past several years has seen the diversification in the economy diminish the dominance of the energy segment. Still, oil and gas exploration and related industries will continue to be a mainstay in the years ahead. In fact, with the coming decades, research and development will escalate as worldwide oil production peaks and begins to decline.
Emerging technologies in many areas stand to be particularly important to future prosperity. Through continuing efforts to cement a position as a center for nanotechnology-oriented firms, for example, our state stands a great chance to enhance its prosperity over the long term.
Although the federal budget deficit continues to expand and has the potential to lead to a reduction in the amount of capital available in the economy and inflationary pressure, I do not expect a notable constraint in future economic performance stemming from current deficits. The longer these conditions persist, however, the greater the risk of impact on the economy.
With regard to inflation expectations, The Perryman Group anticipates growth in the Consumer Price Index to remain in the 2.5%-3.5% range over the next five years, as gains in productivity and the pressures of the global economy limit the impact of higher energy prices.
The business climate of the state and the underlying strength of its overall business complex provide the foundation for a favorable outlook for the Texas economy through the next several years. The prospects for ongoing economic vitality nationwide are, in fact, quite good. Although there is always the potential for an unforeseen event which sends shockwaves through the economy, the depth and breadth of the current momentum is impressive.