Power
An adequate supply of available electric power at reasonable prices is vital to existing business activity as well as future economic development. However, studies (by my firm as well as other entities analyzing the issue) consistently show a potential shortage of electric power in Texas without significant capacity additions to the electric grid in the coming years.
While several power plants are currently in planning stages, recent estimates by the Electric Reliability Council of Texas (ERCOT) of total requirements (peak demand plus a 12.5% reserve margin) show that the reserve margin is expected to dip below 12.5% by summer 2014 in the absence of new facilities. Significant harms to the economic development prospects for the state can occur without the assurance of adequate power over an extended time horizon.
Population is a primary driver of electricity demand. In fact, demand for electricity has been growing faster than any other type of energy consumption throughout the nation (although this pattern has been temporarily interrupted by the recent recession). In addition to population, business activity and economic growth lead to increased power usage as well. In order to meet these needs, new resources fueled by a variety of traditional and renewable sources will be required.
Nuclear plants represent a desirable source for obtaining some of the needed generation capacity. The number of plants operating in the US has been growing over the past decades, with the total number of nuclear power plants has climbing from 42 in the early 1970s to 104 in 2008. Likewise, the total amount of nuclear power generation over the past 35 years has risen substantially. Most plants are operating near capacity.
Another advantage of nuclear-fueled facilities is that they improve the fuel diversity of the state’s generation resources, which helps reduce the overall cost of power to customers. Using a variety of input fuels for generating electricity lowers prices because it allows for increased fuel switching in a competitive market when the prices of any particular input fuel are high. In Texas, this phenomenon is particularly important in times of high marginal costs for natural gas because the state is highly dependent on that fuel for electric power generation (around 70% at present).
The recent experience of customers in markets with a larger proportion of generation capacity stemming from nuclear power illustrates the potential cost savings. Over the past five years, the average electricity cost for residential customers in the deregulated market areas particularly reliant on natural gas have been more than 60% higher than those in markets with dedicated nuclear power resources. Lower prices, in turn, stimulate the economy as individual customers spend their savings in other ways. In addition, the state is a more attractive site for economic development as a result of greater certainty in power supply and cost effectiveness.
The multi-billion dollar investments involved in nuclear plants also generate substantial business activity both during its development and on a permanent basis through maintenance and operations. My firm recently measured the impact of the proposed expansion of the South Texas Project, where two new 1,350-megawatt units (Units 3 and 4) located adjacent to the existing units are in the development phase. The construction of Units 3 and 4 of the STP would lead to an estimated $15.1 billion in total spending in the economy, $7.3 billion in output (real gross product), and 91,607 person-years of employment. Over the course of the construction phase, the project will also generate an estimated $385.5 million in State fiscal revenues and $204.7 million to various local governments (in constant 2009 dollars). Such an effort can be particularly beneficial as the state tries to build momentum in its emergence from the recession.
Once in place, Units 3 and 4 will continue to lead to a sizable economic stimulus through daily operations, maintenance, and related initiatives. At maturity, the ongoing operations of Units 3 and 4 would lead to incremental business activity in the state of $3.6 billion in annual spending, $1.2 billion in output (gross product) each year, and 8,407 permanent jobs. Once fully operational, the plant will generate $38.6 million in annual State revenues and $179.2 million to local public entities each year. Similar benefits have been calculated for other proposed nuclear plants that we have analyzed in recent years.
This expansion helps ensure the adequacy and affordability of the state’s electric power supply without adding incremental emissions. Along with renewable energy and other sources, this large-scale plant helps the fuel diversity of the power supply, which is presently dominated by natural gas facilities. This greater flexibility helps reduce the overall cost of power to customers.
Proper planning to meet future electricity needs at a competitive price is essential to attracting and retaining business, and new generation projects must be initiated years in advance to allow time for construction and development. The development of Units 3 and 4 of the South Texas Project, along with other generation and transmission investments, help ensure the long-term prosperity of Texas.
posted @ 08:09 AM CST [link]
Friday, January 22, 2010
A Cautious Optimism
As the US moves out of one of the worst recessions experienced in decades, positive signs are on the increase. Financial conditions are improving and consumer confidence, though not completely revived, is encouraging. Federal and state stimulus monies continue to flow into the economy, and the real estate market is expected to enjoy a relatively strong spring. Like many sectors, a spirit of cautious optimism for the US auto industry has emerged, with hopes for a more stable 2010.
Last year presented new challenges to the automotive industry in the form of plunging sales and major restructuring. The year’s headlines focused on the nation’s $64 billion investment in automakers, a move spurred by the downturn in the overall economy and subsequent fall of two of the largest US automakers: General Motors (GM) and Chrysler. In addition to the $49.9 billion aid for GM and $14.3 billion for Chrysler, the government also poured $16.9 billion in aid to suppliers and a financing company in the auto industry.
Government has stepped up as an active player in the US auto industry over the past year, not only in emergency loans but through incentive packages as well such as “Cash for Clunkers.” The Cash for Clunkers program, officially known as the Car Allowance Rebate System (CARS), was put into effect in July 2009. It is estimated that some 690,000 vehicles were sold across the nation during the CARS program, providing a bit of relief for the auto industry. There is some debate regarding how many of those sales were incremental and how many would have occurred regardless, and the price tag for the program was very steep for taxpayers (up to $24,000 per automobile). Even so, the government incentive rebate for trading in older, less efficient vehicles for criteria matching, new, more efficient vehicles positively affected car sales, mainly in July and August as the program ended earlier than originally anticipated.
December saw the first overall growth (absent any federal government incentive program) in auto sales in the US in 2009. Among the largest increases, Ford’s sales expanded 33% during the month, Toyota Motor experienced a sales gain of 32%, and Honda sales rose by nearly 25%. Despite December, overall sales for the year decreased by 21% compared to 2008 sales, reaching only 10.4 million vehicles (the lowest in nearly three decades). In fact, the only major automaker to report an increase in sales for 2009 was Hyundai Motor Group (up 9%). Sales for the nation’s major domestic automakers Ford, General Motors, and Chrysler declined by 15%, 30%, and 36%, respectively.
While too early to be considered a trend, the December uptick ended a difficult year for automakers on a positive note and produced a cautious optimism in a highly concentrated and struggling industry. Momentum in the auto industry is expected to pick up in 2010, although modestly.
This upturn is anticipated to be led by an overall strengthening of the US economy and a gradual loosening of the credit market. While not robust in comparison to historical standards, the nation’s economic picture is definitely much improved from the not-too-distant past, a good sign for the automotive industry.
Government is likely to continue to play a role in the US auto industry for the immediate future as well as more long term through energy and environmental policies. The auto industry has cut production, decreased inventory, and offered fewer incentives in efforts to improve competitiveness and margins.
As the recovery continues and the economy begins to add jobs, more Americans will be entering the market for big-ticket items such as cars. Even with the recent incentive program, some potential buyers have been sitting on the sidelines waiting for better news before taking the plunge. The farther we move from the depths of the recession, the brighter the outlook for auto sales. The result? Cautious optimism for 2010.
posted @ 07:55 AM CST [link]
Friday, January 15, 2010
Not a Jobless Recovery, Just an Early One
As I have traveled across the nation in recent weeks, I’ve begun to hear the term “jobless recovery” in various contexts. Clearly, one of the major concerns on the front burner of the nation’s interest continues to be jobs (and the lack thereof). Even though the recession is officially over, the economy has not yet begun to add jobs, and that has people worried. However, this is to be expected at this stage in a recovery and isn’t yet a cause for alarm. At this early phase, virtually all recoveries can be called “jobless.”
Though there has been some improvement recently in the overall number of workers being furloughed, the latest data from the Bureau of Labor Statistics (BLS) still indicates significant unemployment and individuals having to settle for part-time work. The BLS identifies those who work less than 35 hours per week as part-timers and notes that this category includes both voluntary (those who choose to do so because of other obligations) and involuntary (those unable to find full-time jobs).
Individuals in the latter category currently total about 9.2 million across the country. Although this number has been approximately the same since March 2009, it is more than double the number of people working part time due to economic reasons in 2007. In comparison, the recession of the early 1980s caused a 50% increase in the number of part-time workers while the recession of 1990 resulted in a 25% hike. Technology and trends toward less traditional job situations are probably key factors in the current spike, with companies and individuals more willing and able to structure part-time jobs than in the past.
The BLS estimates that from the spring of 2008 to the spring of 2009—the central timeframe of the recession—the number of involuntary part-time workers grew by about 3.4 million. The downturn caused many employers to eliminate jobs and allocate fewer hours to other positions. While sometimes reducing production, the cutback did benefit employers by decreasing their obligations to provide benefits to employees.
In the process, however, growth in the number of part-timers has negatively affected the retail, hospitality, and entertainment industries. With lower incomes, families don’t eat out as much, and when they shop, they are usually on the lookout for bargains. This change in spending patterns fed the growing uncertainty in the minds of many people regarding the future.
The recession-induced increase in the number of part-time jobs (and resulting decrease in overall income) also reduced tax receipts. Another sector negatively impacted because of the situation has been charitable operations which have experienced smaller receipts.
Recently, firms in some industrial sectors have been hiring top-level, out-of-work personnel, but many of these jobs are of a temporary nature since they are time-limited or project based. Still, this approach is providing companies opportunities to rethink their part-time and full-time needs so that when the employment picture gets brighter in the months ahead, they will be better prepared to move forward. In fact, growth in temporary workers, which has now occurred for several months, is usually an indicator that the labor market is on the road to recovery. Other companies are pushing existing workers to up productivity or hours until they feel more confident that the recovery will continue. This can’t go on forever, however, and hiring will begin as momentum grows.
With some 15.3 million Americans still looking for jobs but unable to find them, long-term unemployment is remaining at a high level. As the nation’s general economy improves, we may see more people encouraged enough to try to get back into the workforce, pushing up the numbers looking for jobs. At this stage in a recovery, growing unemployment is not uncommon (and not bad as long as we are seeing net job gains). As the economy continues to rebound, there is still a lot of room for improvement in getting people back to work and moving part timers into full-time positions.
posted @ 08:25 AM CST [link]
Friday, January 8, 2010
Signs of the Times
Was the rise in recent holiday spending, which represents 25%-40% of many retailers’ annual sales, a harbinger of good times to come? The initial report indicates that consumers opened their pocket books 3.6% more than they did over the November 1 to Christmas Eve period in 2008. Yet, because of the dismal spending record caused by the massive financial challenges that year, the increase in 2009 was not really a financial boom. Still, it is certainly encouraging.
Until recently, much of the news hitting the streets has been about the free fall of the economy and the tightening by American consumers of their purse strings. However, the green shoots of economic recovery are beginning to push their way to the surface, though the length of time it will take before they are in bloom is not yet apparent. As with nature, the economy will have growth in the spring, but we are not yet ready for a bumper crop.
Over the past few weeks, a spirit of optimism has gradually emerged and the preliminary fourth quarter data being reported by various industries indicates a mild upswing may be on the horizon. Of course, if the uptick in consumer spending is maintained, the prospects for a healthier economy in 2010 will be greatly improved.
There are other indications that the recession is losing its grip on American life and that some new paychecks could probably be in play later this year. Among those signs are the generally downward trajectory of jobless claims (from around 600,000 per week in early 2009 to about 500,000 currently), along with notices regarding the rebuilding of inventories that had gone into deep freeze during the worst of times, plus the December reports noting the expansion of manufacturing—the fifth consecutive monthly gain.
Ongoing job creation endeavors by the nation’s lawmakers certainly have the potential to prime the economic growth pump, but the pace of advancement will likely be slow because of the timidity various industries are exhibiting in stepping out and expanding because of myriad unknowns. Several sources indicate that job losses have slowed to a crawl, and many firms have hiring plans for the coming months.
Even so, a glimmer of sunshine is peeking through the clouds of uncertainties and shedding some light on the positive trends in various areas such as industrial production and trade. Especially visible is the stabilization of housing markets. Bolstered by federal tax credits for home buyers and rock-bottom interest rates, sales of existing residences have been picking up steam and inventories have dropped to the lowest level in two and a half years. There are still some bumps in the data, but the general direction is undeniable.
The number of foreclosures continues to pour water on the fires of growth and prices will likely continue to drop in some markets over the short term. There will still be downward months (such as November) before we’re totally out of the woods. Moreover, the recent slowdown in construction spending is indicative of the fact that confidence in the future has not yet been fully restored.
Although the nation’s financial system is gaining strength, its health remains fragile. Challenges such as increased regulation, higher taxes, budget deficits, and weakening of the dollar are still lurking and could diminish future economic growth.
In addition, while personal income is rising, the flow of credit that businesses need to expand and employ new workers remains sluggish. However, if financial markets perk up, wealth creation will pick up and create opportunities for investment which will undoubtedly push the economy forward along the path of recovery.
While it’s too early to make a definitive call as to when this expansion will accelerate (my best estimate is the latter half of 2010), the signs are becoming clearer that the economy will continue to gain some momentum. As a result, despite the formidable challenges that remain, the direction of our nation’s economy in 2010 will generally be on the positive side.
posted @ 07:59 AM CST [link]
Friday, January 1, 2010
Eyes Forward
For more than three decades (ugh!!), I have been analyzing an amazing amount of data related to the economies of the US and Texas, as well as major regions and metropolitan areas in the state, in order to develop outlooks for short- and long-term periods.
Rarely have I studied times with as many challenges as we have been experiencing over the past two years or investigated periods filled with such a variety of questions seeking answers seemingly all at the same time.
The year 2009 will soon be in our rearview mirror, but some remnants of the doubts so prevalent a few months ago will likely linger. Moreover, new unknowns around the corner may have the potential to impact our economic growth in the years ahead. Nevertheless, I am optimistic about the future and encouraged by the recent signs of recovery and the emerging energy of consumers and businesses alike.
Despite the varied crises the US has faced, the nation remains the global leader on most economic levels. Output (gross domestic product) per person greatly exceeds the world average, and the productivity of American workers reigns as the global standard. Our technology leadership is unchallenged, and our preeminence in areas ranging from genomics to robotics to nanotechnology remains largely unchallenged.
From 2009 to 2014, the US real (constant 2000 dollars) gross domestic product is predicted to expand by approximately $2.03 trillion, representing a yearly growth rate of 3.37%. Over this same period, the real gross product of Texas is anticipated to climb at a 4.50% annual rate, thereby adding $237.10 billion to the state’s output of goods and services generated by labor and property.
As we enter a new year, we are assured by the fact that financial market conditions are improving, and consumer confidence (though still not completely revived) is becoming more positive with each upward tick of the overall economy. Stimulus funds provided by both federal and state governments have helped smooth the waters that were so dramatically roiled by the recession.
Although recovery is becoming more visible on the horizon, the sun is not yet shining brightly everywhere. The trend in employment has not turned definitively upward, and fluctuations are expected to continue for a while. The staggering loss of more than seven million jobs since the recession began in December 2007, combined with the millions who are working part time because they are unable to find full-time employment, continue to restrain momentum to a significant degree.
Still, across the nation, the employment drop is growing smaller each month, and since October, the Lone Star State has been showing a positive gain in wage and salary workers. Over the 2009-2014 timeframe, approximately 1.25 million new jobs are forecast to be created across the state, with the services industries accounting for about 54.09% of the gain. The trade and government sectors are anticipated to provide 14.29% and 10.56%, respectively, of the increase in the state’s employment during this timeframe.
Over the next five years, US employment is projected to achieve a 1.39% compound annual growth rate, while Texas will likely realize a 2.18% per annum expansion. The state’s yearly population predictions from 2009 to 2014 are also expected to be on the plus side—nearly twice the nation’s rate of growth over this period—Texas, 1.75%; US, 0.93%.
With Texas attracting so many new people, the need for housing is expanding. This ongoing phenomenon bodes well for the real estate and construction sectors. The pace of building has not been sufficient during the recession to keep up with recent gains; as a result, inventories have been dropping and home builders are reporting more activity. The increasing average price of a home over the past few months suggests a trend toward the restoration of the industry’s health.
While the population growth will bring numerous benefits, the upward swing will also create issues, specifically those related to providing the necessary infrastructure, educational opportunities, health care, and public safety.
Our nation continues to face myriad challenges. As the US economy gains strength in the coming months, full health will likely still be hampered to some degree by tight credit conditions for businesses, unemployment, stressed market conditions, and the temporary nature of fiscal repairs that have been subsidized by stimulus funds.
Each of these factors will affect investment and consumption and may slow the recovery in its early phases. The uncertainty and potential costs associated with health care reform, as well as the ongoing military operations on two fronts, will remain of significant and intense interest.
Fortunately, Texas is faring better than most states as its overall economy has been less damaged, the infrastructure remains sound, the cost structure is competitive, and the economic development and regulatory frameworks are favorable. In addition, some segments of energy and technology-oriented manufacturing, as well as various other industries that have been traditional economic generators for the state, are now approaching the cusp of rebound and will in all likelihood be among the sectors that will lead Texas out of the recession.
Thus, while various issues still confront the US and Texas, the overall economic picture is much improved compared to the not-too-distant past. We are no longer at the brink of financial meltdown, most indictors have turned positive, and the negative pattern in others is much improved. Although 2010 will be a year of transition, it should mark the beginnings of a sustained expansion.
posted @ 08:05 AM CST [link]