Interesting Numbers As many of you know, my firm is in the midst of a pro bono economic development analysis for Texas and its regions. It is part of a mandate (unfunded) from the legislature to the Texas Department of Economic Development. It has been and continues to be a fascinating experience.
Even after more than 20 years, number junkies like me enjoy new insights into our great state and how it all hangs together. It also gives me a chance to talk to a bunch of people about Texas, something I do all the time anyway. I learned a long time ago that what people say is at least as important as what numbers tell me, but you can’t ignore the cold, hard facts in black and white.
My latest foray is to develop detailed net export numbers for the state by industrial category. These numbers tell us which goods and services we produce more of in Texas than we need, leaving us something to export. They also identify the categories where we use more than we produce (we’re net importers). This analysis provides useful insights into both current strengths and potential opportunities. I am in the process of deriving similar measures for other states and all of the metropolitan areas and planning regions in Texas. The resulting comparisons will tell us even more, but the numbers themselves are quite enlightening in their own right.
Texas industries with net export potential send about $90.1 billion per year in net goods and services out of the state (thus bringing money in), or about 15% of private sector gross state product (in constant 1996 dollars). Over 40% of this total is in oil and gas extraction, indicating that much more diversification in our export base can still be accomplished.
About $7.8 billion is in distribution, a number that has been enhanced by the reforms in trucking regulation a few years ago and which can be further stimulated by specific policy initiatives in the future. About $11.8 billion in net exports occur in manufacturing. This total is spread over a relatively narrow range of industrial sectors, including chemicals, petroleum refining, leather products (a small amount in absolute terms), and electronics. We are close in a few other areas, but not quite there.
Texas is also a net exporter of transportation (particularly air, pipelines, and transportation services), communication services, and utility services (primarily natural gas). These findings bode well for us as a center of activity and a viable location for business activity, particularly when combined with the surplus in distribution.
There are, however, some obvious difficulties as well. While Texas is a net exporter of agricultural products, we are a net importer of both agricultural services and food processing. These shortfalls represent billions of dollars in output each year which would accrue to the benefit of rural Texas. We are also net exporters of hotel and lodging services and amusements. Thus, while tourism is big in Texas, on balance we appear to be spending more elsewhere more than we’re getting back. There are also several categories of manufacturing where we have opportunities for improvement, including metal fabrication, machinery, transportation equipment, and instruments. Despite some major centers of activity, we are a net importer of medical services (though, for better or worse, our lawyers are net exporters).
It should also be noted that individual areas exhibit different characteristics than the state as a whole. Austin, for example, is a large exporter of machinery (primarily computers), but imports its oil and food. Amarillo and Abilene are net exporters of both agricultural services and food processing, thus exhibiting some success in the value added opportunities from farming and ranching. (I am doing the urban areas in alphabetical order and have thus far only made it through the “A’s.” I’m sure I’ll have more to offer later.)
In short, these new numbers tell us that we are doing well in many areas, but can do much better in others. The export production from our net export industries contributes more than 500,000 high-paying jobs to the Texas economy, with average wages about 75% above the norm. By pinpointing the successes and failures by geographic regions, we can begin to formulate more effective strategies at the state and local levels for future prosperity.
The Truth About Electric Competition in Texas As of January 1, 2002, a substantial portion of the Texas electric utility industry was opened to retail competition, the result of the implementation of the Texas Electric Choice Act (Senate Bill 7). The ensuing few months have seen seemingly unceasing headlines about the demise of Enron, allegations regarding possible market manipulation in California, constant calls for investigations out of Washington, and a healthy dose of banter in Texas politics about utility costs and policy. All of this fog can hide the most critical questions about electric competition in Texas: is it working? and are we benefiting from it? The answer to both of the queries is unambiguous and unequivocal—Yes! and Yes!
Although only a few months have passed, we are already seeing the benefits of freeing the market for electricity. The 6% savings mandated by law for residential and small commercial customers is just the tip of the iceberg of potential benefits of opening the power purchases to the workings of supply and demand. Additional rate reductions have been experienced by many customers who have switched to alternative providers. In fact, approximately 10% of the eligible load has already been converted, with those taking advantage of the ability to shop for a retail electricity provider ranging from the state’s largest power users to governmental units to individual residential customers. The development of wind power and generating plants with enhanced environmental properties has also been markedly accelerated.
Power costs are somewhat higher than they have been at points in the past for one simple reason: fuel costs are higher. That would be the case with or without competition. The real issue, despite all the campaign rhetoric, is simply that electric bills are lower today than they would be in the absence of competition. And, although the market will fluctuate with supply and demand, overall prices will remain lower on an average basis.
In order to assess the magnitude of these gains, I estimated the total savings by category (residential, commercial, industrial, and public sector). These savings are typically spent for other types of goods and services, which in turn generates additional economic activity. Similarly, industrial users and public entities are able to deploy additional reserves to increase production and provide needed services. My firm has evaluated the initial benefits of electric competition in great detail, and results for all major categories of customers are being released this week. For now, I will just hit the high points.
The total economic impact of savings to residential, commercial, industrial, and public sector customers are estimated to include $716.3 million in annual total expenditures and more than 5,280 permanent jobs. These economic effects will continue to grow over time.
The construction of generation facilities generates encouraged by deregulation also sparks a substantial amount of business activity in the state. During the four-month period of January through April alone, the ongoing construction led to overall economic effects totaling $2.9 billion dollars in total spending and 25,562 person-years of employment. Since Senate Bill 7 became a reality in mid 1999, the overall benefits from power plant development have been $32.4 billion in total spending and more than 285,000 person-years of work for Texas employees. Construction benefits will continue to accrue to the state economy on an ongoing basis in response to growing demand.
Like anything new and different, electric competition is subject to substantial scrutiny. There have, of course, been some transitional problems. This is not uncommon, or even unexpected, given the magnitude of the industry restructuring. The experience of the electric utility industry has generally been less disruptive than that of other industries, and, in fact, has been far smoother than that of other states. The problems experienced to date have been isolated, transitory issues have been (or soon will be) resolved. I’m not trying to minimize the matters in any way; by the same token, they shouldn’t be blown out of proportion at the expense of the gains to the economy and the environment that are piling up every day.
Because competition in Texas was birthed in the midst of an historic corporate demise and a rancorous political season, the real story is often lost in a sea of extraneous information. But the bottom line is quite simple: competition is working. Period!
Signs of Life I am often asked if there are any obscure indicators I look at to gauge the future of the economy—the kinds of things that only an economist could love. I do have a few that rarely, if ever, make the headlines. They can, however, tell a lot about what’s in store.
Back when oil was king and I was a baby economist, I came to rely on the “shiny rig indicator.” As I ambled around Texas, I discovered that if oilfield equipment was being sandblasted, drilling would soon follow. That one still works. In the labor market, I always pay attention to the “quit rate.” If people are voluntarily leaving their jobs in search of greener pastures, things are looking up. To get a handle on traditional core manufacturing industries, I am fond of tracking patterns in freight car unloadings. If raw materials and intermediate goods are being moved around and about, you can safely bet stuff is being made.
You may well have noticed a pattern here. It’s no big secret. I tend to follow those measures that are a few layers below the radar screen and a few steps before the final product. They are leading indicators, but many of them are not important enough for most folks to include in any kind of formal index.
Believe it or not, I mention all of these things about oil, jobs, and traditional manufacturing in order to talk about high tech. For the first time in the past eighteen months, my favorite indicator of the prospects has microelectronics turned decidedly upward. In this case, I like to watch the orders for high-tech manufacturing equipment (the machines that make the chips rather than the chips themselves). When these orders go up (which they did by a bunch last month), production will soon be on the rise. This renewed strength is good for Texas (especially Austin). As this sector comes back, we will be left with only telecommunications equipment as a significant lagging segment of the emerging recovery (my subterranean measures there suggest that we are still a few months away from anything exciting).
As microelectronics, the great symbol of our diversification in recent years, rises from the ashes, a word of caution is in order. Despite its inherent volatility, this sector has been a source of enormous growth in recent years. When we next find ourselves searching for signs of recovery (which will hopefully be a long time from now), however, we are likely to see that chips have been morphed into the brave new world of biotechnology. We can only continue to make them smaller and faster if we adopt new technologies which abandon lasers and use molecular processes. This area is only one of many now on the horizon. What is considered “high tech” by one generation is almost inevitably a routine commodity to the next.
The point is simply that, while Texas did an excellent job of becoming a leader in microelectronics, a challenge lies before us to ensure we have similar success with the next wave of technological innovation. A lot of creative energy is going into this effort on many fronts, but we are not the only state to recognize both the potential payoff and the sense of urgency.
For now, however, we can take comfort in lesser-known measures of great import. Rigs are being shined, people are changing jobs, freight cars are being unloaded, and—finally—machines to make chips are being ordered. Full momentum has not yet arrived, but you might as well pop a cork.
Doing It Right All of us want to see our communities prosper in the future. It not only enhances our own quality of life, it also creates the opportunities that keep our kids and grandkids around (even with five teenagers, I still regard that as a good thing).
There is, however, widespread disagreement on the best way to go about achieving that aim. The issue is how to balance the need for economic expansion with the corresponding challenges of increasing congestion, eroding environmental quality, and potentially widening gaps in income. There is no magic answer, but a recent study sheds some useful light on the subject. In particular, it ranks the top ten factors in site selection from a very reliable source, the companies that actually chose a location in the recent past and those in the process of making a selection at the moment.
This “from the horse’s mouth” information reveals, first of all, that the workforce is the most important factor, with the related category of education and training availability not far behind. Demographic patterns have blessed Texas with an abundant labor pool, but our training leaves something to be desired. While we have many outstanding educational institutions, we lag behind in several key training and income categories. With the untimely death of our Smart Jobs program, it is imperative that we create a new job-training mechanism that will match up to others around the country.
Additional areas which recorded high marks were availability of facilities, utilities, overall business climate, transportation, and access to markets and suppliers. No big surprises here, and Texas generally stacks up well. We have a good transportation system, although growth and inadequate funding are posing notable challenges for the future. New and innovative approaches, such as the Trans Texas Corridor, are being implemented to address these concerns. Our business climate is well regarded in most respects; we have abundant electric power supplies, competitive rates, and a retail competition plan that is the envy of the country. Our supplier and market access is exceptional, and we are aggressively addressing key environmental concerns.
The eighth item on the list was incentives. The fact that they rank so low led many to claim they were not important at all. That claim is, quite simply, wrong. Incentives, as much as I don’t like them in principle, are absolutely crucial in the final stages of most site selections these days. The point of the rankings is that if a community is not a desirable place to work, with the attributes a business needs, it will never make the “short list” and, thus, never have a chance to even talk about incentives. The first key to success for any area is to develop a local workforce, infrastructure, and business climate that encourages firms to invest locally. The second key is to be able to compete effectively for the opportunities that will then come your way. Like it or not, that means incentives.
Another issue along these lines is the use of economic development funds. Hundreds of Texas communities have voted to tax themselves in order to have the needed funds to promote long-term growth. As budgets have tightened over the past year, however, all too many cities have dipped into these funds for basic municipal services. This practice undermines the purpose for which the legislature set up this opportunity, and literally threatens the entire pool (several hundred million dollars per year) of locally-controlled funds which are essential to competition. If we are to remain in the game, we must play by the rules.
In short (something I know a lot about), make your community a strong place to live and work, marshal you resources for economic development, and use them appropriately and wisely. In shorter, do it right!
Wisely Sitting Tight Things are not looking so good in the Middle East as I sit here today. Efforts to force a peace process have shown limited promise, and it’s almost sure to get worse before it gets better. And of course tension in the Middle East creates tension in the market for oil. Prices jump and bump at every new bit of information flowing in from halfway around the world. But even though the situation in the Middle East remains uncertain, Texas oil companies aren’t rushing out to fire up the rigs.
There’s an old saying I’m sure you’ve heard: once bitten, twice shy. Seems like it even found its way into a hit song not too long ago. It can be applied to all sorts of situations, but it basically deals with lessons learned. What’s going on in the energy sector reminds me of that saying, even though I hesitate to use the term “shy” in connection with an industry so full of risk-taking, high-rolling characters.
Here’s the situation. We’re sitting on plentiful supplies of oil, and our nascent economic recovery has yet to show consistent signs of picking up a lot of steam. As the largest consumer of oil on the planet, the economic health of the US is vital to sustaining demand. Until it’s clear the slowdown is history, producers are going to continue to sit back and watch. They’ve been bitten in the past, and they’re somewhat shy.
About 20 years ago, we were coming off the peak of the Oil Boom (generally known outside of Texas as the Energy Crisis) and oil prices were approaching $40 per barrel. About 10 years ago, there was a spike at one point during the Gulf War when they actually broke the $40 per barrel mark. Today’s $20-$25 per barrel price is nowhere near these levels. Although we’ve seen prices edge up, it’s still not a huge increase by historical standards. Moreover, there’s every reason to believe some of the price pressure is temporary.
Natural gas is a different story. Because it’s not something we can easily import, it’s not affected by political tensions to the degree oil is. Currently, drilling for natural gas is picking up as we work off the leftovers from heavy production over the past couple of years and a mild winter. Many existing wells are nearing depletion, and gas prices are up significantly. So there has been some increase in natural gas drilling activity, but it’s a relatively mild upswing at this point.
I, for one, am glad to see this somewhat cautious response. A look back at the roller coaster ride the industry has taken is all it takes to feel relief at the current slow-and-steady, wait-and-see, look-before-you-leap mentality. The time isn’t right for a rush to drill, drill, drill. If peace breaks out in the Middle East, we’ll see oil prices take a significant (although, in my opinion, only temporary) tumble. We don’t want a huge buildup that only makes sense at today’s prices, because tomorrow may see them off by 20% (or more). Better to sit tight and wait.