The Texas Outlook 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.
posted @ 08:01 AM CST [link]
Friday, November 21, 2003
The US Economic Outlook One of the most important things I do is help people deal with the present and plan for the future by providing insight into the economy. As part of this process, my firm releases an economic forecast every fall. In this week’s column, I’d like to share some of highlights from my analysis of the US economy. Look for further installments (including Texas and metro area forecasts) in the weeks to come.
The nation has faced a number of challenges over the past few years. Among them were the bursting of the stock market bubble in the spring of 2000, the subsequent recession, the traumatic events of 9/11/01, and public awareness of various accounting and corporate scandals that had been occurring for some time. Coupled with these difficulties were the military conflicts in Afghanistan and Iraq along with the continued American presence in those and other countries around the world. Even though the US recession was officially over as of November 2001, the recovery has been the slowest since World War II, but there are now signs of increasing momentum. The third quarter 2003 gross domestic product climb of 7.2% is the best quarterly gain in nearly two decades; it is also the broadest-based expansion in the past three years.
The services-producing sector is leading this advancement, and major contributors to the increase in real gross domestic product have been federal defense spending, nonresidential fixed investment, personal consumption expenditures, and a revival in the tech sector. The comeback in investment is likely to escalate in the future as (1) low interest rates make more projects viable once the spending cycle begins, and (2) the 1999 bubble of Y2K investment enters its replacement phase. Thus, the US economy now appears poised to begin a sustainable rebound.
Industrial activity is now increasing, and there are signs that manufacturing, which has suffered greatly over the past two years, is moving out of the doldrums. Business fixed investment, particularly in computers and structures, and capital goods investment are also showing sparks of new life and energy. The purchase of durable goods will likely see a significant hike, with expenditures on nondurable goods rising at a slightly slower pace.
As the cost of borrowing remains low, the demand for loans to purchase homes continues at a healthy level. Mortgage rates are projected to climb slightly in the coming months as overall interest rates inch up in response to signs of positive growth in the economy. However, the housing market will remain vibrant and stay a bright spot in the economy.
In terms of specific growth projections, the US economy will continue to gain momentum next year as productivity increases and the demand for domestic goods and services remains strong. Real (inflation adjusted in 1996 dollars) gross domestic product (GDP or output) is forecast to achieve a 3.40% growth rate over the next year. Meanwhile, employment (using the wage and salary measure) is predicted to see a 1.40% rate of growth from 2003 to 2004. The population of the US is projected to expand by about 1.00% next year to surpass 294.48 million. Inflation is likely to remain low, and interest rates are expected to stay at a modest level, though they will probably experience a general, upward trend.
All in all, rising productivity is anticipated to lead to greater incomes and profits, which should encourage consumption and investment. As key sectors expand and capital formation resumes, the nation’s economy will continue to gain strength. Although there will certainly be bumps in the upward trend, it appears the US economy has weathered the recent storm and is now poised for a period of renewed vigor.
posted @ 09:00 AM CST [link]
Friday, November 14, 2003
How Did We Do It? The US recently released a truly remarkable statistic. In the third quarter of this year, productivity (output per worker) expanded by more than 8%. When you stop and think about it, that fact is little short of miraculous. In our multi-century history of innovations, urbanization, massive infrastructure projects, industrial revolutions, universal education, information superhighways, steam engines, electricity, and the transcontinental railroad, we have managed to establish an impressive level of production per worker. In three short months with no headline-grabbing advances, we managed to increase that value by one-twelfth. It enabled us to have one of the best months on record in terms of expansion in the Gross Domestic Product despite a stubborn reluctance to hire new employees.
How did we do it? The answer is complex in that there are multiple factors. First, the simple demographic fact that the Baby Boomers are getting older (I am one of them) plays into the process. Because of this phenomenon, we have the most educated and experienced (and, hence, productive) workforce of any country yet recorded. Thus, we start from a good place, which also goes a long way toward explaining how we have seen solid performance (though certainly not this spectacular) in this measure for more than a decade.
Along the same lines, we have experienced a remarkable creation and deployment of new technologies in the recent past. Personal computers, microprocessors, wireless communications, the Internet, and a host of advances in assembly-line functionality have allowed us to do more with fewer workers. Although most notable in manufacturing, this phenomenon is also observed in agriculture, utilities, mineral extraction, and even services. When you combine better equipment with more skilled folks to run it, things can’t help but turn out well.
These two factors, however, only serve to explain a strong trend that is necessary to obtain such a dramatic increase, but are not enough to fully account for it. Another mechanism thrown into the mix is the current stage of the business cycle. As the economy moves from a period of sluggishness to one of expansion, firms are naturally reluctant to go on a hiring binge. Thus, they first try to squeeze everything they can out of their existing labor base. This situation normally persists for only a couple of quarters and always peaks just before the employment phase of the recovery. The unusual level of uncertainty that has been prevalent in the current cycle—fueled first by September 11, then by corporate scandals, and then by the threat and reality of war in Iraq—caused this “jobless” phase to continue for the better (or worse) part of two years. It reached its lofty zenith in the past quarter. Average hours per worker climbed notably; orders went up; and inventories dropped precipitously. Recent numbers indeed suggest that the hiring process has already begun in earnest, but not before the pent up need for it gave us one heck of a kick in output per worker.
Will this growth in productivity be sustained over the long haul? Yes, but certainly not at the pace we recently observed. Are productivity gains a good thing? Without a doubt! Think of what the world would be like if the wheel had never been invented. People expressed concern as the factory systems evolved in 18th century England and mass production revolutionized manufacturing in the US a century ago, but business activity and individual opportunity continued to flourish. At a more selfish level, if I make 10% more stuff and you increase my pay by 10%, my higher standard of living rises without the inflationary downside. One of the primary reasons we were able to enjoy the long period of growth without rising prices in the 1990s was the pattern in productivity. As we move forward in the recovery, which is now gaining strength, the creation of exciting new technologies promises an ongoing pattern of enhanced well-being driven by the engine of productivity.
Simply stated, the stars lined up to give us a quarter for the record books, a pattern we cannot expect to persist as employment begins to rise. Yet the trend from which it sprang is sufficient to enable a healthy economy for years to come.
posted @ 08:41 AM CST [link]
Friday, November 7, 2003
Technology in Texas In the 21st century, technology will continue to grow in its role in our daily lives. The sophistication of the gadgets we carry in our pockets far surpasses anything that could have been conceived of mere decades ago, and the future is likely to hold even greater advancements. The predominance of technology is not limited to the everyday use by consumers, but is increasingly a key engine for growth in national and state economies, particularly Texas.
Technology attracts new businesses to the state, adds to state exports, and represents a key generator of high-paying jobs. However, the recent slowdown has proven without a doubt that technology-related industries are far from an automatic answer to every economic ill. It is important for Texans to understand the impetus for the 1990s technology boom in the state economy and the more recent contraction in order to plot a course toward ensuring Texas remains at the forefront of the new high-tech economy of the 21st century.
High-tech industries in Texas are centered predominantly around two metro areas, Dallas and Austin, although other cities are increasingly attracting technology firms. Dallas has the third largest number of high-tech jobs nationally (following San Jose and Boston). Numerous substantial technology companies, including Texas Instruments and a multitude of telecomm concerns, contribute to the Metroplex’s position as a center for high-tech industry.
Austin has established a technology economy that is predominately focused on three categories: semiconductors and electronics, computers and peripherals, and software. Austin is also in the process of developing more industries with a significant technology component such as biomedical products, film and music, multimedia, and transactions services.
The development of the high-tech economy in Texas can mostly be attributed to the technology boom of the early to mid-1990s. Between 1994 and 2000 alone, Texas high-tech employment increased by 52%. The growth in high-tech industries began to decline in 2000, with the burst of the technology bubble. In 2001, Texas high-technology employment decreased about 1% (3,000 jobs); even more severe declines were observed in 2002, and momentum is only now beginning to surface.
Despite the recent downturn, Texas is still at the forefront of the high-technology economy. Texas ranks second in the country in semiconductor manufacturing employment (48,600), computer and office equipment manufacturing employment (35,800), and data processing and information services employment (45,900). Texas ranks third in software services employment (71,100) and in communications equipment manufacturing employment (33,400).
While the Lone Star State has seen great advancements in the technology-oriented sectors of the economy, this is not a time for complacency. In order to guarantee future growth, workforce development is crucial to meeting the demands of high-technology firms in the state. The recent slowdown led many firms to downsize in order to cut costs, other firms have increasingly sought cheaper labor outside of Texas and the United States. However, as economic recoveries in key trading nations gain momentum and excess capacity conditions are resolved, the demand for tech products will grow. With this growth will come a need for specialized and highly trained employees.
While the Texas Legislature has taken several steps toward enhancing the quality of the workforce, more emphasis on specialized training will be needed in the future. In addition to education and training issues, Texas must increase incentives for high-technology firms to relocate here. The state has made great strides in this direction, but still falls short of what is available in other, competing states in numerous instances. This is particularly crucial in the emerging technologies sectors.
One such sector in which the state is poised to benefit is biotechnology. Texas possesses many of the underlying elements necessary to establish a flourishing biomedical industry. In order to become a major biotechnology center, Texas must leverage the scientific base and become the leader of innovation and commercialization of biotechnology.
Without a doubt, technology companies have revolutionized the Texas economy, particularly for specific regions. The business activity generated by these firms in turn benefits a wide variety of other industries. While investment and employment are down notably from the levels of the late 1990s, technology-oriented firms remain one of the key engines for future growth. In particular, the newer emerging technologies (such as biotechnology, nanotechnology, next generation semiconductors, and others) stand to be the source of tremendous economic gain. It is imperative that Texas be well-positioned to become a center for these new fields.
posted @ 08:39 AM CST [link]