A Look Back at 2011
As we go to press, 2011 is rapidly waning. The past year saw economic recovery, though at a snail’s pace. However, the economy did survive some significant shocks without sliding back into recession. A few of the major events and trends of this most historic year are highlighted below. There was a touch of good news in terms of hiring across the United States, with business leaders and data releases indicating more profits, more spending, more optimism, and (finally) more hiring. Notably, the good news was driven by perceptions that the economy was truly improving in fundamental ways as opposed to some points in the past when temporary stimulus funds, Census efforts, or tax advantages led to some transitory gains. However, mismatches between the skills sets of those looking for work and job requirements are further compounding the problem of slow hiring, and I’m afraid we’re stuck with significant unemployment for a while. Both rounds of our economic forecasting process this year indicated that, despite a slowdown in public employment, Texas is set to remain one of the top-performing areas of the United States. This decades-old pattern stems from a number of characteristics including a friendly attitude toward business, favorable tax structure, lower cost structure, location, natural resources, relatively strong incentive programs, and economic and regulatory policies. These factors enhance opportunities for relocating businesses, expanding operations, and creating jobs—particularly in the growth industries of the future. While business cycles are inevitable, we have the groundwork in place for future economic growth. Texas Legislators dealt with a number of difficult matters this year, one of them being a significant gap between projected revenue and what would need to be spent to maintain the status quo. Virtually every program and agency was subject to a hard look, with cuts falling on many. While a balanced budget was reached (partially by kicking the can down the road and leaving a shortfall as the next session begins), I have grave concerns about some of the decisions (particularly in the areas of education and certain aspects of health and human services) in that they may cause bigger problems (and costs) down the road. The Lone Star State suffered through the worst drought in half a century, with some regions seeing the worst conditions on record. While parts of the United States dealt with devastating floods, Texas crops withered and reservoirs shrank. Agriculture losses were in the billions and many cities were near crisis points. While the fall has brought some relief, we still have a long way to go to recover (and there are indications that this summer could be another dry one). Oil prices were high through the year, sparking a flurry of drilling activity in Texas, but also leading to inflationary fears. While oil is certainly essential to the US economy and higher prices are undesirable from the perspective of national economic growth, I also don’t think high oil prices will be an insurmountable threat to the recovery. Much of the run-up was fueled by political unrest in the Middle East, as many nations went through notable regime changes, the end result of which will not be known for some time. Gold prices also hit historic levels and maintained the longest bull market in history. In April, Standard & Poor’s Ratings Services for the first time began to discuss a potential downgrade of US sovereign debt. In August, S&P downgraded US sovereign debt to AA+ status, shaking confidence and rocking already jittery financial markets. While in reality the threat of default is zero and demand for US debt is the highest since 1995, US debt levels are problematic and must be dealt with. Inflamed rhetoric, demagoguery, and incessant posturing was rampant as Congress and the White House bumbled and stumbled toward a debt ceiling increase, thus avoiding a major disaster of astronomical proportions that was totally of their own making. While the best way to solve the United States’ fiscal problem is a tough question (with many answers of varying merit), one thing is clear: we have chosen to tax about 65 cents for every dollar we spend in the federal government, and that’s simply not a situation we can maintain. The United States was certainly not alone is dealing with debt; problems in Greece, Italy, and other southern European nations are far worse and drew much attention throughout the year. The euro’s stability was threatened and, given the interconnected nature of the business complex, the global recovery was also called into question. While progress has been made toward workable solutions, we are not out of the woods on this one. Another event of 2011 which we will never forget was the earthquake of historic proportions and associated tsunami which devastated Japan. The loss of life and tragic scenes were difficult to comprehend, and returning to normalcy was a mammoth task. While most companies are back up and running and the global supply chain issues stemming from the tragedy are largely resolved, the infrastructure losses were massive and the potential for nuclear energy around the world was given a notable setback. A milestone was passed when the global population topped seven billion, setting off reactions ranging from celebrations to doomsday predictions related to our planet’s ability to support so many humans. Whether you see the population reaching seven billion as wonderful or terrible, one thing is certain: we are reaching these billion-level changes with rapidly increasing speed and some nations will be hard pressed to deal with their burgeoning numbers of citizens. The space shuttle Discovery flew its final mission before retiring to a museum, ending an era which began way back in 1984. The contributions of NASA and the shuttle program to the economy are much larger than most people realize, and it was bittersweet to watch the last shuttle mission come to a safe conclusion. Another instance of closure was when the informal but powerful reign of Osama bin Laden, the mastermind behind the unprecedented terrorist attacks on American soil of September 11, 2001, was finally ended by a team of US soldiers. Several of 2011’s challenges have only been temporarily dealt with (such as the debt ceiling and future payroll taxes), and of course next year will bring its own situations. However, as I’ve said in this column in recent weeks, I expect moderate growth for the US and Texas economies, though I don’t think the path will always be a smooth one.
posted @ 08:01 PM CST [link]
Friday, December 23, 2011
Growth All Around
As I’ve mentioned in recent columns, The Perryman Group’s latest forecast calls for Texas to continue to outperform the nation in the coming years. Unemployment and relatively weak housing markets remain an issue in some areas, but most regions have shown clear signs of improvement. The focus of today’s inquiry is the outlook for the major industry groups within the state. Fortunately, Texas enjoys a highly diverse economy with a significant presence across multiple sectors. This characteristic is one of the keys to being able to absorb national and global disruptions in a relatively effective manner.
Several overarching trends are shaping my projections for growth over the next five years. Improvement in the global economy will benefit the state’s large base of export-oriented businesses, which are expected to see increasing activity. These include, among others, agriculture (which should see comeback from the devastating drought losses), machinery, refined petroleum products and chemicals, computers, telecommunications equipment, and electronics. Though the industry is cyclical, continued high prices will keep oil and gas exploration and production activity at relatively strong levels, enhancing growth in a number of regions. The Eagle Ford Shale in southern Texas is adding notably to an already vibrant sector. Continued expansion in the role of the Texas ports is also generating a notable stimulus.
The bottom line is that a modest upward trend is expected to occur through the short-term forecast horizon, though uncertainty and other drags on the national economy, as well as public sector retrenchment, will work to slow momentum. The Perryman Group’s most recent forecast calls for growth in output (real gross product) in Texas over the 2011-2016 timeframe of a 4.29% annual pace, while employment expands by 2.22% per annum. (We use compound annual growth rates, meaning that they reflect changes in the base from which growth is calculated.)
Looking first at output (real gross product), growth is projected to be broad based, with all segments likely to expand. Durable manufacturing is forecast to expand at a rate exceeding 6% over the 2011-2012 timeframe, aided by increases in international demand. Other sectors expected to see rapid expansion include services (especially health care and professional), mining (primarily oil and natural gas), and nondurable manufacturing; each of these industry groups is forecast to see output growth exceeding 5% over the next year. Even over a five-year time horizon, durable manufacturing and services are likely to maintain a pace of growth exceeding 5% per year through 2016.
In terms of job growth, the state’s large services sector (which currently comprises more than 39% of all jobs) is expected to see the fastest rate of expansion over the next few years. Other segments likely to experience particular strength over the next year are mining and construction, as housing development resumes a pace indicative of underlying population trends and commercial activity begins to expand. The government sector is the only one forecast to continue to retrench over the next year, though some hiring is expected beyond that time. Looking over the next five years, wholesale and retail trade joins services and construction with job growth at a compound annual rate of 2% or more.
As noted, the fact that the Texas economy includes a diverse mix of industries is a major reason for its relative economic stability and consistently positive growth expectations. In some cases, these industries are “luck of the draw” such as mining. In others, such as the multi-faceted technology segment, many have worked hard and shown great vision to establish Texas in a position at the forefront of growth. Business cycles are inevitable, but at least in the Lone Star State, we have a variety of sources for future jobs.
posted @ 07:55 PM CST [link]
Friday, December 16, 2011
Economic Forecast for Texas’ Largest Cities
We have recently completed our annual short-term outlook for the United States, Texas, and the state’s metropolitan areas. While I don’t expect things to smooth out entirely quite yet, on balance, I think our big cities will see notable growth over the next five years. Here is a look at The Perryman Group’s latest short-term (2011-2016) forecast for Texas’ largest cities.
The Austin-Round Rock-San Marcos Metropolitan Statistical Area (MSA) has recently experienced employment growth, though it has been uneven and notably slower than in the mid-2000s. The area’s highly educated workforce and base of growth industries will continue to give the region a competitive advantage in attracting desirable corporate locations.
The Austin area experienced a gain in total nonfarm employment of 13,300 from October 2010 to October 2011 (according to data maintained by the Texas Workforce Commission), and the current unemployment rate remains significantly below that of the state or nation. The Perryman Group’s latest forecast indicates that the economy of the area will continue to strengthen. Growth in real gross product (RGP or output) of 4.49% is likely, and wage and salary jobs are projected to expand at a 2.43% compound annual pace, resulting in the addition of some 104,100 net new positions.
From 2011 to 2016, the Dallas-Plano-Irving Metropolitan Division (MD) economy is expected to see moderate, though still bumpy, growth. Over the past year, the Dallas-Plano-Irving MD added some 32,400 jobs, but more recently, jobs have been shed in some sectors. Over the next five years, all major industrial sectors are forecast to expand, though interim periods of job losses are likely, and the area is likely to emerge as one of the strongest in the nation.
The Perryman Group’s near-term forecast for the Dallas-Plano-Irving MD calls for moderate growth in all key economic indicators over the five-year timeframe. Real gross product is expected to grow at a 4.41% rate, and some 270,000 new wage and salary jobs are projected to be created over the period.
The Fort Worth-Arlington MD has recently experienced significant hiring, with total nonfarm job gains of 5,400 between September 2011 and October 2011 and an increase of 16,400 over the year. Particularly strong hiring has occurred in the professional and business services; leisure and hospitality; and trade, transportation, and utilities industry groups.
The Perryman Group expects improving conditions in the Fort Worth area over the next few years. The Barnett Shale continues to be a source of economic stimulus, and anticipated rising natural gas prices in the coming years will generate employment and investment opportunities. Real gross product (RGP or output) is projected to see a 4.38% compound annual growth rate in the Fort Worth-Arlington MD, while wage and salary employment expands by 2.29% per annum over the short-term horizon.
The El Paso MSA has experienced uneven performance, with expansion in some industries offset by weakness in others. Following a fairly strong recovery from late-2009 through 2010, job gains have more recently leveled off. Fort Bliss and associated activity give the regional economy a stable source of stimulus. In addition, strong ties with Mexico enhance a number of business operations, with improving conditions expected to lead to long-term gains.
From 2011 to 2016, the El Paso MSA is forecast to experience growth in real gross product at a 3.81% compound annual rate. Wage and salary employment is expected to grow at a 2.03% annual pace, reaching 343,700 by 2016.
Total nonfarm employment in the Houston-Sugar Land-Baytown MSA expanded by some 23,300 between September 2011 and October 2011 and year-over-year gains were 79,500, continuing the upward trend in employment which began in early 2010. Half of the major industry groups added 10,000 or more net new positions, with the largest number in the professional and business services category.
While cyclical by nature, the oil and gas industry is generating substantial activity. The Port of Houston, together with other regional facilities, provides a source of stimulus which will only be enhanced as global economies improve. The area’s strong health care base and various research and technology-oriented businesses are other reasons for the Houston area’s strong economic performance.
These strengths of the area economy set the stage for healthy growth through the short-term forecast horizon and beyond. The Houston-Sugar Land-Baytown Metropolitan Statistical Area is expected to see growth in wage and salary employment at a 2.30% compound annual rate during the 2011-2016 period, placing it among the best-performing areas of the country.
Relatively strong growth is projected for the San Antonio-New Braunfels Metropolitan Statistical Area, with the services sector dominating expansion. Although several segments of the economy have been shedding jobs recently, these losses have been more than offset by gains in other industries, resulting in a total year-over-year increase in total nonfarm employment in the area grew of 8,100. Unemployment in the area remains below the levels of the state and nation.
The San Antonio area’s large and growing base of education, health care, military, and related activity will serve as a source of long-term expansion. While other key industries (such as tourism and manufacturing of automobiles and aircraft components) are more subject to business cycles, improvement in national economic conditions will generate future growth. Add to this foundation expansion in a number of industries ranging from biotechnology to financial services, and the stage is set for growth for many years to come. The Perryman Group’s most recent short-term (2011-2016) forecast calls for expansion in output (real gross product) in the San Antonio area at a 4.12% annual pace, while wage and salary employment is likely to grow at a 2.25% rate.
Business cycles are inevitable, and the economy’s performance is likely to remain uneven for some period of time. Even so, Texas’ largest metropolitan areas are expected to see significant growth over the next five years at rates outpacing most of the rest of the nation.
posted @ 08:02 PM CST [link]
Friday, December 9, 2011
A Warning Shot
Standard & Poor’s Ratings Services placed its long-term sovereign debt ratings for 15 eurozone nations on CreditWatch with negative implications earlier this week. As the pre-eminent agency monitoring the default risk associated with debt of various kinds, S&P’s action garnered worldwide attention, moved equity markets, and sparked reactions by many European heads of state (despite the lost credibility from the US downgrade in the Fall which financial markets largely ignored). There are clear parallels to the situation faced by the United States which led to a similar action by S&P. In April, the ratings agency pointed out US strengths such as its high-income, highly diversified economy, and track record of supporting growth while containing inflation. However, the lack of agreement among US policymakers on how to reverse fiscal deterioration or deal with longer-term fiscal pressure and the fact the US deficit has risen significantly as a percentage of gross domestic product led S&P to revise its outlook for the United States downward. In its December 5 statement, S&P noted five factors in the eurozone causing “systematic stresses” and putting downward pressure on the credit standing of the eurozone as a whole. These factors include tightening credit conditions, higher risk premiums on a growing number of sovereigns, disagreement among policymakers, high indebtedness, and the risk of an economic recession in 2012. Reaction to the CreditWatch notice was mixed. Some European leaders said the S&P action would have no bearing on their actions; others seemed to view it as a positive development in that it increases the sense of urgency for the European Union (EU) summit (upcoming as we go to press on December 8 and 9). The importance of the meetings was underscored by US Treasury Secretary Timothy Geithner’s multiple visits to Europe over the past few months. Given the extent of linkages among economies around the globe, Americans have a vested interest in what goes on in Europe. If debt problems there spiral out of control, export-oriented business will clearly suffer, as will entire industries such as airlines. Financial markets will also deteriorate, of course. French President Nicolas Sarkozy and German Chancellor Angela Merkel have proposed a plan which includes provisions such as penalties for euro states with excessive deficits. The idea is to restore confidence and calm markets. Italy appears to have staved off a looming crisis with an austerity plan; rates on Italian bonds dropped notably on news of the prime minister’s proposed course of action. The incoming Spanish prime minister appears on board for change as well. However, there are other nations (such as Britain, Ireland, and the Netherlands) which are less inclined to a sweeping move such as an amendment to the EU’s charter. The leaders of the world’s largest economies must take effective action toward a long-term solution to the inextricably linked problems of debt and deficits. In many nations, underlying fiscal imbalances are a very real threat to long-term prosperity, and all options (including amending the EU charter) should be on the table. Solutions will not come easily and even after implementing sound policy, it will take time for things to begin to turn around. Debt issues must be dealt with strategically and systematically over an extended period of time, but the consequences of failing to solve these underlying problems are simply too grave to ignore. All signs are pointing to the urgency of action in Europe (and, as a matter of fact, in the United States), and S&P’s action is nothing more than a reflection of the fact that it’s time for real progress.
posted @ 07:55 AM CST [link]
Friday, December 2, 2011
Buying Bonanza!!!
I am going to begin with a brief moment of personal privilege. I was more than humbled and overwhelmed last week to be named “Texan of the Year” by the Texas Legislative Conference. It is a rare day that I am speechless, but this one came pretty close. I want to thank everyone who has sent good wishes to me and my family. I am sure I will stop smiling at some point, but it won’t be any time soon. I will, however, get down to business. During normal economic times, an estimated 70% of the US economy is driven by consumer spending. As household outlays go, so goes the economy. It is little wonder, therefore, that the level of retail sales is monitored so closely. The news so far for Black Friday and Cyber Monday sales is nicely positive, a welcome relief over the past several years. Black Friday has become part of our popular culture and hitting the stores on that day is a holiday tradition for many families. Although the term originally referred to a horrific day for the stock market back on September 24, 1864, the phrase has been describing the day after Thanksgiving since the late 1960s. Many view Black Friday as the time when retailers begin to show a profit or “go into the black” for the year. A survey for the National Retail Federation (NRF) conducted by BIGresearch indicates that US shoppers likely spent a record $52 billion, with 226 million shoppers visiting stores and websites over the Black Friday weekend (Thursday through Sunday). Almost one fourth were at the stores by midnight, either waiting for stores to open or shopping Thursday evening. Retailers did their part by opening earlier and putting forth aggressive bargains to tempt the willing. No matter how you measure it, this year is a notable improvement over last. Shoppers increased from 212 million to 226 million, total spending set a new record, and the amount spent per shopper rose from about $365 last year to $399 this year. A second source of information, ShopperTrak, which tracks foot traffic and actual sales through some 50,000 retail outlets across the US, also found better results, with sales up 6.6% over the same day last year. Interestingly, the NRF/BIGresearch survey indicates male shoppers spent an average of $484 each (with $202 of it online), while females spent $317 (with $102 online). For those with income levels less than $50,000, the total spent was $274, while those with incomes over $50,000 spent $493. Persons in the northeast spent somewhat more than those in other regions. Clothing was the most frequently purchased category, followed by consumer electronics/computers and toys. Department stores were most often on the list of venues, with almost 49% of shoppers indicating they would visit such stores. Next on the list were discount stores, with nearly 38%, followed by online (with more than 35%). The big question, of course, is how the rest of the shopping season will pan out. ShopperTrak data indicates this November data was better than last year’s. Add to that a better Black Friday weekend, and the question becomes will we actually see larger sales for the year or were shoppers just making their purchases earlier. One question the NRF asked was what percentage of shopping had been completed. A full 39% of those surveyed responded that they were only 10% (or less) through, and less than 8% indicated they were finished. This is certainly promising for retailers, which historically (according to ShopperTrak) rack up 20% of their sales for the year between Thanksgiving and Christmas. Economic growth remains sluggish, and the willingness of consumers to spend is clearly good news. While certainly no magic answer for lasting prosperity (which will require dealing with uncertainties such as the debt situation), holiday gifting is already bringing smiles.
posted @ 08:10 AM CST [link]