The Texas Economic Climate The signs are now unambiguous: the best of the U.S. economic recovery is behind us. Gross na­tional product grew at a rate of only 2. 7 percent in the third quarter of 1984, after posting 10.1 and 7.1 percent quarter growth rates in the first and second quarters of the year. Industrial production decreased 0.6 percent in September after increasing for twenty-one consecutive months. Although retail sales and housing starts bounced back in September after a slow summer, it appears that much of the pent-up demand for houses, autos, and durable consumer goods that was unleashed by falling interest rates in 1982 and 1983 has been satisfied. Business investment remains very strong, but it will certainly slow as production capacity reaches desired levels and business planners realize that the overall growth rate of the economy is slowing. Finally, the high-priced dollar and a growing trade deficit continue to retard economic growth. One positive result of the, slowdown of U.S. economic growth is falling interest rates as the de­mand for credit decreases and the Federal Reserve loosens monetary policy with reduced fears of in­flation. Most of the monetary aggregates are now at the lower end of the Federal Reserve's target range and this gives the Federal Reserve consider­able leeway in loosening the money supply. • As of late October, the prime rate stood at 12.0 percent and has decreased about 1 percentage point in the past month. Conventional fixed rate, thirty-year mortgage rates are now running around 14.05 percent-down from a peak of 14.7 percent in August 1984. It is unlikely, however, that mortgage rates will reach the 12 percent level that is necessary to unleash a new upsurge of housing construction in the foreseeable future. Unfortu­nately, even with slowing economic growth, the continuing competition between government and private demands for credit will keep interest rates relatively high in comparison to inflation. Texas Developments Paralleling national trends, the rate of Texas economic growth has also slowed in recent months. After peaking at a 5.0 percent growth rate in the fourth quarter of 1983, state nonfarm employment growth has slowed to 1.8 percent (see figure 1). Be­cause of continuing sluggishness in the energy in- Figure 1 Texas and U.S. Nonagricultural Employment (Seasonally adjusted) Percentage change at annual rate 6 19 83 tdtl I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I IUr dustry, the strength of the Texas economic re­covery never matched that of the United States as a whole. In addition, the current slowdown in state economic growth has been more dramatic than that experienced in the nation. Finally, after thirteen months of recovery, Sep­tember statewide seasonally adjusted nonfarm em­ployment, at 6,362,500, has surpassed its prereces­sion (March 1982) peak of 6,349,100. Still, the Texas economic recovery has been extremely un­balanced. While employment in service-producing sectors has reached record highs, employment in goods remains well below its late-1981 peak. Among goods-producing sectors, employment in mining (dominated by oil and gas extraction) and employment in manufacturing have experienced moderate rates of recovery over the past year, but construction employment continues to slide because of an overbuilt office market in Houston and a glut of multifamily housing in Dallas-Fort Worth, Houston, San Antonio, and Austin (see table 1 ). Oil Prices and Drilling After a year of tentative recovery, the last development the state energy industry needs is another round of falling oil prices. In recent weeks, however, cuts in oil prices by Norway, Britain, and Nigeria appear to be paving the way for another Table 1 Texas Nonfarm Employment Sector September 1983-September 1984 (In thousands) Sept. Sept. Percentage Sector 1983 1984 change Goods-producing 1,647.2 1,673.8 1.6 Mining 258.1 271.9 5.4 Construction 425.3 403.4 -5.2 Manufacturing 963.8 998.5 3.6 Service-producing 4,562.3 4,693 .2 2.9 Transportation and public utilities 373.6 384.7 3.0 Finance, insurance, and real estate 395.3 405.7 2.6 Trade 1,566.6 1,605.3 2.5 Services 1,192.2 1,235.0 3.6 Government 1,034.6 1,062.5 2.7 Total 6,209.5 6,367.0 2.5 Source: Texas Employment Commission. cut in the official OPEC price of crude oil by as much as one to two dollars a barrel. What is especially unsettling about the recent period of oil-price weakness is that it is occurring during the fall -a time when the expectation of a winter upturn in energy demands normally tends to firm up oil prices. Thus, even if OPEC does not cut its oil prices before the end of the year, re­newed pressure to cut prices will develop in the spring as energy demands decline and the world crude oil glut becomes more apparent. Uncertainty about the future path of crude oil prices has inhibited the normal fall and winter rebound in drilling activity. The U.S. rotary rig count started to rebound in May 1984 after a greater than normal decline in drilling activity in the first four months of the year. From April to May, the seasonally adjusted rig count increased by 10.3 percent from 2,186 to 2,411. Since May, however, the rig count has increased by only 2.4 percent and stood at 2,470 in September. The weak performance of the drilling industry in the summer of 1984 has caused us to reduce sharply our projections of the U.S. drilling activity. In August, a U.S. rig count of 2,600-2,650 seemed attainable for 1984. Now, a figure around 2,400­2,450 seems more reasonable. For 1985, a 17 per­cent growth rate in the rig count to 2,800-2,850 Figure 2 Texas Index of Leading Economic Indicators (January 1981=1.00) 1.06 1.04 1.02 1.00 0.98 0.96 0.94 0.92 0.90 0.88 ) 0.86 1981 1982 1983 1984 tdtl I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I IUr tftl I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I l IDr Figure 3 Nonagricultural Employment in Four Largest Texas Metropolitan Areas (Index: January 1981=1.00) / 1.20 Austin / --, .,,,.,,. 1.15 ,, # ,,.. --San Antonio -~ -"" _,,, ----­1.10 -""' ,,,,. ---­ """" ----::--.. ­ . /.-·­ .,,,,------•" .---­ 1.05 ----...... -Dallas-Fort Worth Houston1.00 1981 1982 1983 1984 Table 2 Nonagricultural Employment and Unemployment by Metropolitan Area Nonagricultural employment Unemployment (thousands) rate Area August 1984 August 1983 Percentage change August 1984 Abilene 57.0 56.9 0.2 3.8 Amarillo 79.4 76.3 4.1 4.2 Austin 296.7 274.9 7.9 3.4 Beaumont-Port Arthur-Orange 141.3 138.2 2.2 10.3 Brownsville-Harlingen-San Benito 62.2 60.5 2.8 12.7 Bryan-College Station 44.5 43.0 3.5 3.7 Corpus Christi 129.4 128.5 0.7 7.9 Dallas-Fort Worth 1,663.4 1,575.6 5.6 3.5 El Paso 166.9 161.5 3.3 9.7 Galveston-Texas City 68.2 65 .9 3.5 9.1 Houston 1,519.0 1,487.4 2.1 6.1 Killeen-Temple 63.9 60.5 5.6 4.9 Laredo 30.4 28.5 6.7 15.2 Longview-Marshall 67.4 66.7 1.0 7.4 Lubbock 90.2 88.6 1.8 4.9 McAllen-Pharr-Edin burg 76.1 74.3 2.4 19.9 Midland 57.2 49.9 14.6 3.6 Odessa 60.0 54.4 10.3 4.3 San Angelo 37.6 37.0 1.6 3.8 San Antonio 455.5 432.6 5.3 4.7 Sherman-Denison 35.0 34.4 1.7 4.5 Texarkana 47.5 45.9 3.5 7.5 Tyler 58.5 56.4 3.7 4.8 Waco 75.9 73 .3 3.5 4.2 Wichita Falls 53.3 52.2 2.1 4.4 Total Texas 6,345.4 6,126.6 3.6 5.6 Source: Texas Employment Commission. tftl I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I l IDr ltl I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I IJDr seems possible with constant oil prices. If oil prices are cut either now or in the spring of 1985, the 1985 rig count will be significantly lower. Outlook for 1985 Now that 1984 is drawing to a close, it becomes interesting to predict how the Texas economy will perform in the coming year. The best guess is that if oil prices remain constant, the Texas economy will continue to experience slow but steady recov­ery as the state's energy industry continues to recover from extremely depressed levels. If oil prices are cut by one to two dollars a barrel, the recovery will be more anemic but will continue. If oil prices are cut by more than two dollars, perhaps by five dollars a barrel or more, the state's econo­my could be brought to a ~ear recession. The Bureau of Business Research index of Texas leading economic indicators continues to be stuck around 0.91 (January 1981 = 1.0). In recent months, the index fell from 0.92 in May 1984 to 0. 90 in July and then recovered back to 0.91 by September (see figure 2). Among the five com­ponents of the index, manufacturing hours and real Table 3 Components of the Texas Index of Leading Economic Indicators (July-September 1984) Measure July August September Manufacturing weekly hours 41.8 41.9 41.7 Retail sales (billions of 1967 dollars) 2.51 2.56 2.60 New housing per­ mits (thousands) 14.59 14.53 13.65 U.S. wellhead price of oil (1967 dol­ lars per barrel) 8.34 8.32 8.33 Initial claims for un­ employment insur­ ance (claims per thousand employees) 9.26 9.66 8.97 Leading indicators index (January 1981=1) 0.90 0.90 0.91 Note: All figures are seasonally adjusted. Sources: Texas Employment Commission, U.S. Bu­reau of the Census, and U.S. Department of Ener­gy. oil prices have remained relatively flat over the past three months, while new housing permits have declined and retail sales and new claims for unem­ployment insurance have improved (see table 3). The leading indicators series thus reinforces the view that the Texas economy will continue to im­prove in coming months, but an economic boom is certainly not imminent. Measures of Employment and Unemployment The most accurate and up-to-date measures of economic activity at the regional level are measures of employment and unemployment. Two sets of current indicators are available: the Bureau of Labor Statistics (BLS) monthly report on wage and salary employees at nonfarm establishments (obtained from a survey of establishments) and the BLS monthly estimates of total labor force, em­ployment, and unemployment (obtained from the current population survey). Of these two measures, the employment data from the population survey are more comprehensive and up-to-date, while those from the establishment survey are probably more accurate. Both measures reached a prereces­sion peak in March 1982, but while the establish­ment survey series showed a drastic decline in employment through the middle of 1983, the population survey series indicated a slight decline through late 1982 and then showed strong growth afterwards. Over the past year (September to September), the population survey series has increased 7.8 percent, while the establishment survey series has increased only 2.5 percent. In comparison, the U.S. population survey series has increased 3.3 percent over the same period, while the establishment survey series has increased 4.0 percent. Ifobservers were to rely on the population sur­vey series, they would probably conclude that the Texas economic recovery over the past year has, in fact, been stronger than the U.S. recovery. Other (less current) indicators, such as personal income, industrial production, and retail sales, however, suggest that this is not the case and sup­port the establishment survey series in indicating that the Texas economic recovery has been weaker than that in the nation. Thus, the population survey series appears to provide an overly optimis­tic measure of state economic performance. -Thomas R. Plaut Research Economist ltl I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I t tI I I I I I I I I I I I I I I I I I I I I I I I I IJDr z(tl I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I IDr efforts, along with other state Year Unemployed Labor force Rate Texas rate and federal programs, are helping 1981 67,683 713,699 9.4 5.7 the Border and South Texas re­1982 88,106 803,223 10.9 7.0 gion to supplement the mining, 1983 114,269 849,235 13.4 7.6 tourism, and agricultural sectors, 1984 95,712 867,300 11.0 5.5 which have been the traditionally Source: Texas Employment Commission estimates. strong sectors in the past. -Susan Goodman Research Associate Slow Recovery in the Border and South Region Encompassing forty-one counties in six planning regions, the Border and South Texas region, more than the other regions in Texas, has been severely affected by recent jolts to the state's economy. The drop in world oil prices, the devaluations of the peso, and adverse weather conditions have weakened the sectors on which the economy of this region is based-mining, trade with Mexico, and agriculture. With 13.5 percent of the state's population, the Border and South Texas region did enjoy economic growth during the 1970s. Benefiting from steep oil prices, the mining and trade sectors contributed to a 4.9 percent average annual increase in real gross product from 1973 to 1981. During this time, nonagricultural employment increased by 4.9 percent and population increased by 2.4 percent. In 1981, the region's total gross product came primarily from four sectors: mining (19. 2 percent), trade (17.3 percent), government (14.6 percent), and manufacturing (13 percent). Because the economic conditions that adversely affected the Texas economy in 1982 are magnified in the Border and South Texas region, the region has not benefited appreciably from the state's general economic recovery. Although the unem­ployment rate for the region has decreased from a high of 13.4 percent in 1983, the rate in August 1984 was twice that of the entire state (see table). In eleven counties in the region, at least one out of every ten people in the labor force was without employment in August. Gross sales in the Border and South Texas re­gion, similar to those for the state, have not in- Unemployment Rates in the Border and South Texas Region (August of each year) Panhandle and West creased in recent years. In 1983, gross sales in the region were $26.3 billion, down 3.4 percent from the total in 1982. By comparison, statewide gross sales decreased from the previous year by 2. 7 percent. Although retail sales for the metropolitan areas in the region decreased from $8.8 billion in 1982 to $8.2 billion in 1983, retail sales figures for the first quarter of 1984 are up from the same period of the previous year by 15 percent. As in the past, the economic strength of the Bor­der and South Texas region depends, to a large ex­tent, on the strength of the Mexican economy. Nonetheless, the region is attempting to diversify its economy, especially in the area of manufactur­ing. The maquiladora (twin plant) programs along the border have added to the further industrializa­tion of the region; in 1983, about 250 twin-plant firms along the Texas-Mexico border employed more than 82,000 workers. The foreign trade zones set up in bor­ der cities have assisted in continu­ ing trade relations with Mexico and other foreign countries. These z(tl I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I IDr •1Bureau of Business Research • P.O. Box 7459 Austin, TX 78713-7459 NONPROFIT ORG. U.S. Postage PAID Austin, Texas Permit No. 1630 Editor: Charles F. Dameron, Jr. Texas Business Review is published six times a year (February, April, June, August, October, and December) by the Bureau of Business Research, Graduate School of Business, University of Texas at Austin. Texas Business Review is distributed free upon request. * * * The Bureau of Business Research serves as a primary source for data and information on Texas and on the dynamics of change. The Bureau's research program concentrates on the determinants of regional growth and development and investi­gates specific issues for clients. The information services division answers inquiries by telephone and mail, responds to walk-in visitors, and offers computerized data from the 1980 census of the population and on manufacturing firms in Texas. The publications division produces periodicals, directories, books, and monographs on a variety of topics that shape the development of the Texas economy. Jtllllllll ll llllllllll llllllllllllllDr Announcements Texas Economic Outlook Breakfast Series: In January, three business experts from the U.T. Graduate School of Business and the Bureau of Business Research will travel to five cities across the state and comment on economic developments in Texas and the nation. Dean William Cunningham, Associate Dean and Bureau Director Victor Arnold, and Bureau Chief Economist Thomas Plaut invite you to attend. The breakfast series will be held in these cities: Dallas (January 7), Houston (January 8), San Antonio (January 9), El Paso (January 10), and Austin (January 11). Each session includes breakfast and costs $15. Texas Economic Outlook Conference: A one-day confer­ ence will be held in Dallas on January 7 in conjunc­ tion with the first breakfast talk. Additional speakers include two economists from Data Re­ sources, Inc., and a panel of five prominent econo­ mists from around the state. The cost of the conference is $150. For further information • contact the Bureau's Lucy Haylor (512/471-1616).