Bureau of Business Research August 1986 College and Graduate School of Business, University of Texas at Austin The Texas Economic Climate Earlier this year the Bureau of Business Research sponsored a Texas Economic Outlook Conference in Houston in order to present economic forecasts for the state for 1986-1987 and to provide a framework for interpreting information about the state's economy. Dr. Robert (Bob) Krueger expand­ed the discussion ofproblems caused by fall­ing oil prices by discussing the importance of oil and gas to the United States as a whole and to Mexico. His comments follow. When I was a U.S. congressman serving on the Interstate and Foreign Commerce Committee and was offering legislation in early 1976 to deregulate natural gas prices, Ralph Nader came to testify against the Krueger bill to deregulate prices. At that time, I reviewed with Mr. Nader the energy posture of the United States. I said, "Mr. Nader, we currently get about 2 percent of our country's energy from nuclear sources. Do you favor an increase in the use of nuclear energy?" I thought I knew Mr. Nader's response to that one. He said no. And I said, "All right. That's 2 percent. We get another 2 percent from firewood. Do you propose cutting down more forests?" And he said no. "All right; that's 4 percent. We get about another 4 percent from hydroelectric ) power. Do you know any wild and scenic rivers you would like to dam?'' And he said no. And I said, "All right, we have 8 per­cent. We get roughly another 16 percent • from coal. How do you feel about black lung disease and strip mining?" He said he did not really favor an increase in that. "All right," I replied, "that leaves us with about 75 percent of this nation's energy coming from oil and gas. Do you have any sugges­tions to increase the domestic production of oil and gas?" But he didn't. I think back to that often. Even though the energy picture doesn't look as rosy as it did a few years ago and we will have to look to other areas for the strength of our economy in this state, we need to keep in mind that those percentages have not changed remarkably in the last ten years. If you look at the long term, in every year during this century, for example, America has gotten 90 percent of its energy from oil, gas, and coal. We have to figure that oil, gas, and coal are going to remain at about 90 percent of our overall energy supply. Texas, obviously, is closely tied to energy, and even those of us who grew up in a dry town like New Braunfels, which is dry in oil and gas, need to keep in mind that we are all connected very heavily with the oil and gas industry. Even if we don't personally own oil and gas, given the large acreage we have in the public lands of Texas and what all of us get from severance taxes, it is obviously of immense importance to all of us indirectly if not directly. Well, if we think it is important to Texas, it is far, far more important to Mexico. Think how you would feel if you were running a country in which over 50 per­cent of all the money that goes into the na­tional treasury comes from the sale of oil and gas. That's Mexico. That means oil and 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 IJtr gas sales are more important than all taxes, all other sources of income combined. Mexico for the past few years has been pro­ducing oil at the rate of 2.7 million barrels a day. Of that Mexico uses about 1.2 million for domestic purposes and exports about 1.5 million barrels a day. If over half of all their money is coming from oil and gas, imagine the devastation caused by falling world oil prices. The importance of oil to Mexico and particularly the importance in recent years can be understood if we realize that at the end of 1976 the proven reserves of oil and gas equivalent in the United States were roughly 60 billion barrels. The proven re­serves in Mexico at that same time were 6 billion. We had a 10 to 1 lead on them. By petroleum day, March 18, 1981, the proven reserves in Mexico were 67 billion barrels of oil and gas equivalent, while ours stayed roughly the same. So in just four years Mexico had more than a tenfold increase in proven reserves. It was the largest single in­crease in proven reserves in the world with the exception of Saudi Arabia. Although some question the specific reserve figures released by the Mexican government, no one questions that Mexico has vast reserves, now estimated to be the fourth largest in the world. Mexico has an emotional tie with oil and gas that is much stronger even than the Texan's emotional tie. The nationalization of the oil industry in Mexico in 1938 was a kind of declaration of economic independence. Before nationalization the international oil companies were withdrawing oil from Mexico as fast as they could get it out of the ground, and there were some real losses to Mexico because of that. To the people of Mexico oil and gas are part of their patri­mony, part of their national inheritance. In this country we talk about the Department of Energy. In Mexico the department that deals with energy is called the Department of Patrimonio or ''patrimony.'' To sell off oil and gas is like selling off the family jewels. This resource is irreplaceable; it is something that belongs to the people of Mexico. So on one hand they realize that they have to sell oil and gas to take in the money; on the other hand it is extremely difficult for them, because they feel they are selling off part of their own patrimony. When the price of oil fell in Mexico and fell worldwide, the peso of course had to fall with it. Because of progressive devaluations the confidence in the system was under­mined. Now from 1976 to 1981 the Mexican economy was growing at a rate of 7 percent a year compounded. Those of us who can remember 7 percent interest rates know that 7 percent, compounded, doubles every ten years. So the Mexican economy was growing at a rate at which it would double every ten years. It was growing that fast on the basis of the expectation that the price of oil could only go up, and on very, very heavy borrow­ing. When the price of oil fell, the peso fell as well, and with it confidence plummeted, not only in Mexico itself but also worldwide. The people of Mexico are worse off today than they were four years ago; the gross na­tional product is actually less today than it was four years ago, and Mexico has gone through some shattering experiences. The earthquake was only a part of their shatter­ing experience. Much larger was the shatter­ing of confidence and the shattering of oil prices. Mexico is nonetheless an immensely impor­tant trading partner both to the United States and to Texas. In 1981 the total trade between Mexico and the United States was $29 billion, two ways. Mexico had moved from a position of fifth to become the third largest trading partner of the United States, after Canada and Japan, having moved ahead of both Great Britain and Germany. Since that time Mexico dropped back again because oil prices have fallen and the economy has fallen on such hard times. Even though Mexico's relative position has de­clined since 1981, as a trading partner, our total trade with Mexico is higher today than it was then. Moreover, Mexico is the largest single foreign supplier to the United States of oil, providing us about 750,000 barrels a 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 IJtr Jitl 111111 I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I 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'Ar Nonagricultural Employment in Five Largest Texas Metropolitan Areas (January 1984=1.00) Austin Nonagricultural Employment and Unemployment by Metropolitan Area Nonagricultural employment Unemployment (thousands) rate Area May 1986 May 1985 Percentage change May 1986 Abilene 53 .2 54.0 -1.5 9.4 Amarillo 81.3 81.5 -0.2 6.9 Austin 369.0 359.7 2.6 5.8 Beaumont-Port Arthur 130.3 138 .0 -5 .6 16.3 Brazoria 58 .2 59.6 -2.4 12.0 Brownsville-Harlingen 65.4 64 .9 0.8 16.3 Bryan-College Station 49.5 48.9 1.2 6.9 Corpus Christi 135 .2 135 .9 -0.5 13.2 Dallas 1,352.3 1,311.2 3.1 5.9 El Pa,so 178 .7 177.9 0.5 12.3 Fort Worth-Arlington 513 .2 505 .5 1.5 7.0 Galveston-Texas City 72.7 73.4 -0.9 12.3 Houston 1,481.5 1,486 .3 -0.3 10.7 Killeen-Temple 68.4 66.7 2.6 7.8 Laredo 35 .2 34.5 2.0 16.3 Longview -Marshall 67 .6 69.4 -2.6 13.9 Lubbock 92.3 91.l 1.3 7.3 McAllen -Edinburg-Mission 86.0 84.1 2.3 17.7 Midland 47 .3 49 .6 -4.6 11.7 Odessa 48 .3 52.l -7.3 16.0 San Angelo 36.8 37 .7 -2.4 8.0 San Antonio 488 .1 484.0 0.9 7.6 Sherman -Denison 37.4 37.7 -0.8 7.5 Texarkana 45.8 45.4 0.9 10.l Tyler 63.9 62.6 2.1 8.7 Victoria 28.3 30.0 -5.7 12.0 Waco 78 .8 78 .5 0.4 8.6 Wichita Falls 51.6 52.0 -0.8 8.9 ) Total Texas 7,273.7 7,444.0 -2.3 9.3 Note: These data reflect the Bureau of Labor Statistics' redefined metropolitan areas in Texas. Source: Texas Employment Commission. Jitl 111111 I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I 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'Ar Jdl I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I 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 Components of the Texas Index of Leading Economic Indicators (February 1986 -April 1986) Measure Feb. Mar. Apr. Manufacturing weekly hours 10 40.89 41.29 41.40 Retail sales (billions of 1967 dollars) 2.48 2.47 2.45 New housing permits (thousands) 9.14 9.53 8.61 U.S. wellhead price of oil (1967 dollars8 per barrel) 5.57 4.60 4.61 Initial claims for unem­ ployment insurance 7 (claims per thousand employees) 11.60 13.22 15.91 Leading indicators index 6 (January 1984=1) 0.85 0.81 0.80 Note: All figures are seasonally adjusted. Sources: Texas Employment Commission, U.S. Bureau of the Census, and U.S. Department of Energy. day. And Mexico remains an extremely im­portant trading partner to the United States in many products other than oil and obvious­ly an important one to Texas. Mexico offers to Texans one of the finest opportunities for business growth, in spite of all the problems, of any place around. If Mexico is important to the United States in terms of trade, we are vastly more impor­tant to Mexico. Roughly two-thirds of all of Mexico's foreign trade is with the United States, so overwhelmingly are we their domi­nant partner. And even though Mexico is eleventh largest in population, it is seven­teenth largest in world economies, and seven­teenth is significant. -Robert (Bob) Krueger, Lloyd Bentsen Chair in Government/Business Relations, LBJ School of Public Affairs, University of Texas at Austin Texas and U.S. Unemployment Rates 12 11 5 ++-4-+++++++++-++++++w+_____ 1983 1984 1985 1986 Source: U.S. Bureau of Labor Statistics. Texas Index of Leading Economic Indicators (January 1984 =1.00) 1.100 Goods Empbyment 1.050 1.000 -------­ 0.950 0.900 0.850 0.800 0.750 0.700 ++--t-+-1-t-+-+++++-+-11-+-1-++++++~~ 1984 1985 1986 Jdi1111 :11111111111111111111111111111 I I I I I I I I I I I I I I I I I I I 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 Jtll I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I 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'Ar The Texas Mystique In the early 1980s lenders viewed Texas real estate as perhaps the single best place to invest dollars in loans, and investors, as the best place to invest in real estate assets. Texas real estate was sort of the epitomy of success. Everybody knew that Texas econo­mies were recession proof. Real estate was about as safe a bet as there was. That's what I call the Texas Mystique. Houston led the nation in most of the housing starts through the 1970s and into the early 1980s. When Houston slowed down, Dallas-Fort Worth picked up and led the country in housing starts. The Texas Mystique was pretty easy to believe in. The result of that was an in­credible flow of dollars into the Texas real estate economy, whether in terms of financ­ing for new projects to be built or dollars buying existing real estate projects. As the markets began to be overbuilt, local lenders cut back. The next step was for the out-of-town lenders to step in. Deals that the local bank wouldn't finance, a savings and loan from Arkansas or California probably would. If a developer failed to find financing there, he was likely to be able to find some source of equity money offshore. The Texas Mystique encouraged everyone to expect suc­cess regardless of the facts. The deregulation in the savings and loan industry in 1982 unleashed perhaps the greatest storm of new real estate financing in any period in Texas history as thrifts expand­ed aggressively away from single-family home mortgage lending into commercial real estate financing, in some cases without the expertise that they needed to evaluate those financing decisions. Deregulation funneled a tremendous amount of money into the real estate business, and again the question was not where could the money be invested pru­dently, but where could the money be in­vested in commercial real estate. Where are we headed? We are learning the new Texas realities. We are finding that many of our cities are subject not only to U.S. business cycles but also to international business conditions. The obvious examples are Houston and the energy markets; Dallas, Panhandle and West Fort Worth, and Austin, the semiconductor area; San Antonio, the peso devaluation. So we have gone from a very idealistic, unreal image of Texas real estate back down to earth in a sudden and, in some cases, bruis­ing manner. We are clearly on the downside of this real estate cycle. The opportunities for starting new projects do not exist as a general rule. But those opportunities still ex­ist in the form of the purchase of properties that are undervalued in markets that have bottomed out and that perhaps are going to be improving over the next couple of years. The position of adjusting to where we are on the real estate cycle is not a permanent one. Texas markets will be back as the local econ­omies recover and diversify and continue to grow. I don't think we'll go back to the speculative fever of the Texas Mystique. That may have been a one-time phenomenon like a boom town on the western frontier a hundred years ago. I don't think we will see that mystique return, but I think we will see continued growth. Texas, California, and Florida still look like the places for growth over the next ten to twenty-five years. As long as there is that growth over time, there will continue to be real estate opportunities ahead. -Ronald Witten, President ofMIPF Research, from the Bureau's Economic Outlook Conference Jtll I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I 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'Ar •1Bureau of Business Research NONPROFIT ORG. U.S. Postage • P.O. Box 7459 PA ID Austin, TX 78713-7459 Austin, Texas Permit No. 1630 ;•:. • Editor: Lois Glenn Shrout • 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 Texa~ 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. JAiI I I I I I I I 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 Announcements Bureau of Economic Analysis projections of total population, as well as projections of earnings and employment by major industrial sector, are now available from Information Services (512) 471-5180. Projections for each state and each metropolitan area in the United States are available. The sixth edition of Texas Family Law, delayed indefinitely last year, is now in pro­ duction and should be available in the fall. Prepared by Dr. Gaylord A. Jentz, Herbert D. Kelleher Centennial Professor in Business Law and chairman of the Department of General Business at the University, this edi­ tion reflects changes resulting from recent major revisions of the Texas Family Code. For more information, call (512) 471-5179. •