• 



Bureau of Business Research 
April 1988 
College and Graduate School of Business, University of Texas at Austin 

The Texas Economy: • Forecasts Versus Ancient History 
In a January 1988 speech in Beaumont, Bob Bullock, Comptroller of Public Accounts for Texas, made public his forecasts for the future of the Texas economy. The forecasts are quite optimistic. According to Mr. Bullock, the state economy has bottomed out and has now entered a period of recovery. 
The comptroller cited figures for total nonagricultural employment as the most compel­ling single item of evidence that sustained recovery has begun. This series appears to have reached its trough in August 1987 and is ex­pected by the comptroller to grow at an average annual rate of 2.2 percent from now to the year 2000. This growth rate for jobs is expected to keep unemployment quite low-it falls from its 1987 value of 8.3 percent to 5.0 percent over the forecast period. 
While employment is growing and unemploy­ment is shrinking, personal income, population, oil prices, natural gas prices, and the rig count are all expected to experience increases. The reasons given for the expected recovery include an export-led rebound in manufacturing and direct stimulation of the Texas economy through federal defense spending. These factors have al­ready induced healthy growth and increased ca­pacity utilization in the petrochemical, electronics, aircraft, missiles, and transportation equipment industries. 
The main problem I have with the comp­
troller's forecasts is that they are point 
forecasts-we have no idea from these point 
forecasts of the range of likely outcomes. Many of the economic services offer a range of likely scenarios by forecasting several outcomes based on different underlying assumptions. In develop­ing the forecasts described above, the comp­troller's office assumed that GNP for the period 1987 to 2000 would grow at the rate of 2.6 per­cent. To put this assumption in perspective, compare it to the 2.7 percent growth in the period 1981 to 1987. The apparent assumption behind the comptroller's forecasts is a period of continued U.S. prosperity, lasting another twelve years, even though our current period of prosperity has already lasted longer than any boom in postwar history. 
The most important influence on the Texas economy is the U.S. economy. Given the stock market crash of 1987, there is ample reason to assign a high likelihood to a range of GNP growth substantially lower than 2.6 percent. Since many analysts have already decided to downplay the importance of the 1987 crash, it may seem odd to bring it up now that it is over four months in the past. The 1987 crash is an­cient history . Surely we would know by now if it were the herald of a major economic down­turn, wouldn't we? 
Lessons from History What were people saying in March 1930? Did they know that ten years of depression lay ahead? In an excellent treatise on the economic history of the Great Depression, we find the following passage referring to views held in the financial community from January to April 1930: 
... on the whole [they] supported the common and official view that the U.S. Economy was strong and healthy despite speculative excesses. By and large, this was also true of the economic 




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services. Even those who were most forthright in some of their utterances on the developing dangers stopped far short of depicting their true magnitude, muted their warnings as the crash ap­proached, and became reassuring after it had oc­curred. (Joseph S. Davis, The World between the Wars, 1919-1939, 1975 .) 
Earlier, in mid-November 1929, the Harvard Economic Society Weekly Letter contained the following comment on the October crash: ''A severe depression like that of 1920-1921 is out­side the range of possibility. '' Experienced bus­iness forecasters were nearly unanimous in predicting an upturn in the spring of 1930. 
It was easy in the early months of 1930 to be optimistic. The stock market seemed to have leveled out in December, and it actually rose in the early months of 1930. (See figure 1). The Federal Reserve Index of Industrial Production also showed signs of recovery in the first few months of 1930. (See figure 2.) But the fun­damental problems that brought about the crash were still present, accompanied by new problems brought on by the crash itself. After its brief uptick in early 1930, the stock index began to drop again in mid-1930 and continued to drop for the next three years. The index did not achieve its precrash peak until 1951-twenty-one years later. The volume of 
Figure 1 
100 
90


' 
" 
80 Combined Average of 
70 

103 Stocks (dollars 60
per 
share) 
50 

40 
30 Oct28 Oct29 Oct30 


trade experienced in October 1929 would not be realized again until 1968. 
Deposit Runs and the Bank Holiday 
The banking crisis did not take place immedi­ately after the 1929 crash, but a whole year later. The entire banking system was a house of cards due to a variety of problems, but the ac­tual run on deposits was touched off by the failure of a relatively inconsequential bank in New York. The widespread coverage of ques­tionable practices on the part of this bank led to a collapse of public trust in all banks, which many believe was the proximate cause of the run on deposits. From the time of the crash un­til the runs began, prominent authorities in government and commerce continued to praise the newly formed Federal Reserve System for maintaining banking stability. 
In the aftermath of the 1987 crash, we have observed a continuing trend of bank failures, especially in Texas, but the problem seems to be under control. A run on the banks is unlike­1 y, as long as depositors continue to have confi­dence that the FDIC (or FSLIC as appropriate) will be able to make good on its deposit in­
) 
surance. 

Figure 2 
100 
90 
80 
Federal 
Reserve 

70 
Index 
of 


60
Industrial 
•

Production 50 
40 


J 
30 Oct28 Oct29 Oct 30 

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Employment and Unemployment Rate by Metropolitan Area 
Total nonagricultural employment (thousands)  Total employment (thousands)  Unemployment rate  
Area  Jan.  1988  Jan.  1987  Percentage change  Jan.  1988  Jan . 1987  Percentage change  Jan.  1988  



Abilene 49.1 48.8 0.6 49.7 48.9 1.6 7.4 
Amarillo 78.3 77. l 1.6 93.2 90.9 2.5 6.7 
Austin 349.9 354.7 -1.4 394.2 396.2 -0.5 7.0 
Beaumont-Port Arthur 127.l 128.3 -0.9 138.9 138 .9 0.0 12.0 
Brazoria 57. l 55.3 3.3 72.6 69.7 4.2 9.6 
Brownsville-Harlingen 65.9 64.5 2.2 80.9 78.2 3.5 16.9 
Bryan-College Station 45.4 45 .7 -0.l 51.5 51.l 0.8 5.3 
Corpus Christi 124. l 124.l 0.0 141.4 139.5 1.4 I I.I 
Dallas l ,328.3 l ,3 19 .9 0.6 l ,346.6 l ,323 .5 1.8 6.4 
El Paso 187.1 183.6 1.9 206.7 201.0 2.8 11.3 
Fort Worth-Arlington 512.7 508.5 0.8 621.9 610.5 1.9 7.0 
Galveston-Texas City 69.3 70.5 -1.7 94 .6 95.6 -I. I 11.0 
Houston 1,386 .4 l ,361. 5 1.8 1,452.4 l ,413 . l 2.8 8.0 
Killeen-Temple 69.8 68.5 1.9 85.4 82.6 3.4 8.2 
Laredo 36.3 34.7 4.6 38.9 36 .9 5.4 14.1 
Longview-Marshall 64.6 64.0 0.9 70.4 69.3 1.6 I0.3 
Lubbock 90.8 89.6 1.3 !04.2 102.l 2.1 6.0 
McAllen-Edinburg-Mission 93.1 89.5 4.0 124.3 117.9 5.4 19.6 
Midland 43.4 43.2 0.5 45.3 44.6 1.6 7.6 
Odessa 43.5 41.1 5.8 48.8 46.6 4.7 8.6 
San Angelo 36. l 36.0 0.3 41.6 41.2 1.0 6.3 
San Antonio 503.6 495.9 1.6 558.6 544.0 2.7 8.3 
Sherman-Denison 37.7 37.1 1.6 45.4 44.0 3.2 7.7 
Texarkana 45.3 45.2 0.2 53. l 52.0 2.1 8.4 
Tyler 60 9 60.4 0.8 69.4 69.0 0.6 8.3 
Victoria 27.5 26.7 3.0 33.6 32.9 2.1 8.2 
Waco 77. l 76.9 0.3 84.4 82.7 2.1 9.0 
Wichita Falls 50.2 49.4 1.6 52.6 51.3 2.5 7.6 
Total Texas 6,517.7 6,440.6 1.2 7,479.2 7 ,328.5 2.1 8.4 
., Total United States 102 ,265.0 99,511.0 2.8 112 , 139.0 !09,084.0 2.8 6.3 

Note: These data reflect the Bureau of Labor Statistics' redefined metropolitan areas in Texas. Data are not seasonally adjusted. Figures for 1987 have undergone a major revision; previously published 1987 figures should no longer be used. Revised figures are available upon request. All 1988 figures are subject to revision, with the exception of Texas and U.S. total employment. 
Sources: Texas Employment Commission and U.S. Bureau of Labor Statistics. 
Nonagricultural Employment in Five Largest Total Employment in Five Largest Texas Metropolitan Areas Texas Metropolitan Areas 
(January 1984= 1.00) 
1.25 
1.20 
1.1 5 
1.1 0 
1.05 
1.00 
0.95 

AUSTIN DALLAS FT. WORTH HOUSTON SANANTONIO 
(January 1984=1.00) 
1.25 
1.20 
1.15 
1.10 
1.05 
1.00 
0.95 

0. 9 0 +tt-ttt-Ht-ttt-IH-Ht-ttttt1H-tt+t+-ttt-H-t-'H-Hrt-+'tt-ttt+1 
1984 1985 1986 1987 
0 . 9 0 ++++++'H-H-+++-H-H-+++-H-t+i++il-+Hi++il-+H+++ll-+H+-H 
1984 1985 1986 1987 

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The Government Will Save Us Ask most people if we could have another Great Depression, and they will say no. They reason that since 1929, we have learned how the economy works, and we have developed policy tools to fine tune it. In 1929 ill-conceived government policies actually made the situation worse. But today monetary policy and federal spending and taxation can be adjusted as needed to keep us on a steady state growth path without unemployment or inflation. There is certainly a grain of truth to this the­ory. As an economist, I would hope that we had learned something in the last 50 years. However, in practice, government decisions are made in a political environment. Congress has never demonstrated an ability to respond quick­1y or decisively to economic stimuli. While the Federal Reserve System has the ability to respond somewhat more quickly and rationally than Congress, its ability to regulate the econo­my is limited when monetary policy is working at cross purposes with fiscal policy. The best that can be hoped from the government in the 
Components of the Texas 
Index of Leading Economic Indicators 
(October 1987-December 1987) 

Measure  Oct.  Nov .  Dec.  
Manufacturing  
weekly hours  41.90  41.99  41.98  
Retail sales (billions  
of 1967 dollars)  2.61  2.52  2.10  
New housing permits  
(thousands)  3.72  2.85  2.16  
U.S. wellhead price  
of oil (1967 dollars  
per barrel)  4.62  4.47  4. 13  
Initial claims for unem­ 
ployment insurance  
(claims per thousand  
employees)  10.54  9.84  10.63  
Leading indicators index  
(January 1984= l)  0.85  0.84  0.78  

Note: All figures are seasonally adjusted. 
Sources: Texas Employment Commission, U.S. Bureau of the Census, and U.S. Department of Energy. 
practical world is that it won't make things worse. 
Are We out of the Woods Yet? March 1988 is similar to March 1930. As yet, there have been no concrete signs of col­lapse. In fact, things don't look too bad right now. The stock market has seemingly settled down, and, as observed by the comptroller, there are optimistic signs in other data series as well. However, for a conservative investor it is too soon to proclaim that the U.S. economy is out of danger. As in 1929, the problems that in­duced the collapse in stock prices are still present. It is still too early to know whether what we see is a new plateau or if it is merely the calm before the storm. I would surely like to believe in the comp­troller's figures. I'd love to get my share of the 
6.3 percent annual growth in per capita per­sonal income he has predicted. But I do not plan to bet the deed to the ranch on it. My sug­gested strategy for business today is-hope for the best, but prepare for the worst. 
-Jerry Olson Economist Johnston , Olson, & Associates 
Texas Index of Leading 
Economic (January  Indicators 1984=1.00)  
1 . 1 0  Total Employment  

1 .05 
1.00 
0.95 
0.90 
0.85 
0.80 

0.75 
0 . 7 0 Ttt-HH+t11-H1-HH++t1-H1-H++++t11+++H++++H-+++4 
1984 1985 1986 1987 

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Keys to River City Future: Military, Education, and Water 
On a summer day in 1691 a small Spanish military expedition under the command of Domingo Teran de los Rios set up camp near the pure water of the San Antonio River, a little north of what now is San Antonio's Loop 
410. The expedition was followed a few years later by Franciscan priests who said they came to the spot to teach the Indians. Three hundred years later, the military, education, and pure water remain important keys not only to San Antonio's past, but also to its future. 
The population of the San Antonio metropoli­tan statistical area was 1,276,400 in mid-1986. Total nonagricultural wage and salary employ­ment for December 1987 stood at 500,300 persons. The federal active duty military contin­gent in San Antonio stands at 43,083 with an additional 39,103 civilians who work for the military. Together these groups account for 16.4 percent of the nonagricultural wage and salary employment in San Antonio. San Antonio is also home to 32,185 retired military and reservist per­sonnel, including their survivors. These groups taken together provide an obvious and undeniable stability to the overall employment picture for San Antonio. 
When all government workers at all levels­city, county, state, and federal nonmilitary-are considered in San Antonio, the total swells to 110,300 employees. The government segment thus represents 22 percent of the nonagricultural wage and salary work force in San Antonio. For comparison, government workers represent only 
11.4 percent of the work force in Dallas and 13.7 percent in Houston. 
Two other segments of San Antonio's work force are larger than the government sector in terms of numbers of workers. The services sector of the economy employs 117,900, or 23.5 per­cent of the work force, and trade-retail and wholesale-employs 134,900, or 27 percent of the work force. Manufacturing is an important but distant fourth with 46,300 workers, or 9 percent of the work force . 
Education looms large in the shaping of San Antonio's future. Of particular importance for the long term is education at the secondary level. The dropout rate from ninth through twelfth grades for San Antonio .and surrounding counties is about 36 percent, about 3 percent higher than the state as a whole. A recent study prompted by San Antonio Mayor Henry Cisneros' Target 90 project and funded by the Ford Foun­dation examined Texas high school dropouts between 1982 and 1986. The study analyzed the effects of lost wages, lost tax revenues, in­creased crime, and other factors. The conclu­sion was straightforward: high school dropouts cost Texas $17 billion each year. Put another way, one dollar for education returns nine dollars in benefits to Texas taxpayers. Although the data are statewide, their implication for San Antonio is clear: the city must become even more aggres­sive in its efforts to assure completion of at least a high school education for its young people. The human values of a basic education are not debatable; it's also good business. 

The third important factor in determining San Antonio's future is water. The irony in San Antonio's nickname-The River City-is that San Antonio is the largest city in the United States dependent wholly on underground water, specifically on wells drilled into the Edwards Aquifer. The overall problem is reasonably simple: Texans worry more about underground water and regulate it less than almost any other state. San Antonians, along with other Texans, eventually will have to accept regulation of underground water resources. 
The specific problem is that droughts occur in Central Texas with unpredictable regularity. No one disputes the assertion that San Antonio eventually must supplement the ground water with surface water-reservoirs-but the high cost and long lead time make reservoir construction an intensely political issue. Neither high cost nor politics should tempt San Antonio to play Russian roulette with its water table or the · Texas climate. 
San Antonio will face the year 2000 with 
bright prospects indeed if the city and the state 
deal wisely and promptly with the issues of 
education and water. Perhaps the single image 
San Antonio should hold up for itself is that of 
a retired Army or Air Force engineer water 
skiing on one of the many man-made lakes that 
ring the city. 
-Bruce Renfro 
Assistant Professor of Journalism 
Southwest Texas State University 


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•1Bureau of Business Research 
GE ERAL LIBRARIES 
• 	P.O. Box 7459 TX UNIV OF PCL 1 114 SERIALS RECORDS
Austin, TX 78713-7459 
CAMPUS MAIL CAMPUS 
• 
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 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. 

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Announcements 
The NEC Corporation of Japan has made the Nikkei Telecom Database available to U.T. stu­dents and professors through the Graduate School of Business and the Bureau of Business Research at the University. As a result, current news about movements and conditions in the securities, money, and commodities markets will be available online, and users will also be able to access a wide range of news articles from major Japanese newspapers. 
Texas Population Estimates: County and 
Place Totals, July 1, 1986 is now available 
from the State Data Center, Texas Department 
of Commerce. To obtain a copy of the publica­
tion or more information, write the agency at 
P.O. Box 12728, Austin, Texas 78711.