Burea'fi"?tBusiness Research JUL 2 5 1988 August 1988 College and Graduate School of Business, University of Texas at Austin The Texas Economy and the Presidential Election of 1988 Economic indicators provide a mixed signal for the future of the Texas economy. While the positive signs are encouraging, the trouble spots continue to cause concern even among the most optimistic forecasters. Barring further stock market difficulties, the biggest ''economic'' event of 1988 will be the national election. As is frequently the case during election years, tremendous uncertainty currently exists over the future direction of national economic and social policy. Because the Texas and national business cycles are looking more alike and because the more diversified state economy is looking more like the U.S. economy, the economic policy of the new administration will more directly affect Texas than in years past. That policy will either fuel business and consumer confidence or make the upcoming national recession worse than it otherwise would be. What the Indicators Say Some positive signs for the Texas economy include the recent drop in the state unemploy­ment rate (although it is still the highest rate among the eleven most populous states), a natural gas industry that continues to hold promise, a resurgence in population growth, improved prospects for U.S.-Mexico trade and border development, and fairly large increases in the number of jobs, especially in manufactur­ing and in wholesale and retail trade. A fairly steep decline in the number of executive jobs is expected to continue, however, as financial institutions close or merge. Within the manufac­turing sector, the outlook for electronic equip- GENERAL LIBRARIES ment, petrochemicals, apparel, and steel is quite promising. Exports of aircraft products, machin­ery, and, to a lesser extent, oilfield equipment have assisted the Texas economy in recent months. Although net out-migration actually occurred in Texas during 1987, this outflow is widely viewed as only temporary. Texas continues to have a higher birthrate and a younger popula­tion than the United States as a whole. Demo­graphic trends, therefore, suggest an expanding labor supply, which will provide the work force needed for business expansion and a growing market for consumer goods. Both population growth and a rising real disposable income should stimulate retail sales during the remainder of 1988 and 1989. Strong signs are also appearing in such Texas industries as timber, cement, wine, and motion pictures although none of these is large enough to become a leading sector for the state. By the time final sales figures are recorded, tourism should have boosted the state economy this summer as expected. The opening of Sea World in San Antonio has provided a major impetus in Central Texas with the usual spillovers to the restaurant and hotel/motel industries. (A similar boost is expected when the state aquarium in Corpus Christi is completed in early 1990.) The outlook for "Winter Texan" business in the Rio Grande Valley is also solid for the upcoming winter. In addition, Christmas sales in the state, which did well in 1987, are expected to help the economy in late 1988. The outlook for agriculture, especially cotton and beef, is similarly positive. On the negative side, banking, construction, real estate, and energy show few signs of im­proving in the near term. The outlook is poor for commercial real estate, commercial con­ ttll I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I 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 struction (especially offices, which remain grossly overbuilt), home building, and mobile homes. Foreclosure postings remain at all-time high levels in the state's major markets, and an unusually high number of actual foreclosures by lenders is still occurring throughout the state. Bank failures will continue as will frantic ef­forts to merge troubled savings and loan associ­ations. Highly questionable past lending practices continue to plague the financial indus­try. While energy, farm, and foreign loans are currently causing less concern than they were, real estate loans continue to be a long-term problem. Overall lending activity remains low and will sink further as interest rates rise. The Texas-U.S. Link As a state economy matures, it becomes more diverse and relies less and less on a single prod­uct or set of products. Heavy reliance on a strong energy sector in the past, for example, enabled Texas to avoid many of the cyclical swings in the U.S. economy. So long as energy prices re­mained high, the Texas economy appeared se­curely insulated from the national business cycle. The depressed energy market of recent years has hastened the diversification of the state economy. With diversity, the Texas popu­lation will be less dependent on the erratic be­havior of oil prices but more dependent on the health of the national economy. While the Texas economy is attempting to recover, the U.S. economy is seeking to main­tain its recent record of modest growth. Eco­nomic forecasters continue to debate the long-term effects of the stock market crash of October 1987 and the timing of the next national reces­sion. Although that recession now appears more likely to occur during 1989 than 1988, econom­ic recovery in Texas will be slowed considera­bly whenever the national recession hits. Deficit-financed economic growth over the past six years has been steady, but the future outlook for the national economy is uncertain. Despite all the supply-side rhetoric, the eco­nomic legacy of the Reagan administration will be record federal government and trade deficits that hurt our long-term prospects. How these problems are dealt with by the next administra­tion will have serious consequences for state economies that now closely parallel the U.S. business cycle. (The irony of the Reagan eco­nomic policy is that it caused a revival of the belief in Keynesian demand-management, deficit­creating stimulus.) High levels of defense spend­ing prevented the Texas recession from being worse. Although Sematech in Austin received commitments for defense funding earlier this year, the overall outlook for defense dollars in the state is not promising. As the threats of higher inflation and higher interest rates materi­alize, additional adverse effects on the state eco­nomy will be felt. New construction and real estate, already experiencing long-term difficul­ties, will be hurt further, for example, as in­ terest rates rise. Based on the historical record, Texans are rightfully proud of the claim that solutions to their economic problems have come from themselves and not from federal efforts in Washington. As similarities between the state and national economies grow, however, so does our response to federal economic stimulus or the lack thereof. The precise mix of monetary and fiscal policies chosen by the next adminis­tration will, like them or not, influence the di­rection of the state economy. As the Democratic and Republican platforms are formulated with greater clarity, the potential impacts on Texas will become more evident. Until each candidate articulates his specific policy goals and plans for achieving them, predictions for the national economy must be tentative and based on eco­nomic conditions as of midsummer. Although both platforms are likely to emphasize economic growth and a reluctance to raise taxes as a defi­cit trimming measure, the prospects for sustained growth beyond this year appear dim. Upward pressure on interest rates, a low savings rate, an astronomical federal deficit, a troublesome trade deficit, and the unlikelihood of further declines in the national unemployment rate all prompt this view. Conclusions The fantasies of defense buildups and tax cuts without increasing the deficit, of domestic pro­gram cutbacks without hurting anyone but wel­fare cheaters, and of a foreign policy that offers concessions to international drug dealers while hoping that the problem will miraculously dis­appear are over. (The drug problem, incidentally, ) ) ttll I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I 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 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 I IJtr Employment and Unemployment Rate by Metropolitan Area Total nonagricultural employment (thousands) Total employment (thousands) Unemployment rate Area May 1988 May 1987 Percentage change May 1988 May 1987 Percentage change May 1988 Abilene 49 .3 48.4 1.9 50.8 50.0 1.6 6.6 Amarillo 78.6 77.2 1.8 95.4 94.1 1.4 5.7 Austin 352 .0 357 .3 -1.5 406.0 407.9 -0.5 6.1 Beaumont-Port Arthur 129.8 128 .2 1.3 144.6 143.0 I. I 10.5 Brazoria 58.4 56.9 2.6 75 .9 73 .7 3.0 8.2 Brownsville-Harlingen 67 .2 65.7 2.3 85.3 83.2 2.5 13.0 Bryan-College Station 48 .1 47.3 1.7 54.8 54.2 I. I 4.5 Corpus Christi 125 .1 123.7 1.1 147 .1 144.4 1.9 9.9 Dallas 1,333.8 1,329 .6 0.3 1,381.8 1,366.9 I. I 5.8 El Paso 188.5 185.4 1.7 213 .5 207.5 2.9 10.3 Fort Worth-Arlington 514.5 515 .8 -0.3 638.4 634.9 0.6 6.4 Galveston-Texas City 70.8 72 .7 -2.6 99.0 101.3 -2.3 9.0 Houston 1,404.2 1,376.7 2.0 1,495.l 1,466.3 2.0 7.1 Killeen -Temple 70.6 69.9 1.0 88.3 86.5 2.1 7.5 Laredo 36.5 35.4 3.1 40.2 38 .8 3.6 12.8 Longview-Marshall 65.7 64.0 2.7 72.4 71.1 1.8 8.6 Lubbock 92.3 91.3 1.1 108.l 106.1 1.9 5.4 McAllen-Edinburg-Mission 89.7 87.9 2.1 126.1 122.4 3.0 15.l Midland 44.7 43.3 3.2 46.7 46.0 1.5 6.0 Odessa 43.4 41.7 4.1 50.0 48.l 4.0 7.6 San Angelo 36.3 36.3 0.0 43.0 42.9 0.2 6.1 San Antonio 510.5 502.9 1.5 579.2 565.5 2.4 7.8 Sherman-Denison 38.3 37.4 2.4 47.3 45.6 3.7 6.2 Texarkana 44.9 45.1 -0.4 53.8 53 . l 1.3 8.3 Tyler 61.7 61.9 -0.3 70.9 71.2 -0.4 7.4 Victoria 27 .8 27 .1 2.6 34.3 34.0 0.9 7.0 Waco 78.5 77.6 1.2 87 .0 85.9 1.3 7.1 Wichita Falls 50.6 50.0 1.2 54.7 53 .6 2.1 6.2 Total Texas 6,574.0 6,497.0 1.2 7,729 .2 7,619.6 1.4 7.3 Total United States 105,946.0 102,268.0 3.6 114,222.0 112,377.0 1.6 5.4 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 1.25 (January 1984=1.00) 1.20 1 .15 1 .1 0 1.05 1.00 0.95 Texas Metropolitan Areas 1.25 (January 1984=1.00) 1.20 AUSTIN DALLAS FT. WORTH HOUSTON SANANTONIO 1.15 1.10 1.05 1.00 0.95 0. 90 +tt-Httfft"ltttHt1Htttt+lt+++Htt-ttt-tH1-Htt-tt-I 1984 1985 1986 1987 1988 tLll 11111111 11111 11111111111 I I I I II I I I I I I I I I I I I I I I I I I I I I I I 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 tltl I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I 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 is an economic as well as a social issue because of the devastating effect illegal drugs have had upon our most valuable productive input, h_u­man resources.) Given our present econonnc situation, increased deficit spending will not be a viable tool for pulling the economy out of the next recession. The reality the next administra­tion (no matter which party it represents) must face includes the need for a blueprint for investment-led (rather than consumption-led) economic growth without a rekindling of infla­tion a reduction in the federal deficit without a gro~th-stunting tax increase, and continued_ im­provements in productivity to enhance our mter­national competitiveness. At the moment, the means to achieve these ends are hidden in vague campaign promises from both sides. In the face of this uncertainty, Texans have perhaps more at stake this election year than ever before. -Joseph E. Pluta Associate Professor of Economics St. Edward's University Components of the Texas Index of Leading Economic Indicators (February 1988-April 1988) Measure Feb. Mar. Apr. Manufacturing weekly hours 41.40 41.69 42.10 Retail sales (billions of 1967 dollars) 2.57 2.55 2.27 New housing permits (thousands) 2.67 3.36 2.89 U.S. wellhead price of oil ( 1967 dollars per barrel) 3.86 3.71 3.97 Initial claims for unem­ ployment insurance (claims per thousand employees) 10.47 10.60 9.50 Leading indicators index (January 1984= 1) 0.81 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. San Angelo (continued) Although San Angelo reminds us of the past in a number of ways, it also offers several useful lessons for the economic future of Texas: • Those who refrain from going wild in a boom are less likely to go broke in a bust. Making a living from the land does not have to produce severe economic swings. . • The high-technology Santa Claus 1s fickle. The hearts of civic leaders beat faster when multinational firms and high-tech plants come to town, but these facilities can also fade away. • Political connections are as useful as ever. Reservoirs, university campuses, and air force. bases do not spring out of the ground or remam in operation on their own. . • Effort, good judgment, and modest mvest­ment can create an attractive community in what might otherwise be an uninviting setting. With reasonable luck, most Texans will be a little older in the future. The average San Angelo resident already is -older and wiser, perhaps. -Charles P. Zlatkovich Associate Professor of Accounting The University of Texas at El Paso Texas Index of Leading Economic Indicators (January 1984=1.00) 1.10 1.05 1.00 0.95 0.90 0.85 0.80 0.75 0 . 7 0 -itt11'tHtttttHttittttt1'1ttttt1'tttt111tt1ttttttttttt1t1 1984 1985 1986 1987 1988 tltl I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I 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 tlll I I I I I II I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I 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 San Angelo: Texas, Past and Future In many ways, looking at San Angelo gives one a feeling of looking back at the way Texas used to be. In other ways, San Angelo provides useful insight to Texas' future. As metropolitan areas go, San Angelo is small. Only about fifteen of the 300-plus metropolitan areas in the nation have fewer residents. While most Texans think of San Angelo as being way out west, it is closer to the geographic center of the state than any other metropolitan area. San Angelo is somewhat isolated -there are no Inter­state highways and no nonstop scheduled flights to anywhere more exotic than the DFW airport. San Angelo is close to the land -agriculture and mineral production play a larger part in the local economy than in most metropolitan areas. Most of these characteristics mirror Texas' past. All Texas metropolitan areas were once fairly small by national standards. Before the Interstate and the jet airplane, all Texas cities were a long ride away from anywhere else. The Texas economy was, and still is, closely linked to the land. While San Angelo shows us where we have been, it also provides some indications about where we are going and what can happen along the way. The average San Angelo resident is older than the average Texan. As time passes, the average Texan's age is also likely to increase. Quality of life and basic resources are impor­tant to San Angelo. The setting along the Concho River is reminiscent of Austin, and the presence of nearby lakes (sometimes taken for granted in East Texas) is the envy of other West Texas metropolitan areas. San Angelo residents have demonstrated willingness to pay for civic im­provements. In the recent past, local property tax rates were among the highest of the Texas metropolitan areas. San Angelo also benefits from the presence of Angelo State University. The mere possibility of a major Japanese in­ dustrial firm locating a plant in the area causes flurries of excitement in cities (and towns) across the nation. A high-technology plant causes even greater excitement. San Angelo had one (a Mitsubishi aircraft plant) before most Texans had ever heard of a Honda automobile, yet it proved no more invulnerable to basic economic conditions than a typical Rust Belt foundry. The building now houses federal government facilities. San Angelo managed to escape much of the craziness that afflicted parts of Texas during the early 1980s boom years. The city lacks the empty office buildings, incomplete shopping centers, and bankrupt hotels found in many Texas cities. The sane atmosphere is more remarkable because Tom Green County and several of the surrounding counties produce significant quantities of oil. San Angelo did well when Texas was booming and suffered when Texas was suffering, but the peaks and valleys were less severe. The unem­ployment rate in San Angelo has tended to stay at about 75 percent of the state rate in both good times and bad. San Angelo is proud of its agricultural heri­tage. References to its status as a major primary wool market are found in most descriptions of the city, but one looks in vain for visible signs or relics of the agribusiness activity. The sheep and goat industry has not produced a historic landmark on the order of the stockyards in Fort Worth or the Spindletop field in Beaumont. The economic activities that make the most notable relative contributions to the San Angelo economy in comparison to the state and the nation are communications and the military. GTE accounts for most of the communications industry activity, and Goodfellow Air Force Base is the military installation. Both activities were threatened with shutdowns in the recent past. The GTE operations survived a consolida­ tion program, and Goodfellow became the site of a new military intelligence training facility. The largest manufacturing employers are com­ ponents of Johnson & Johnson and Levi Strauss. Ethicon, the Johnson & Johnson unit, makes surgical sutures and needles in an unusual under­ ground facility. A nearby Levi Strauss unit makes jeans in more typical surroundings. San Angelo serves as the commercial center for a large, although somewhat sparsely populated, geographic area. San Angelo's retail sales per person frequently rank among the top 20 metropolitan areas in the nation. (continued on preceding page) tlll I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I 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 •1Bureau of Business Research SERIALS ACQUISITIO S UNIV OF TX AT AUSTI • P.O. Box 7459 GENERAL LIBRARIES Austin, TX 78713-7459 PCL 1 .. 114 CAfllPUS 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. 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 IJ4r Announcements Correction: The second line of the second paragraph of the Houston article (June issue of this newsletter) should have read as follows ­ ''With the plunge in prices that commenced in 1981 , the region's manufacturing base was decimated. Improvement in oil prices and drill­ ing activity may bring back some of the em­ ployment in this sector." We apologize for the error. The June issue of Texas Economic Indica­ tors carried tables reporting the 1986 per capi­ta income in Texas by metropolitan area and by county. For more information on the data, call (512) 471-5180; to order the issue, call • (512) 471-5179.