Bureau of Business Research August 1984 College and Graduate School of Business, University of Texas at Austin The Texas Economic Climate It's becoming an all-too-familiar story-interest rates keep rising, but strong economic recovery continues. In June, continuing pressures on short­term rates forced large commercial banks to once again increase their prime lending rate from 12.5 to 13.0 percent. At the same time, the U.S. Depart­ment of Commerce revised its estimate of first quarter gross national product (GNP) growth from a boom rate of 8.8 percent to an even higher rate of 9. 7 percent. The government also released its "flash" estimate of second quarter GNP growth, which at 5. 7 percent may indicate some economic slowdown, but the growth of the national econo­my still remains well above its long-term sustain­able rate of about 3 percent. In Texas, economic recovery continues, but growth remains below the national rate and there are some signs that the state's growth rate is also slowing. Total nonfarm employment in the state increased to a seasonally-adjusted level of 6,322,000 in May, and it is poised to pass its peak of 6,349,000 of March 1982. However, after peaking at 5.1 percent in the fourth quarter of 1983, the growth rate in state non farm employ­ment slowed to an estimated 1.9 percent in the second quarter of this year. U.S. employment growth has also been slowing, but the second quarter 1984 growth rate is well above Texas' ) at 4.0 percent (see table 1). • While employment in the service-producing sector is reaching record levels, the weak recovery in goods-producing industries is preventing a stronger rebound in overall state employment. Among goods-producing sectors, mining and manu­ since employment bottomed in mid-1983, but employment in construction continues to slide because of overbuilt office, condominium, and apartment markets in many parts of the state. News on state unemployment continues to be good. In June, the state's unemployment rate was reported at a seasonally adjusted 4.8 percent-a drop of almost one percentage point from the May rate of 5. 7 percent. It must be stressed, however, that because of a relatively small sample size monthly changes in the state unemployment rate can be deceiving and quarterly averages are much more accurate. The state unemployment rate dropped from a peak of 8.5 percent in the first quarter of 1983 to 6.5 percent in the first quar­ter of 1984, then declined to 5.8 percent in the second quarter. The Energy Picture World oil markets are stable and oil prices are firm. The escalation of the Iran-Iraq War in recent months has helped keep oil prices from declining, but the recent behavior in spot prices indicates that Table 1 Nonfarm Employment Growth Rates at Annual Rates (First quarter 1983 to second quarter 1984) 1983 1984 Area 2 3 4 2 Texas -0.7 -0.5 1.3 5.1 3.4 1.9* Unites States 0.5 3.4 3.7 5.8 4.8 4.0* *Estimate based on May data. facturing have experienced moderate rebounds ltlIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIJ&r oil traders do not believe that the war will lead to a major increase in prices. Persons in the drilling industry can now breath a sign of relief. After dropping through the first four months of 1984, the Hughes U.S. rotary rig count has now turned around. The rig count rebounded very strongly from 2, 120 in April to 2,277 in May and now stands 18 percent above its level of one year ago. Now that the normal beginning-of-the-year decline in drilling activity is over, the rig count will almost certainly continue to increase for the rest of the year. In fact, the strength of the May rebound has caused us to revise our estimate of the average rig count for 1984 from 2,500 to 2,600-2,650. Statewide Outlook The outlook for the Texas economy for the rest of this year remains unchanged from two months ago: the state economic recovery now has so much momentum behind it that nothing short of a major drop in oil prices or a significant in­crease in interest rates could cause a recession this year. The outlook for 1985 and beyond also is basically positive if the U.S. economic recovery re- Figure 1 Texas Index of Leading Economic Indicators (Index: January 1981=1.00) l.06'"T""---------------­ ,.........,41.."', .. . 1.04 . .. I. 1.02 I•. '•. . 1.00 ... . • 0.98 ·.•.••. 0.96 ·.. 0.94 \,.., Goods employment . ',,, ...·""........... 0.92 "•.....,,,.. 0.90 0.88 0.86-+-----+-----+-----+------I 1981 1982 1983 1984 mains intact, oil prices stay firm, and oil and gas drilling continues its strong rebound. After bottoming at 1.36 (1973=1.0) in February 19 83 , the Bureau of Business Research index of leading economic indicators for Texas has re­mained stuck at 1.41 to 1.42 for the past five months (see figure 1). Over the past three months (March to May), all of the five indicators have remained relatively unchanged, except for a small recovery in new housing permits from its bottom in March (see table 3). The leading indicator index appears to be say­ing that the Texas economic recovery will continue but a major acceleration in growth is not likely. On the other hand, the probable strong second-half rebound in oil and gas drilling should fuel activity in Texas oil and gas services and drilling-related manufacturing, and this development may reverse the slowing growth trend of the first half of the year and lead to some acceleration in the state's growth in the second half. Agriculture Twenty-five years ago agriculture produced about 6.5 percent of the total economic output in Texas. Today, this figure has declined to about 1.8 percent. Still, agriculture is a major component of the economy in many parts of the state, espe­cially in West Texas and the Panhandle. Agriculture is a notoriously volatile industry; over the past few years, farm incomes in Texas have been squeezed by low product prices, poor harvests resulting from drought or bad weather, and high costs of energy and other inputs. State cash receipts from farm marketing peaked at $10.1 billion in 1979 but had fallen to $9.4 billion by 1983. Over the same period, farm proprietors' income, which represents net income after ex­penses, fell from $2.3 billion to $692 million (it actually bottomed at about $689 million in 1982). Several factors, however, now indicate.that some improvement in the state's agricultural .sector appears likely. First, product prices are improving somewhat and input costs, especially for energy­related inputs, are under control. (High interest rates, however, continue to be a serious problem.) Second, a return to reasonably normal weather should improve yields and harvests. Third, the federal government's payment-in-kind (PIK) pro­ ltlIIIIlIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIllfrr 1tl I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I 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 Figure 2 Nonagricultural Employment in Four Largest Texas Metropolitan Areas (Index: January 1981=1.00) 1.18~...--------------------------------------. - -Austin1.16 1.14 1.12 -San Antonio ,, --­ 1.10 _ --:= ..--Dallas-Fort Worth -,• 1.08 / ---­ .,,,, J ••­ 1.06 / -----,.#. _,,,,.. _,, ---­ 1.04 __. ---_.., --, ---­ _,,,,.. --=---------... ­ 1.02 -,,,. ,,--­ _J-' --, 1.00 ~--Houston 1981 1982 1983 1984 Table 2 Nonagricultural Employment and Unemployment by Metropolitan Area Nonagricultural employment Unemployment (thousands) rate Area April 1984 April 1983 Percentage change April 1984 Abilene 57.9 57.9 4.6 Amarillo 79.6 76.8 3.6 4.6 Austin 298.3 283.8 5.1 3. 7 Beaumont-Port Arthur-Orange 140.1 141.7 -1. l 12. l Brownsville-Harlingen-San Benito 63 .3 61.5 2.9 14.5 Bryan-College Station 46.3 45.3 2.7 3.9 Corpus Christi 128.7 130.7 -1.5 9.0 Dallas-Fort Worth 1,646.7 1,570.4 4.9 3.9 El Paso 166.7 163.6 1.9 9.8 Galveston-Texas City 67.8 67.6 0.3 10.4 Houston 1,517.9 1,502.2 1.0 7.3 Killeen-Temple 62.5 59.3 5.4 5.2 Laredo 30.2 29.6 2.0 20.8 Longview-Marshall 67.1 67.4 -0.4 8.8 Lubbock 91.5 91.6 -0.l 6.1 McAllen-Pharr-Edin burg 78.1 79.0 -1.1 23.0 Midland 54.9 50.l 9.6 4.1 Odessa 57.4 54.4 5.5 5.6 San Angelo 37.6 37.1 1.3 4.3 San Antonio 450.4 432.4 4.2 5.1 Sherman-Denison 34.4 34.l 0.9 5.7 Texarkana 46.5 45.7 1.8 8.4 Tyler 58.0 56.8 2.1 4.8 ) Waco Wichita Falls 76.2 53 .5 73 . l 51.8 4.2 3.3 4.3 4.6 Total Texas 6,313.3 6,143.9 2.8 6.4 Source: Texas Employment Commission. 1tl I I I I ! I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I 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 till I I I I 11111111 I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I IJfr gram is temporarily bolstering farm incomes. After reaching a low point of $0.2 billion (at an annual rate) in the third quarter of 1983, farm propri­etors' income in the state skyrocketed to $1 .9 billion in the fourth quarter. The major factor leading to this resurgence in farm income was the cotton PIK payments, which were made in Octo­ber. Retail Sales and Bank Deposits In recent years, various government policies, including personal income tax cuts, reductions in capital gains tax rates, liberalized depreciation schedules, and the deregulation of financial institu­tions, have purportedly been aimed at increasing savings and investment and thus restoring health to a sluggish economy. Have these policies worked? Yes, but for the wrong reasons. After declining through the second half of 1981 and all of 1982, the U.S. economy rebounded and moved into a period of strong economic recovery beginning in early 1983. The recovery, however, has been led by increased consumer spending, not Table 3 Components of the Texas Index of Leading Economic Indicators (March-May 1984) Measure March April May Manufacturing weekly hours 41.8 41.9 41.9 Retail sales (billions of 196 7 dollars) 2.56 2.50 2.50 New housing per­ mits (thousands) 16.92 19.36 19.08 U.S. wellhead price of oil (196 7 dol­ lars per barrel) 8.46 8.41 8.38 Initial claims for un­ employment insur­ ance (claims per thousand employees) 8.96 9.01 9.10 Leading indicato.rs index (January 1973=1) 1.42 1.41 1.41 Note: All figures are seasonally adjusted. Sources: Texas Employment Commission, U.S. Bu­reau of the Census, and U.S. Department of Ener­gy. by increased business investment. From the end of 1982 to the end of 1983, national consumer spending increased 9 .0 percent. During 1983, personal consumption expenditures as a percentage of disposable income reached 92.4 percent-the highest rate since 1963. Corresponding to the higher rate of consumer spending, the personal savings rate has declined and personal savings as a percentage of disposable income reached 4.9 percent in 1983, the lowest rate since 1949 (the personal savings rate actually peaked at 8.6 percent in 1975 during the low point of the 1973-1975 recession). Although it has shown some signs of reviving since mid-1983, business investment, relative to the overall economy, has generally declined over the past few years. In 1979, total business fixed investment peaked at 12.0 percent of the gross national product-by 1983, this rate had dropped to 10.5 percent. In Texas, the best measures of consumer spend­ing and savings are retail sales and bank deposits. Typically, during a recession, consumers cut back their spending and save their earnings (if they are working) because of fears of unemployment, while during a recovery they increase spending dramati­cally. During the low point of the 1981-1982 recession, for example, retail sales growth dropped while the growth in bank deposits remained strong. During 1983, the pattern has been somewhat uneven, but with the beginnings of economic recovery, retail sales growth has surged while bank deposits growth has dropped. Despite the recent recovery in retail sales, Texas retail sales as a percentage of personal income has generally declined over the past ten years. Sales as a percentage of income peaked at 53.5 percent in 1973, and by 1983 the rate reached 47.9 per­cent (the rate bottomed at 47.5 percent in 1982). In part, the trend of declining retail sales relative to income reflects the problems in the state economy in the past two years, but most of the decline can probably be explained by a shift in consumer spending away from goods and toward services. Nationally, the percentage of consumer spending on services has generally increased since the end of World War II, and this proportion increased from 43.8 percent in 1973 to 49.8 percent in 1983. Similar figures are not available for Texas, but the state is almost certainly following national trends. -Thomas R. Plaut Research Economist till I I I I 111 11111111111 I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I IJfr tftl I I I I 11111111111111111111111111111111111111111111111111111111i1111111111111111 IDr High Technology in the North and Central Region The growth of population, employment, and gross product in the North and Central region of Texas during the last decade was influenced to a large extent by the predominance of manufactur­ing, especially in the computer and electronics industries. Although the three major metropolitan areas in this region accounted for only 31.8 per­cent of the state's population in 1982, they pro­vided 40.6 percent of manufacturing employment and over two-thirds of high-technology employ­ment in Texas. About half of the state's 1,500 high-technology manufacturing firms are located in the North and Central region. The Austin, Dallas-Fort Worth, and San Anto­nio metropolitan areas are the major areas of high­technology growth and employment in the state. The composition of employment in each area, however, is quite different. Austin's manufacturing sector accounts for only 10.8 percent of wage and salary employment in the area. Yet more than 44 percent of Austin's manufacturing employment is in high-technology industries. Austin is electronics based, as a number of its high-technology firms manufacture office computing and accounting machines, electronic components and accessories, and measuring and controlling instruments. In addition, a number of research and development firms are locating in the Austin area, taking advan­tage of the University of Texas and the skilled work force. In comparison to Austin, the Dallas-Fort Worth Metroplex is more industrialized, yet the manufac­turing base is not as concentrated in the high­technology sectors. Manufacturing employment represents 18 percent of total employment, but high-technology employment accounts for more than 28 percent of the manufacturing base in the High-Technology Employment, 1980-1983 Average annual Metropolitan growth rate area 1980 1981 1982 1983 1980-1983 Austin 12,490 14,001 l 3,90S 14,701 5.6 Dallas-Fort Worth 77,881 88,888 86,158 87,000 3.8 San Antonio 5,971 6,970 7,836 8,138 10.9 Source: Texas Employment Commission. Panhandle and West Metroplex. The area's high-technology economy revolves around producers of communication equipment, electronic components and accessories, and aerospace and defense systems. One out of ten of San Antonio's wage and em­ployment workers is involved in manufacturing. Of these employees, only 16.6 percent are within the high-technology sector. San Antonio's high­technology base consists of firms producing elec­tronic components as well as those manufacturing surgical, medical, and dental instruments. The growth of high-technology employment that the region experienced in the 1970s has con­tinued into this decade despite the effects of the national recession. From 1980 to 1983, a surge of growth in high-technology manufacturing occurred in the three major metropolitan areas; employment grew by an average annual rate of 5.6 percent in Austin, 3.8 percent in Dallas-Fort Worth, and 10.9 percent in San Antonio (see table). Employment growth in this sector suffered in 1982 as the state began to feel the ef­fects of national reces­sion and a shake-out in the computer industry. Nonetheless, employ­ment in these sec­tors increased in 1983, and the outlook re­mains bright. -Susan Goodman Research Associate 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 IDr . • 1Bureau of Business Research • P.O. Box 7459 Austin, TX 78713-7 459 _, . ·~ . ' ,:& ~. ss·~.~.~ . . -.~ 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. NONPROFIT ORG. U.S. Postage PA ID Austin, Texas Permit No. 1630 tDJI11111 I I I 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 Announcements For further information on the following pub­lications and data services and their costs, contact the Bureau's information services division (512/ 471-1616). Population Estimates: The Census Bureau has recently released population estimates for 1982 by county and metropolitan statistical area (MSA). Included in the data are estimates of net migration. Per Capita Income: Data for 1982 by county and MSA are now available. Texas Trends: This concise summary of historical, cur­rent, and forecast data on the Texas economy is available free on request. Every month, Texas Industrial Expansion re­ ports on new and expanding manufacturing firms in Texas, as well as other business news in the man­ ufacturing sector. The cost of a one-year subscrip­ tion is $20. Another monthly newsletter, the Natural Fiber Abstract Service, reports on cotton, wool, mohair, and the textiles industry in general. • Subscriptions to the newsletter are free.