Texas Economy - Main Features

About Texas

Texas is the second largest and second most populous state in the United States.  Texas’ population reached 20,851,820 in 2000 according to the latest estimates from the U.S. Census. With 84.8 percent of its population living in metropolitan areas, Texas is predominantly an urban state.  This is underscored by recent population trends—the state’s 24 metropolitan areas accounted for over 91 percent of Texas population growth between 1990 and 2000.  Growth in the state’s metro areas, however, is not evenly distributed. It is concentrated in the largest metropolitan areas like Dallas, Houston, San Antonio and, notably, Austin, which added 403,536 people nearly doubling its population.  Other areas with significant growth are metros located along the border with Mexico such as McCallen, Brownsville, and Laredo.  One of the fastest growing regions in the state is the Lower Rio Grande Valley.

The Current Business Climate

Texas Economy[1]

Although economic growth in Texas has decelerated, it has not declined as much as that of the nation, so Texas remains a growth leader among the 50 states.  In the rate of job growth from June 2000 to June 2001, Texas ranked fifth, behind only Nevada, Florida, Wyoming, and Colorado.  Twenty-eight states now have annual job growth rates below 1 percent, and seven of them lost jobs over the past year.  Texas ranked third in the number of new jobs added over the past year (221,000), behind California (310,000) and Florida (229,000).

A growing oil and gas industry has to some extent insulated Texas during the national economic downturn.  Since War II, all but one U.S. recession was preceded by a sizable jump in global oil prices.  Currently, the U.S. uses 20 million barrels of oil per day and produces only 5 million, resulting in a net energy import bill of $130 billion per year, up three-fold over the cost in 1999.  Higher oil and gas prices have boosted the state's oil and gas industry, and with a much greater concentration of oil and gas producers in Texas than nationwide, the strength of this industry has propped up the state’s aggregate economy by mitigating the cutbacks in the consuming sectors.  Although oil and natural gas prices have given back some gains since the first of the year, prices have remained high enough to prompt net hiring in the energy exploration industry, which has increased its Texas workforce by 6.6 percent (9,300 jobs) over the past year.

While helping the energy industry, higher energy prices have contributed to the weakness now prevalent in many manufacturing and service industries.  Most notably, high natural gas prices have wreaked havoc on the profit margins of the state's petrochemical industry, since natural gas is a primary source of feedstock materials for petrochemical producers.  Apparel and transportation equipment manufacturing are also in the red, as judged by job losses over the past twelve months.

All Texas industries except manufacturing continue to add jobs, albeit at a slower rate than over the last eight years.  In the past twelve months, every sector except mining and finance has seen less robust growth than experienced during the previous twelve months.  Ninety-two percent of Texas jobs added over the past year have been in service-producing, as opposed to goods-producing, industries, and the share has risen with the loss of manufacturing jobs and the drop in apartment and office construction.  Finance has been given a lift by lower interest rates, which are boosting single-family real estate markets and encouraging the refinancing of loans.  Through most of the 1990s, Texas construction led the state's industries in job growth, and this sector now has five jobs for every three it had eight years ago.  After average annual job growth of 6.3 percent over the last eight years, these jobs are now growing at a 3.7 percent annual rate.  Largely owing to lower mortgage rates, housing permits were up 5.1 percent during the first five months of 2001, compared to the same period of 2000.  Reflecting the downturn in consumer confidence, average housing prices statewide declined by 2.5 percent from May 2000 to May 2001.

The Near Future[2]

With federal funds interest rates at their lowest levels since the early 1990s, the Federal Reserve Bank has less leverage to stimulate the economy much further.  Rate cuts earlier in the year are just now beginning to show their effects, as they work their magic with a long lag time.  Two of the leading national economic forecasting firms—DRI-WEFA and Economy.com—both call for the national economy to strengthen during the remainder of this year.  Conversely, investment capital has fallen precipitously, partly because banks have understandably become more cautious in making business loans.  As the national economy slumped and consumer confidence fell, the value of all loans held by commercial banks chartered in Texas fell 28 percent from the first quarter of 2000 to the first quarter of 2001.  Even though interest rates are down, investment actually has declined. Economy.com notes that banks’ increased caution about making loans is a national phenomenon, and with credit harder to find, businesses and households are “finding it increasingly difficult to invest and spend”.

As demand abated in 2000, payroll employment did not immediately reflect the slowdown.  First, companies cut overtime hours, then regular weekly hours, followed by culling temporary and part-time workers.  Cutbacks in full-time workers were consequently delayed, but showed up toward the end of 2000 and early 2001.  Although June registered a slight uptick in employment growth, it is too early to know if this represents the beginning of a trend.

Over the next two years, Texas gross state product is expected to grow at about 4 percent annually, compared to a 6.1 percent annual increase over the 1995-2000 period.  More jobs will continue to be generated than lost, although the rate of employment growth will slow to just over 2 percent annually.  Inflation, with annual increases that trotted up from a 1.1 percent rate in January 1999 to 4.4 percent in July 2000, appears to have topped out for this cycle.  Consumer price inflation, as of June 2001, stands at 3.9 percent, and is forecast to be about 3 percent in 2002.

A rebound in the national economy would benefit Texas.  Optimism for the near future lies in the positive effects of the Federal Reserve Bank's interest rate cuts, with a level of consumer confidence that remains relatively high and has ceased falling.  Further benefiting Texas is an expected acceleration in the Mexican economy, which is forecast to rebound in 2002, reviving Texas' major export market.  Also, the Texas rig count is at its highest level (514) since 1986, energy efficiency improvements have balanced away some of the deleterious effects of higher energy prices, and worker productivity has continued to increase.  Finally, the U.S. and Texas economies are expected to garner a small boost from federal tax rebate checks getting into the hands of consumers during the July-September period. No boom is expected, but Texas should avoid a recession.

Foreign Investments

By any measure, Texas has successfully integrated itself into the global marketplace.  Not only has the state experienced a precipitous rise in its exports in recent years, but it has also been the recipient of surging inflows of foreign direct investments.  Part of the state’s international appeal can be attributed to its fortuitous geographic location.  With its first-class road, rail, air and sea linkages, Texas has become the primary route by which goods are shipped between the United States and Latin America.

Among US States, Texas is the top destination of foreign direct investment from the individual nations of Germany and Australia, as well as Latin America, the Middle East, and Africa.  The state is the number two destination for British and Dutch investment, and retained the third-highest cumulative investment from Canada and France.  Texas is only second to California in terms of overall foreign investment in the United States.  The manufacturing sector is the chief beneficiary of the investment inflow.  The US bureau of Economic Analysis reports 2,428 foreign-owned establishments in Texas, that employ over 320,000 Texans, making Texas one of the leading locations in the United States for multinationals company.

Exports

In 1999, exports from Texas to Mexico increased 14 percent and exports to Canada grew 3.5 percent, creating a sum of $32.6 billion of exported merchandise ($66.9 billion ROW).  Since NAFTA was implemented, Texas has been exporting to these partners in a steady increase of 111.1 percent.  Clearly, our economy continues to be more and more dependent on trade for growth.  In 1999 the state of Texas, second only to California, boasted $91 billion in annual exports.

Business Incentives

Incentives for business are offered at both the state and local levels.  The majority of incentives available for businesses in Texas are provided at the local level.  Some examples include: employee training, infrastructure development, project financing and tax abatement.  The Italy America Chamber of Commerce, Inc. can provide companies with an estimate of the business incentives that they are likely to receive by locating in particular communities.

The Labor Force

Composition and productivity

Education

Productivity