THE U.S. AND TEXAS – A TALE OF TWO ECONOMIES
“All of you remember your macro-economics class from college, right?” asked Tom Gilligan, economist and Dean of the McCombs School of Business at UT while addressing the room at the October Texas CEO Speaker Series event in Austin. “It’s GDP = consumption + business investment + government spending + net export.” When looking at each element that makes up the Gross Domestic Product, the forecast for growth in the U.S. economy is low according to Gilligan, based on the most recent forecast from the Philadelphia Federal Reserve.
But, take a look at Texas and growth is in its DNA.
The U.S. Census bureau recently released statistics showing Texas added more people (421,000) than any other state last year – and while Texas only has eight percent of the U.S. population, the state added nearly 19 percent of the nation’s population growth for the year. In addition, by the end of last year, Texas employers had replaced all 427,600 jobs lost during the recession and continue to add jobs, while only 48 percent of U.S. jobs lost have been recovered.
Three of the biggest drivers of the Texas economy – energy, technology and health care – are all contributing to the growth, although some sectors more than others. Texas CEO, along with Texas Enterprise, an online business publication of the McCombs School of Business at UT, welcomed McCombs Dean Tom Gilligan; Spencer Berthelsen, M.D., Kelsey-Seybold Medical Group; Steve Felice, Dell; and, Cedric Burgher, QR Energy, to talk economics, trends, jobs and what’s coming in the next year.
The View From 30,000 Feet
Gilligan reviewed each of the four foundations of the U.S. GDP and sees little to suggest the economy will come roaring back nationally. “Incomes are not going up and they have actually contracted a great deal over the course of the recession,” said Gilligan. In addition, employment and underemployment are affecting households working to pay off their mortgage, credit card and student loan debt. As a result, households are reducing spending which also contracts the economy.
Gilligan doesn’t see a lot of incentives for businesses to invest these days because balance sheets look good and businesses are making profits, although profit growth potential is not there. Adding to the lack of incentives is uncertainty over the tax policy.
The final factor – net exports – are slowing with Europe acting as a big drag on economic growth and no pockets of good trade.
Gilligan sees improving private sector balance sheets because the debt has been worked down in most parts of the business sector and also sees a possible shift in the way consumers spend money. “There will be more spending on necessities like energy, health care and possibly education. The way to think about the future is to think less about how you spend the new dollars you get in the household, and more about how existing dollars are going to be reallocated to satisfy needs.”
Gilligan’s overall view of the national economy? Pessimistic.
Drilling Down to Texas
While the U.S. economy is barely treading water at a growth rate near two percent, the Texas economy is tracking to finish 2012 at 3.6 percent – well above the three percent most economists see as the dividing line between growth and a stall.
Richard Fisher, head of the Dallas Federal Reserve, delivered a speech in October titled, “The United States Is Not Europe and Texas Ain’t France: America as the Thoroughbred Economy.” In his remarks, Fisher spoke about how the private sector and the American business community are ready to expand but won’t move forward until the uncertainty of health care, taxes, and regulatory structure are resolved. “The great inhibitor of job creation is the uncertainty over taxes and spending and regulation that plagues businesses. Even if businesses do not like the rules that govern their behavior, knowing those rules with certainty gives them something to plan around and navigate through,” said Fisher.
Fisher observed that Texas works with the same monetary policy as the other 49 states, pays the same interest rates on mortgages, commercial, industrial and consumer loans; and works under the same federal regulatory regime governing banks and financial institutions and operates with the same stock market as the rest of the nation. And, as Fisher noted, Texas does have a low propensity of social services, but “We excel at creating the single most important driver of human dignity and pride: jobs.” By attracting hundreds of thousands of new residents, Fisher sees Texas as striking a balance of job creation and social services.
The 22-year time span of job growth in Texas covers legislatures under both Democratic and Republican leadership and Democratic and Republican governors, with all creating a pro-business, pro-growth environment.
Fisher’s recommendation? “Set aside short-term political myopia . . .focus on incentivizing America’s businesses to create jobs.”
The Five Trends in Health Care
For businesses paying the cost of health benefits, the insurance company payers, those working in the health care sector and their patients, here are five trends Dr. Berthelsen sees in 2013.
Health Care Reform Will Continue
“Health care reform is here to stay. We now have version 1.0 and it’s going to have to continue because it’s underpinned by economic imperatives both from the private and governmental sectors,” said Berthelsen. According to a study funded by Commonwealth, the United States spends twice as much per patient on health care, which is not resulting in twice the benefits as in other countries. The U.S. score was either last or next to last on ten of twelve metrics of quality.
Berthelsen said version 2.0 and 3.0 of reform will likely come with the next election cycle with the focus turning to cost control.
Insurance Company Expansion Will Lower Some Costs & Raise Others
Part of the major thrust of health care reform has been insurance reform and extending coverage to a broader population. “One benefit,” noted Berthelsen, “We move away from taking care of patients when they need rescuing and start taking care of them with when they need prevention.” This should help bring down some costs.
Conversely, Berthelsen said that those with insurance through an employer or a private purchase will see costs go up after health care reform; meaning those who are healthy will have to pay more for those coming into the risk pool who previously couldn’t get insurance.
Health Care Will Become Accountable
“Healthcare will become accountable – not just more accountable – but accountable because it’s not accountable today,” said Berthelsen. Health care organizations that practice accountable care operate with a payment and care delivery model that ties health provider reimbursements to quality metrics and as a result, cost less.
Kelsey-Seybold is an accountable care organization based in Houston. Berthelsen sees health care moving from fragmentation of services into systems managing the total cost and quality of care, and increasing the value of the health care patients receive. To make that happen, there will need to be a heavy investment in medical management programs, information infrastructure investments and a scientific-based, evidence-based approach to health care, “Rather than opinion-based regional bulwarks,” said Berthelsen. “We will move from payment on a fee for service basis which pays for volume, but not for value, to a system of pre-payment for a population of patients to achieve attractive health care outcomes over a period of time.”
More Employers Will Convert to Self-Funding
Because of the ACA, and bringing more high-risk patients into the insurance pool, Berthelsen sees employers that are now fully insured more likely to move into the self-funded arrangement for benefits. “Some employers may go to a defined contribution plan where they give their employees a set amount of money to go into the exchanges to buy insurance on an individual basis,” said Berthelsen.
Self-funding will be advantageous to employers because companies will only be exposed to their own risk and not to the new risk of the ‘difficult to insure’ patients with higher needs, and will not be exposed to the risk mitigation strategies being applied in the insurance market.
The Physician Shortage
There will be a physician shortage, observed Berthelsen. “It’s easy to predict a trend that’s already partially true and we do have a shortage in Texas,” he said. Texas ranks 45th in the nation in terms of the number of physicians per 100,000 population, plus a large number of physicians are at retirement age. Texas medical school graduates supply a fixed rate of replacement, and not all of those med school graduates will stay in Texas. “We know we’re going to have increasing demand as we expand the insurance pool of patients and we go more to preventative care rather than rescue care,” Berthelsen said.
Steve Felice shared three trends in technology and business: greater productivity, accessing new markets to find new areas of growth and the need to get more out of customers.
With most institutions looking to modernize infrastructures, Felice forecasts a movement to standards-based computing. “This is a big change in our industry because most large institutions have run their business on proprietary platforms,” said Felice. While beginning a decline, proprietary mainframes are still pervasive around the world but technology advances in computing speeds and the performance of processors are changing the need for proprietary technology to standards-based systems using servers, instead of mainframes.
The other productivity trend is the phenomenon called “bring your own device” to work. “With the emergence of smart phones and tablets, there’s a growing pressure on institutions to allow their employees to bring their own devices into the workplace,” said Felice. But, while employers have resisted requests in the past, now it’s being viewed as a cost saving opportunity because it allows employees, particularly the younger generation, to have a much different work day – working from home and working different hours with their own hardware.
“Our customers want to know how to implement ‘bring your own device’ and let the employee pay for the device; but there are complications related to security,” noted Felice. Since Dell’s business is 80 percent related to institutions, and as Windows 8 for tablets comes out, Dell is looking at security and manageability.
Felice sees low technology usage in China, Africa, Brazil, India, and Indonesia, meaning substantial growth in tech sales, and is also forecasting more growth globally with e-commerce and cloud computing for medium and small business. “In the past, you’d have to set up an office in a foreign country and create an infrastructure there,” he said. Because of cloud computing, businesses can access customers, supply chains, and all kinds of competitive information without having a physical presence. Cloud computing is leveling the playing field for any business to enter any market around the world.
More Out of the Customers
To get more from the customer, the first trend is big data and the second is social media.
“There is a massive amount of data available about consumers,” said Felice. “There are emerging software and hardware technologies about condensing data, analyzing the data, and gaining insights out of the information. He forecasts a big trend growing in technology to get that kernel of information about a particular customer allowing companies to target a specific product or service to them.
Felice observed one of the most cost effective ways to find out about customers and competition is through social media. “If not done properly, all you get are anecdotes.” With a social media command center, businesses have the capability to evaluate every comment being made about a business or a competitor. Dell puts their social media feedback in categories of positive, negative, neutral, hot trends, bad trends and act on it. “You can also gain tremendous competitive insights and understand what trends are positively or negatively affecting your competition,” said Felice. Today companies are using social media as one of their primary marketing engines.
“In the United States we have an increase, for the first time in 30 years, in energy production,” said a smiling Cedric Burgher. Those increases in production have implications for capital investment, job growth and for the balance of payments on the export-import imbalance. Citibank’s chief commodities economist estimates between $200 to $300 billion could be created with oil and gas investments, along with 2.5 to 3 million jobs – all in the U.S. The publicly traded companies invested about $318 billion in capital in the last year, alone. The best part? Energy production also has big implications for Texas because a lot of the investment for job growth will occur here.
Sources, Supply & Demand
Oil & gas make up about 60 percent of the total energy sources, with nuclear, renewable energy and coal making up the balance. “We expect natural gas and renewables to be the fastest growing sectors on a percentage basis,” said Burgher. “On the other hand, while oil, gas and coal will grow at a slower rate, we think it will continue to make up over 50 percent of our energy supply for the foreseeable future.”
Burgher thinks 85 percent of the near-term future capital investment, what drives job creation, will go to oil and gas development and services. Those services include transportation in the midstream sector, and refining in the downstream sector, with only 15 percent of investment going to coal, utilities, and renewable energy.
Oil is a worldwide market. Oil is transported easily and the macro drivers are the big economies of the world like the U.S., Europe, and now China and India – driving the demand side for oil. On the other side, the supply side has been dominated by the Middle East, by the OPEC countries and Venezuela – now that picture is changing. Over the three-year period from 2009-2011, the U.S. contributed more incremental oil supply than any other country – more than any other OPEC country.
Natural gas is a market more isolated to the U.S. and North America because transportation costs are a challenge. “However,” observed Burgher, “with the emergence of liquefied natural gas and the ability to move natural gas by ship, we see gas becoming more of a global market.” In addition, coal fired power plants are switching to natural gas.
Forecasts through 2015 show the low case scenario of oil production reflecting a 60 percent increase in U.S. oil production, noted Burgher. Harold Hamm, CEO of Continental Resources, testified last month to the House Committee on Energy & Commerce and said, “American is endowed with an estimated 140 billion barrels of recoverable oil. That’s enough to replace Persian Gulf imports for the next 50 years.” The Manhattan Institute said it this way: “A complete reversal in thinking is needed to orient North America around hydrocarbon abundance.”
Three big oil-producing areas in the U.S. are “on fire” right now, and two of them are in Texas. First is the Permian Basis in West Texas. Burgher shared a recent forecast on production by Simmons & Company, with a near doubling by 2015 to around 2 million barrels a day. The second area is the Bakken oil field in North Dakota, with Simmons projecting a 64 percent increase to two million barrels per day by 2015. And lastly, Eagle Ford in South Texas, where production is now up 65 percent. Those three fields combined will see a 68 percent increase in midstream capacity by 2015, noted Burgher.
In just the last 12 months, U.S. midstream companies have invested $29 billion for oil and gas infrastructure. That capital investment is going to drive significant job growth in Texas.
Gilligan: Many people are talking about the ability of the Affordable Care Act to bend the cost curve? Do you see anything in version 1.0 that will make that happen?
Berthelsen: I think American innovation is going to save us from what would otherwise be a centrally controlled health care economy.
Gilligan: A self-serving question, Steve. We’re starting a Master’s Program in Business Analytics next year. It’s about collecting, managing and analyzing the kind of data that’s being collected by organizations. What does Dell anticipate the demand for talent being generated?
Felice: I think it’s a high priority with a demand for talent to analyze the information and the technology to process the information. If you want to maintain a competitive advantage in the world – it’s becoming very difficult to differentiate – the way you’re going to do that is the unique differences in customers and markets. Business analytics is going to be the highest demand profession in any industry in order to be able to differentiate your business from the rest of the market.
Gilligan: Cedric, I was a bit startled by your talk. During the past three or four years we have externalized the notion that we are moving away from hydrocarbons, and you’re saying we have an abundant supply of hydrocarbon resources, and a policy point of view that we need to move toward those resources. How do we have a productive discussion about what our nation’s energy policy should be?
Burgher: There are a lot of facets. We live in a great country where we embrace democracy and freedom and I think people have a voice. I think everybody can relate to this because they touch energy in one way or another by paying their electric bill or filling up their car. We have a great environmental track record and compared to the rest of the world we do a great job.
Consumers will pay for a bit of subsidy, but a 400 percent subsidy for renewables? There’s a lot of education that needs to go on with the people to influence elected officials.
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