By Ray Niekamp, Managing Editor
Photography by Jonathan Garza
The decline in the energy sector, caused by $45 oil, has attracted a lot of attention this year, but as Keith Phillips of the Federal Reserve Bank of Dallas – San Antonio Branch said, “There’s a lot of things going on here besides oil and gas.” Among them is a petrochemical boom along the Gulf Coast, creating thousands of construction jobs, he said. The Texas economy is the 32nd fastest growing economy in the United States, better than the other oil and gas states. Phillips addressed the Economic Forecast panels in San Antonio and Houston.
The 2016 Economic Forecasts were held in September & October in collaboration with the McCombs School of Business at the University of Texas at Austin, the Federal Reserve Bank of Dallas and Texas CEO Magazine.
“We’re currently seeing a tale of two economies – the goods-producing sector versus the service-producing sector,” said Mine Yucel, Senior Vice President of the Federal Reserve Bank of Dallas. Yucel spoke at Economic Forecast panels in Austin and Dallas.
The goods-producing sector, she said, lost 63,000 jobs so far this year, while the service sector was up about 2.6 percent, or 147,000 new jobs. That growth didn’t come from energy – not directly, anyway. The fastest growing sector was leisure and hospitality – restaurants and hotels. “We think this has something to do with the lower gas prices, so people are eating out again,” she said. Health was up 4.7 percent, adding 42,000 jobs, because more insured people have increased the demand for health care.
But for the year, Yucel said growth is not expected to accelerate. The forecast is for a 1.0 percent employment growth – about 118,000 jobs. In fact, Texas’ growth fell short of the rest of the nation for the first time in 13 years.
Unemployment is holding steady at 4.2 percent, she said. Workers who have been laid off from the energy industry have either left the workforce or left the state. Specialty skills like welders, electricians, and diesel mechanics are still in demand, and there are even shortages in low-skilled jobs like machinists and food manufacturing. Jobs have been lost in energy-dependent metros, such as Houston and Midland-Odessa, but more diversified economies, like Austin and Dallas, continue to grow fast. Dallas is seeing the relocation of Toyota, State Farm Insurance, and Liberty Mutual Insurance. Austin is seeing growth in high tech. “But overall,” Yucel said, “if you look at the full year, it’s the service sector that’s making the difference along with professional and business services.”
Weaker global demand and a strong dollar have contributed to a decline in exports, down about eight percent since last year. “Most of our trading partners have weak economies,” she said. “Mexico is slow, Canada is in recession and China is slow.”
Of course, $45 oil has hit the energy sector hard. Rig counts have dropped from over 900 to 365. Oil production peaked at 3.6 million barrels a day in March, and is now at 3.4 million barrels. “Oil prices are very hard to predict and I don’t try because I’ve learned not to,” quipped Phillips, but he said if prices stabilize at $45 to $47, he expects to see two percent growth next year. “If they go down, we’ll see further weakening,” he said.
Yucel forecasts, “The tailwind is the healthy U.S. economy – here will be weak growth, but no recession.”
“Entrepreneurship has hit prime time,” said Mellie Price, the founder and CEO of Softmatch. “Over the last 10 years, you can now start a tech company on less than $1 million in funding and that’s caused
a massive shift in traditional financing models.”
But Price cautioned that tech startups still have a tough row to hoe. “While it might be cost efficient to go pursue your dreams as an entrepreneur, it’s still very expensive to run the entire race,” she said. She pointed out that startups have a “staggering” 90 percent failure rate. And of the remaining 10 percent, 60 percent fail between the first and second rounds of financing, and half the ones that remain fail between the second and third rounds. “Entrepreneurs are crazy,” she said, “and yet they still keep creating and investors keep funding, and I don’t think that will change.”
Price said Austin is in a unique position to serve startups, through the growth of capital accelerators. Austin leads the nation in startups per capita, Price said, but compared to Silicon Valley, the deal numbers are small. Austin has 114 deals per year, representing $600 million invested. But Silicon Valley has ten times as many deals and $24 billion in venture capital. “I think Austin is going to be pushed to focus its tech and investment resources,” Price said.
Regardless of whether the times are good or bad, Price said the “startup ecosystem” will continue to grow. Millennials will fuel that growth, because, “This generation loves working for startups,” she said.
Price expects more investment capital from outside the region to come into Austin. There’s not enough public money to solve the problems in health care and education, and Price thinks the public sector will lean more and more on the private sector to come up with solutions. Price pointed to a shift in financing to education technology, which will help to optimize environments for learning.
“Health care is going to be hugely disruptive going forward,” Price declared. Telemedicine is one area in Texas where she expects growth, as it brings service to rural parts of the state that don’t have doctors. Data science, which has focused on the payer environment, will move into the patient satisfaction environment. Advances in fraud prevention and centralized billing seem like small potatoes, but Price said, “They are huge game changers in health care, and companies in those sectors will be rewarded.”
The future of Austin will be small, incremental changes that in the aggregate will foster great change, Price said. “Bet on the small horses and not on the unicorns — it’s in education and health care technology.”
The big challenge facing technology is the global economy, said Jim Nyquist, the president of Emerson Process Management, a company developing proprietary software products and services helping
businesses automate production.
The low price of oil has “squashed” capital spending, the strengthening dollars has put us at a disadvantage with European competitors, and the economic slowdown in China has hurt. “It’s tough to have a
global economy and it’s made extra challenges as we try to invest,” Nyquist said.
Technology is driving the lower price of oil, with the convergence of 3D seismic analysis, horizontal drilling and fracking, creating a global oversupply of oil and gas. The good news is that’s sending investment into downstream businesses along the Gulf Coast, Nyquist said. Power plants are converting to gas from coal, liquefaction plants will liquefy gas for export, and we’re seeing a huge boom in downstream ethane crackers and ethylene crackers and developing petrochemicals out of cheap gas.
A similar inflection point affecting technology is the Internet of Things – the connection of smart devices. Nyquist said the next big wave of the Internet will be to connect things to things, things to machines, and machines to people. “Any product manufacturer today that makes a dumb product is going to have to figure out how to play in this new world, or they won’t be around very long,” Nyquist said.
But he sees two speed bumps on the horizon. The first is hacking. “We can’t have people hacking into critical infrastructure – it would create havoc,” he said. “That’s an issue we must solve.”
The second is a shortage of skilled software developers. “There is not enough educated talent as demand continues to grow,” Nyquist said. “We have to offshore talent, and we’d rather get our talent here in Austin.” Emerson has enlisted Hank Green, who teaches science on the Internet, to fire up kids about science and technology. “We’re doing our best to find talent because human capital will continue to drive our country and technology and we need more and more talent,” Nyquist concluded.
The chairman of the Texas Water Development Board, Bech Bruun, took a big picture look at the state. “We really can’t talk about growing our economy if we don’t have water,” he said.
It’s the job of his agency to make sure the water will be there in the future. A state water plan forecasts where the water will come from over the next 50 years, who will need it, how much is needed, when
they will need it and how much it’s going to cost. Bruun said the plan is revised every five years.
The water plan will cost Texas about $231 billion, Bruun said. The Legislature appropriated $2 billion for state water projects, and tasked the Water Development Board with turning that $2 billion into $27 billion in new water projects. Bruun said the Board is going to do that by selling revenue bonds — $1 billion worth in the first year of the plan. Funds will then be transferred from the State Water Implementation Funds for Texas, or SWIFT, to programs where bonds are being sold at discounted rates.
While the Texas economy is facing headwinds from the goods sectors of energy and manufacturing, there continues to be growth in the services sectors of health care, leisure & hospitality, education, business services, professional services, government, IT and utilities. Although growth has slowed, overall, it will continue into 2016.
Thank you to our Enlightened Speaker Series collaborator, the McCombs School of Business & to our sponsors: