Austin – 2017 Economic Forecast: Resilient

 Austin – 2017 Economic Forecast: Resilient
By Dacia Rivers
Photography by Jonathan Garza

Speakers at the 2017 Economic Forecast event in Austin focused on higher ed, post-recession job growth, successful start-up ecosystems, the future of artificial intelligence and the area’s booming real estate market. The event was moderated by David Reid, Executive Director of the Baylor Angel Network.

Regional Economy

Dr. Tom Kelly, a Baylor University economics professor and the director of the school’s Center for Business and Economic Research, kicked things off by discussing the number of jobs outsourced from the U.S. in recent years. In particular, he pointed the relatively high U.S. corporate income tax rates, which have driven some businesses to move overseas.

“That’s a problem we’re going to be addressing in the next few years, if not sooner,” Kelly said regarding the disparity in corporate income taxes, “Because that would accelerate the movement of jobs back to our economy from other economies.”

Kelly’s concerns for the Austin-area economy include a loss of manufacturing jobs and a lack of oil and gas money coming into state coffers as the industry’s downturn causes tax revenues to decrease. He said he fears for white-collar positions that are being replaced by robotics and other technologies. On the flip side, Kelly predicted this increased productivity will lead to previously-outsourced jobs returning to the country. As further incentive, doing business in the U.S., as opposed to China or India, tends to carry less risk in transportation and cybersecurity.

Overall, Kelly said he’s excited for business in Austin in 2017.

“The nice thing about Austin is you’ve got a lot of smart people here,” Kelly said. “With Baylor, we’re going to work as hard as we can to make sure our graduates are ready to do their jobs, and when they get in the job market, they’re going to keep on learning.”

Entrepreneurship

Austin has been a tech town for decades, and more specifically, it’s becoming a tech startup town, named the number-one startup metro area in the country two years in a row by The Kauffman Foundation. At Capital Factory, managing director and general partner Gordon Daugherty educates, advises and invests in many of these Austin-area tech startups.

“People talk about what it takes to create a thriving ecosystem,” Daugherty said. “To thrive, you can’t just be good at two or three things – you have to be good at everything – and if you miss even one, it doesn’t work.” Daugherty’s list includes places to work and network, access to mentoring, sources of funding, sources of talent, early entrepreneurship exposure, external connections and diversity.

For places to work and network, Daugherty includes co-working spaces where entrepreneurs can solve problems together in an inexpensive office environment. He also said access to mentors is important for a startup economy, and these can often be found through the many incubators and accelerators that call Austin home.

“It’s these same people who have built companies that have succeeded, and some that have failed, and those that have succeeded and exited — those people become mentors in the ecosystem,” said Daugherty. “Joining accelerators gives these startups the extra attention and support they need.”

Funding is a trickier endeavor. While Daugherty said Austin has more than 500 angel investors and 20 venture funds, the city is missing large institutional investors such as venture capitalists that can write checks for $10 million. When Austin-area startups need to ask for large funds, they have to fly to California or the East Coast, which Daugherty finds to be a shame.

“I think it should be a focus to bring one of those institutions to town,” he said.

Also on Daugherty’s list is access to talent. Thanks to Texas’ many universities, he said, this is an area in which Austin excels. Additionally, young people often want to stay in Austin to work — or come to Austin from other parts of the country — due to the town’s atmosphere and reputation. Daugherty’s also seen entrepreneurship programs spring up at the high school level based on experiential learning and not learning out of a textbook — a trend he endorses.

In particular, Daugherty said he sees the great need for talented developers continuing. Beyond that, he pointed out the marketing field is changing so fast it can be difficult to find employees who are up-to-date on trends, and has even found that some recent college grads have to go back to school to update their marketing educations.

One area in which the startup community needs to change, according to Daugherty, is diversity — both in terms of female entrepreneurship and all other areas of inclusion. He pointed to some changes that were promising, including local initiatives to attract more women entrepreneurs.

Daugherty also touched on some of the new tech trends he’s seeing pop up in the area, largely focused on the fields of artificial intelligence and natural language processing (NLP). One such startup, authors.me, uses NLP to sort through the thousands of manuscripts publishers receive and score them, using a wide variety of metrics to determine which submissions are most likely to be attractive to readers and end in a book deal.

Startups in the areas of augmented reality and virtual reality are trending, too, including a product placement company that analyzes whether viewers are looking directly at a product during a movie or show. “There’s one company that not only can document whether you actually looked at that Coke can or the Dell computer, but can tell you if looked at the can for more than a half-second — if you didn’t, Coke won’t pay for that product placement,” Daugherty said.

In health tech, there’s a company using virtual reality with children to distract them during vaccinations, blood draws or other painful medical procedures.

Even though Austin has a prominent tech community, Daugherty said it still lacks a unified voice. He is working with other tech leaders in the area to create the Austin Tech Alliance, a PAC that will be the community’s voice in local and state politics.

“Austin is an ideal place to start and grow a great tech company,” Daugherty said. “And our community is organizing to have a greater voice in politics and policy.”

David Reid, Dr. Tom Kelly, Gordon Daugherty, Darrell King & Manoj Saxena presented at the 2017 Economic Forecast in Austin.
David Reid, Dr. Tom Kelly, Gordon Daugherty, Darrell King & Manoj Saxena presented at the 2017 Economic Forecast in Austin.

Artificial Intelligence

Manoj Saxena Chairman of Cognitive Scale and Spark Cognition, two Austin-based AI companies, took the stage to share his passion and his paranoia relating to the future of AI. He explained there are two types of AI, the first being artificial general intelligence, which he described as “the brain in a jar.” These are Google-like programs whose goal is to know everything there is to know. Saxena said he is more interested in artificial special intelligence, where AI is applied deeply into a business process to create value. Where Google knows everything about a person, cognitive systems know everything a person knows. Saxena imagines a business world where new workers are trained with the help of software that contains the entire institutional knowledge of the employee being replaced.

Saxena said the convergence of AI, big data, social media, mobile tech, the cloud and blockchain have made this a perfect time for AI to come to the forefront. In the future, he expects that saying “My software does AI,” will be akin to saying, “My software does the Internet,” today — a given.

Saxena said that 90 percent of the world’s information was created in just the last two years. Data is everywhere and in Texas, and he believes it is the new oil business, with his companies serving as the refineries and gas stations for that “oil.”

A managing partner of the Entrepreneurs Fund, Saxena has invested in eleven AI companies, and eight are still running. He is specifically looking for AI businesses that solve difficult problems, making a company intelligent so when all its employees are asleep, software is still hard at work gathering information to improve the business process.

“Twenty years ago when the Internet came out, every business became an e-business,” Saxena said. “With big data and AI, every business is going to become a cognitive business — a business that is learning and evolving on its own.”

When asked what skills Saxena is looking for in his businesses, he stressed that he is always looking for employees and business leaders who can weave together technology and the business model. He’s not just looking for programmers who know a language well; he expects them to be multidisciplinary, and able to use their technological skills to solve problems.

When Saxena was running IBM Watson, he was worried about AI and its potential to eliminate jobs. He believes AI will augment employees and won’t cost jobs in the long run, but in the short term he said it’s possible some middle class workers will be further squeezed between the Uber drivers and the tech CEOs of the world.

“The Internet knows about you. Cognitive systems know what you know,” said Saxena. When thinking about the implications, he can see the day where a new worker will have access to all the knowledge of every worker who has gone before.

Another concern for Saxena is that today’s kids are still being taught to the factory floor model, not to the digital model. “One of my passions is how you skill America,” said Saxena. “In the next five to seven years, how are we going to teach kids? A lot of what we’ve done on the IT side is to take jobs and give them to India.” Saxena said AI can replace those customer service and help center jobs with computer software that’s going to displace workers and it makes him worry.

“We not only need to look at employment and the labor crisis, we also need to look at skills because I believe there is a massive disruption about to come from a world that will be driven by intelligent machines,” Saxena said. “I do believe that we have a massive amount of potential for the next generation of Austin if we play it right with the shift of AI that is coming in.”

In particular, Saxena said he looks to younger generations to use AI and technology to help make the world a better place, such as finding methods to cut back on the 40 percent of energy lost to inefficiency.

Residential Real Estate

As COO of Keller Williams, Darrell King directs the largest real estate franchise company in the world. Headquartered in Texas, Keller Williams has 16,000 agents across the state and, as of September their Austin agents have conducted more than $3.4 billion in homes sales in 2016. Relying on the data from these sales, King shared a comprehensive take on the state of the residential real estate market.

While the U.S. hasn’t recovered from the recession in terms of home sales, Texas has surpassed pre-recession levels. Prices rose between 2012 and 2015 at the most rapid rate in 25 years, but King said that those prices are beginning to slow down, which he feels is a good thing.

“We feel that’s moving closer to a more sustainable rate of growth, and we hope that will alter continuing concerns about affordability in the area,” King said.

Houston hasn’t quite experienced the growth that Dallas and Austin have seen, due to the drop in oil prices, but King said the Houston economy is experiencing growth, albeit slow growth, and the housing market is faring well. In Austin and Dallas, however, new companies continue to come to the metro areas, making inventory and construction the biggest challenges to an ideal real estate market.

Economists call a housing market with between four and six months of inventory a balanced market, but King said Austin and Dallas currently have just two months of inventory. This qualifies as an extreme sellers’ market. Lack of inventory is the biggest challenge there is, contends King, and there just isn’t enough to go around for the influx of new workers.

“Builders have focused on the high-end market and if the contractors don’t pivot to the mid-market priced homes, the market won’t balance to demand,” observed King.

New homebuyers are entering the market at higher ages as well, due to continued growth in student loan debt, which quadrupled nationally from 2003 to 2015, reaching more than $1.2 trillion. While college is a net positive, 71 percent of graduates leave college with a loan average of $29,000. At a 6.5 percent rate of interest, that’s $333 per month to pay it back. “For most of those who apply for a loan, that $333 per month adds 8 percent to their debt-to-income ratio. When that debt to equity ratio exceeds 43 percent, they no longer qualify for a mortgage,” King said.

The real estate contract rate in Texas is up 13 percent, and King said he believes the real estate economy across Texas will still be booming into 2017, though his agents are always prepared for a shift.

“This is just the next inevitable phase in the real estate cycle,” King said. “We prepare our agents for the next downturn and make sure they understand there are opportunities in each and every aspect of each and every phase of the cycle.”

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