Once again, the difference between the economic outlook in the United States versus that in Texas is notable. On a national scale, the economy remains lackluster. The Bureau of Labor Statistics forecasts a slow but steady recovery. Consumers remain cautious, business still isn’t investing, and both jobs and income are not growing.
In Texas, we’re booming. The State Comptroller’s office says the Texas economy continues to outpace the national economy. Take a look at some of the figures:
We added 274,700 jobs in the last year; a 2.5 percent increase. And while many criticize Texas for depending upon low-income jobs, Dallas Fed President Richard Fisher says that’s not necessarily true. We might create more low-paying jobs than any other state, but we also create more high-paying jobs. In the first decade of the 21st century, Texas created nearly a third of the nation’s highest-paying jobs, and there has been a nice increase in middle-income jobs as well.
Single-family housing permits rose 18 percent over the previous year; multi-family permits were up six percent.
Sales tax collections grew by 7.2 percent over fiscal 2012.
The Macro View
To break down the Texas economy even more, and look ahead at prospects for 2014, Texas CEO and the McCombs School of Business at the University of Texas at
Austin convened three panels of executives from the state’s leading economic sectors for events in Austin, Houston, and Dallas. The speakers took at look at the state’s economy overall as well as in specific industries.
Jay Hartzell, professor and chair of the Finance Department at the McCombs School of Business at the University of Texas at Austin, kicked things off in both Austin and Houston with the view from 30,000 feet. He looked at two macro variables: Gross Domestic Produce (GDP) and employment.
The historical benchmark for GDP growth is three percent, Hartzell said. The Fed forecasts this year’s growth at 2.2 percent, and 2014’s at 2.3.
“There is positive growth and a positive trend, but note — it will take another three or four years for the entire U.S. to experience a normal positive,” Hartzell cautioned.
If the GDP benchmark is three percent, the unemployment benchmark is six, Hartzell said. Six percent is regarded as full employment. Today we’re at 7.5 percent, and the Fed predicts we won’t get to six percent until 2016. Once the GDP hits a three percent growth rate, we should see steep declines in the unemployment rate, he added.
A quick roundup of key sectors yields this data: Consumers are dealing with stagnant salary growth and still working to pay down debt. On the business side, profit prospects are slim, depending upon the sector. “The good news is, the market is steady and that’s a good sign,” Hartzell said.
As far as government spending is concerned, Hartzell said there are three ways to get out of a deficit: We can tax our way out, but we lack the political will to do that; we can grow our way out, but the economy is not growing robustly right now; or we can print more money and inflate our way out. The historical inflation benchmark is four percent, Hartzell said. Right now we’re at 1.4-1.8 percent. By 2015, we’ll still be at only two percent inflation.
Speaking at the Dallas event, UT’s Sandy Leeds said final sales are the best indication of GDP growth, and they’ve been growing at less than three percent for several years.
On the labor front, participation in the labor market has been as much as 67 percent of the work force over the past 20 years – now it’s 63 percent. “That’s what’s driving our unemployment rate down,” said Leeds. If we went back to 66 percent participation, our unemployment rate would be four percent higher – 11.2 percent. “It’s somewhat misleading to think we’ve got an employment rate that’s dropping,” Leeds said.
“One of the most important things to know is we’ve lost five million manufacturing jobs,” Leeds said. “These are jobs that don’t require higher education and offer a middle income job with a high school diploma.” But, he said, those higher paying jobs are being replaced by service jobs.
Leeds also sees a disturbing trend in the number of disability claims. “Work has become less strenuous and health care is better, yet one in 20 American workers is disabled and that’s taking about 20 percent of our Social Security spending,” he said. “Disability is the new unemployment insurance.”
What does that all mean? “It’s a slow economy with a positive forecast, but not very robust,” Hartzell said. “It’s still two or three years away.”
Texas is faring better. Hartzell said the Dallas Federal Reserve forecasts 2.3 percent job growth here, while nationwide employment is growing at about .6 percent. Its Leading Index, which predicts economic activity in the state, is approaching pre-recession levels, and is outpacing the U.S. Leading Index by about two to one.
Dallas: Manufacturing, Retail, and Commercial Development
“North Texas is on fire,” said Mike Berry, the president of Hillwood Properties. He cited some reports that the Metroplex would grow by two million people over the next decade. The region is spending $15 billion on highway construction. “We’re fortunate,” he said, “as much as we complain, we are fortunate to have that expansion in infrastructure going on here.”
Berry looked at four major real estate asset classes as being reflective of the market. The multi-family apartment sector has seen deliveries double in the last year, driven by the arrival of 200,000 new residents per year. He said much of that development is taking place in the urban core, which reflects activity in the city.
The office sector is not as impressive, Berry said, but in key suburban markets like Las Colinas, the North Dallas Tollway, Frisco and Fort Worth, it’s back on its feet.
“Retail is a little flatter and it’s typically the last to rebound,” he said. “We did have a lot of excess capacity and it takes a while to absorb that.” He observed that in
some of the high growth sub-markets, development is taking place.
However, in the manufacturing sector, growth has been “incredible,” he said. From building essentially nothing last year, developers are now building spec buildings in the one million square foot range, as well as “build to suit” projects for large customers.
Some of those high-growth, newer markets include Frisco and Prosper near Highway 380, McKinney, South Dallas south of I-20 because of its connectivity to Houston via I-45, and the Alliance corridor north of Ft. Worth. Alliance is an inland port, with an industrial airport and rail connections on 18,000 acres.
“What we have is not just logistics, we also have manufacturing,” Berry said. Flextronics just opened a new building to make the Motorola Moto X smartphone – the first smartphone built in the U.S. GE Transportation is building a new state-of-the-art locomotive factory with 500 new jobs and 1.3 million square feet of manufacturing space. Amazon, the DFW Airport, and the FAA are all building new buildings at Alliance, and Berry said e-commerce and Internet fulfillment will become growing categories.
Kathy Doyle Thomas, the chief strategy officer of Half Price Books, concentrated on the retail sector, which is nervous about the upcoming Christmas season. The government shutdown is expected to hurt sales, because it affects consumer confidence. Consumers are expected to spend two percent less this year, she said, but
“when consumers plan to spend less, they spend even less than they planned to spend – which makes it even worse.” That, coupled with a late Thanksgiving that will give six fewer shopping days for Christmas, means November will see lower sales than a year ago – but December “should be stronger than last year,” she said.
As far as trends in retail, Thomas said there are several, all related to the Internet. Half Price Books learned its main competitor is not Barnes and Noble – it’s Amazon. And these days, consumers engage in “showrooming” – visiting a store to look at merchandise, then going home to do price comparisons online. Online shopping is done via tablets, not smartphones, she said. The typical tablet shopper is a woman who shops in the evening and into the night. Smartphones are used in the daytime to find stores, she said, and maybe to shop, but not to buy.
“Today, every retailer understands the importance of getting you into the store and having something to sell you,” Thomas said. If someone leaves a store because they couldn’t find an item, they’ll shop for it online, and the next time, they won’t even come into the store. Because of that, customer service is more important than ever, she said.
On the manufacturing front, Tony Gilbert, the Vice President of Manufacturing and Engineering at Mary Kay Inc, said everything begins and ends with leadership.
“We have to lead the change to stay competitive but how do we drive the change?” he asked. If Chinese workers are paid six times less than American workers, the answers can be found in automation and waste elimination strategies, Gilbert said.
When Gilbert started at Mary Kay, sales were $50 million annually. He said the company thought it would have to build a new manufacturing plant when sales hit
$100 million. But now, with sales topping $3 billion, the company is still working in its original plant. Automation is the reason, Gilbert said. For the last ten years, overhead has remained the same even as annual merit increases and other costs go up. “We produce our products for lower costs in Dallas than our sister plant in China,” Gilbert said.
To keep that momentum going, Gilbert said the company needs to address two significant needs. First, educate the current workforce on lean principles, teaming skills and problem solving methodology to eliminate waste. Second, educate its mechanics on advance automation technologies.
“On a one to ten scale, education and leadership have moved us to a three or a four on our lean journey,” Gilbert said.
He said besides automation and lean operations, companies can compete and win “if a miracle happens,” and government lowers taxes to free up capital; a single global regulatory standard is adopted, instead of different ones in each country; manufacturing becomes a glamour job; and unfair trade practices are stopped. “In this case, I’m not planning on a miracle,” he said.
Summing up, Kathy Doyle Thomas said Texas is a better place to do business than much of the rest of the country, because of its business-friendly mentality. Berry went further. “It’s the spirit and the culture,” he said. Even with a lot of in-migration, Texans present that spirit and culture so strongly that it rubs off on others. “They buy into the culture quickly and that translates into positives everywhere you go,” he said.
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