With phrases like, “broad based growth,” “robust employment” and “Texas will outpace the nation,” Mine Yücel, Senior Vice President/Director of Research at the Federal Reserve Bank of Dallas (FRB), kicked off the first of four 2015 Economic Forecast panels. Yücel sees the likelihood of ending 2014 at a 3.5 percent employment growth rate for Texas while the U.S. rate is forecast to finish up 1.9 percent. Yücel spoke in both Dallas and Austin, and Anil Kumar, Senior Research Economist and Advisor, shared his observations and statistics in both Houston and San Antonio. The forecast events were held at the Federal Reserve Bank of Dallas, the FRB Houston Branch and the FRB San Antonio Branch, and at the AT&T Conference Center in Austin. Collaborators for the 2015 Forecast events were Texas CEO Magazine, Texas Enterprise and the McCombs Alumni Network.
Who’s Got the Jobs?
While energy may top all others in sector growth at over nine percent, energy still represents only 2.6 percent of Texas jobs. The highest number of jobs added this year is in the professional and business services sectors with one-third of them in technical and scientific jobs. The next highest sector of growth in jobs was in trade, transportation and utilities, with retail jobs the largest gainer.
The high rate of growth has also led to labor shortages, especially in energy and construction. “We have one Houston contact who reported he was hiring armed guards to keep poachers away from his work sites,” noted Yücel. Specifically, there are shortages in specialized workers such as welders, masons, and plumbers and many employers tell Yücel they can’t find workers who can pass the Federal background checks.
While one construction sector, road and bridge construction, is not doing well, residential construction contracts are steadily growing and up about 6.4 percent year over year. “Our contacts are telling us there’s a shortage of developable lots and higher construction costs and labor shortages are limiting growth, and that’s also extended delivery time,” said Yücel.
Yücel cautioned attendees, “These labor shortages aimed at job growth can’t continue at this pace and it’s going to slow as we go forward.”
With Texas the number one producer of oil & gas in the nation, Yücel reminded everyone, “We don’t only produce oil, we supply the world with oil & gas services with one-quarter of U.S. refining capacity and 60 percent of the petrochemical capacity based in Texas.”
In addition to oil & gas jobs, Yucel noted there are jobs in professional services, construction and manufacturing within the energy sector paying very high wages – the highest wages among all industries – which is bringing significant amounts of income into the Texas economy. In 2012, Midland was the metro with the highest per capita income growth and highest per capita income at $83,000 – greater than New York or San Francisco.
The price of oil has been tracking downward in the last several months, and while that helps the consumer in gas prices, Yücel cautioned that oil from shale, the kind produced in Texas, is expensive and needs to be at $70 a barrel to be profitable, so if prices fall below $70 it will stifle growth in the industry and likely within Texas.
Yücel sees the world economy in a flux and the greatest risks to Texas are the economies of Europe and Asia, along with a labor shortage that will slow our growth rate.
Shortages of skilled workers and vacant lots for building have caused some bottlenecks in the construction sector, especially for single-family homes, noted Anil Kumar. The result is a reduced supply of homes on the market, with current supply levels sitting at 3.6 months statewide, much lower than the real estate market’s ideal 6-month supply.
This reduced supply has caused increased home prices, reducing the availability of affordable housing. Kumar sees this trend starting to change. “There is some good news,” Kumar said. “It appears the housing price appreciation has started to soften a bit.”
Following the economic crisis, mortgages that are 90-plus days delinquent or in foreclosure reached record highs, but they have been steadily declining and are now nearing pre-recession levels.
At Austin’s 2015 Economic Forecast panel, speakers focused on bringing manufacturing back to U.S. soil, the future of Texas’ booming real estate market and what the drought means for water availability in Central Texas.
“There’s an opportunity on the horizon. The opportunity revolves around the rapid reshaping of the industrial economy – where access to technology is going to fundamentally change the dynamics for the U.S. and many countries around the world,” and with those words Alex Davern, COO of National Instruments (NI), launched the economic forecast in Austin with keen observations on the technology space and the industrial economy.
Citing the example of hydraulic fracturing as one way cutting-edge technology has solved an industrial problem, Davern said the industrial Internet of Things with its ability to have time synchronized networks, real time operating systems that leverage mass computing power, and the ability to have encrypted wireless communication in high volume, is going to fundamentally change the way the industrial economy works. The industrial Internet of Things is only now taking shape and will have a macro effect on the economy requiring the appropriate investments.
“The United States is the biggest market in the world for just about everything and has tremendous amounts of natural resources, so why is all of our manufacturing and production leaving our shores?” Davern asked, and then answered his own question. “It’s the lack of competiveness in some of the key elements of how we execute.”
Daven listed three challenges in being more competitive: the execution of manufacturing and competing with low cost labor from other countries, access to talent, and the taxation environment in the U.S.
Davern predicts more industrial and manufacturing jobs returning to the U.S. as the cost of labor becomes more expensive in the rest of the world and the evolution of technology continues. He said if companies can increase the efficiency of labor and production over a wide variety of products in switching to U.S.-based production, we will fundamentally reshape the U.S. economy.
When it comes to talent, NI will attempt to hire 250 new engineers and computer scientists in 2015 – and they are hard to find. For NI, not having those new engineers constrains their ability to grow their business in Texas and constrains their ability to drive the innovation necessary to take advantage of the technologies coming that can reshape the U.S. economy. He pointed out that immigration policies requiring international students to return to their original countries after graduation are one reason for the talent scarcity.
Davern said that while Texas is a very business friendly environment, the U.S. is the second least competitive tax environment in the industrial world – only France is worse. “We have to reshape the industrial economy of the U.S.,” Davern said. “We have to apply technology to the problem, which takes engineers, and we have to attract the capital and encourage it to remain onshore.” If those three things get done, Davern sees no reason why the U.S. can’t remain the number one economy in the world.
Jim Talbot, COO of Keller Williams, noted that while sales in Texas were down in 2014 versus 2013, it has been a good year for real estate. He attributed most of the decline to a reduction in distressed property sales along with a reduction in available affordable housing. Talbot expects a strong real estate year in 2015.
Gains in real estate prices in Texas continue to outpace the U.S. Talbot said national year-over-year price gains are expected to run between four and six percent; comparatively, Texas gains will reach between 6 and 10 percent. Home prices in Texas did not fall during the recession as much as the rest of the country and Texas median home prices remain just below the national average.
Inventory is tight, but Talbot said Dallas and Houston saw price increases up eight and nine percent, respectively, last year. Austin’s real estate is the least affordable in the state, 20 percent less affordable than Dallas and Houston. Talbot expects that affordability will continue to drop in Austin, coupled with other infrastructure issues such as traffic problems.
“For Austin, affordability is going to be a hot topic around here and if it continues much longer, it could affect the willingness of businesses to relocate here,” Talbot said.
Mortgage rates are the most important topic in the real estate industry, according to Talbot. Current low rates have been the chief cause of the real estate boom. Rates rose in the second half of 2013, but have declined again this year. Talbot said that rates may drop below 4 percent again, which would further spur the real estate market.
Besides affordability, Talbot tracks student loan debt and its effect on the market. Student loan debt quadrupled between 2003 and 2014, and first-time home buyers are waiting to pay down student loans before they are able to enter the real estate market. Talbot said these increased loans can dramatically affect Millennials’ ability to purchase homes. “There’s nothing we can see that’s moderating student debt, and it continues to grow,” Talbot said.
Housing permits are another indicator of how the market is faring. Multi-family permits are up more than 30 percent this year, while single-family permits are up 8 percent. Permits in Austin are starting to slow down, while the market waits to see if new construction can be absorbed. Single-family permits are starting to rise again, mostly in the suburbs and xburbs.
Electricity and Water
John Hofmann, Executive Vice President of Water at LCRA, spoke first about the new Ferguson Power Plant going online. The combined-cycle natural gas plant has 30 to 40 percent lower emissions and uses 35 percent less fuel than the plant it replaced. LCRA is also heavily invested in coal generation and is working through the EPA’s guidelines to curb emissions.
LCRA’s reservoir system is at 34 percent, which Hofmann said is a good number considering the extent of the drought. “The reservoirs are doing magnificently and doing the job they were designed to do,” Hofmann said. Water consumption has decreased in Austin due to raised awareness and sensitivity around the drought, moving from 200 gallons per person per day down to 130-140 gallons. “In the future in Central Texas on the edge of the desert, watering the grass that belongs in Florida may not be in our future,” Hofmann said.
Hofmann said finding new water supplies is difficult due to increased construction costs, extensive legal frameworks and complicated permitting. Currently ground water is mostly treated as a private resource but regulated locally. Most districts will only grant five-year ground water permits. Hofmann suggested that regulations need to be restructured to make the most of these resources.
By the end of this year, Hofmann expects the LCRA to break ground on its first new reservoir since the 1950s. This off-channel reservoir will operate differently than LCRA’s other systems. It will be a 40,000 acre-foot reservoir that can pump water from lower basin flooding into the reservoir.
LCRA is also moving to take its Bastrop power plant off surface and onto ground water to preserve supply.
Hoffman said LCRA has larger projects in its future, but environmental concerns and funding changes will create new challenges. “Everything we do must go through a lengthy and costly permitting process and implementation is going to be difficult,” he said.
There is a great deal of momentum in the key sectors of the Texas economy. What can slow down continued growth is a lack of engineering and skilled trades talent, a drop in the price of oil below $70 a barrel, and immigration policies – especially those tied to H-1B visas.
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