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’sideal 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.
Engineering & Industrial Construction
In July there was a big jump – including a record high – for construction contract values in Texas. What did that? Construction on the new Dow Chemical plant project in Freeport began, part of a $4 billion Gulf Coast expansion project being built for Dow by Fluor Corporation. In addition, Exxon has also announced a new plant in Baytown, a multi-billion dollar petrochemical plant, also being handled by Fluor. Fluor provides engineering, procurement, construction, maintenance and project management services to their clients.
Fluor CEO David Seaton smiled as he shared the story of moving the company’s corporate headquarters from Orange County, California, to Dallas in 2006. “We were the company that tipped the scale for Texas to have more Fortune 500 companies than California,” noted Seaton. Fluor’s decision to move to Texas was based on a number of factors – energy, world class infrastructure, talent and a business regulatory environment conducive to business.
Seaton knows capital spend on the kinds of projects Fluor handles is a bellwether for the economic future. “We’re out there on the front lines in these communities building these plants before any company makes a dime,” Seaton said. He recognizes the courage it takes for business leaders to make the big spending decisions because companies don’t make any money off of capital projects until their plants go online. “The Dow project is a 40 month project and until they begin production, there’s no revenue from these decisions,” Seaton said.
While there is a bright future in industrial engineering and construction based on pent up demand, there are two areas of concern for Seaton: comprehensive immigration reform and availability of resources. Seaton said, “We need the immigrants to continue to grow.”
Consumer Package Goods
Tom Falk has a 30 year history with Kimberly-Clark and has witnessed a number of changes in consumer behavior on his way to becoming chairman & CEO. Focusing on today’s consumer, Falk sees shifts in purchasing based on ethnicity, age, earning power, and most importantly, innovation.
“First, let’s focus on the demographic shifts,” said Falk. Forty-nine percent of new births in Texas will be Hispanic and that demographic shift impacts how Kimberly-Clark sells Huggies and through what channels.
Falk also tracks age demographic shifts. By 2020, 35 percent of the population of the U.S. will be over age 50 and in Japan the adult care category is already bigger than the diaper category. Kimberly-Clark also sells Depend and Poise products.
Another trend Falk sees is the middle class being squeezed because income levels are under pressure, real wage growth is minimal, and health care costs are going up, leaving consumers with less money to spend. “The reality is,” said Falk, “what do you do about that? ”
Falk’s answer to growth is the need to drive real innovation. “If innovation is a little better like a new color or flavor, mom isn’t interested, but she is willing to spend for innovation and she’s willing to spend to trade up,” he said. “If you drive meaningful innovation, you can still convert the consumer.”
Continuing on the theme of consumer behavior, JCPenney CEO Mike Ullman reinforced the importance of retail to the U.S. economy – retail represents 70 percent of economic spending in the U.S., he said, and it’s the largest employer category in the country.
Ullman started with the positives for consumers: Fuel prices are low, which is having a positive influence on spending and confidence is high, so there’s a sense of well being.
The next influence to consumer behavior is what Ullman calls the AAS factor: Amazon, Apple and Samsung. In 2014, two-thirds of retail sales in the United States are projected to be from those three companies.
“Where did that money come from?” asked Ullman. “Right out of their apparel budget because nobody is going to give up their cell phone or technology in order to buy their fifth piece of sportswear.” Ullman says that’s putting a lot of pressure on retailers.
Continuing on that theme, Ullman pointed out malls are the site of discretionary spending. “If you unload the kids, they disappear into the stores and they can buy anything they want. Their spending is not really on apparel, instead it’s on technology.”
Ullman sees malls as global marketplaces. Where there used to be 65 companies operating department stores in various cities in the United States, today there are five or six. “Today,” said Ullman, “it’s all about globalization with companies like Zara and Mango.”
Ullman agreed with Tom Falk about innovation and recognizes the need for retailers to talk to consumers through mobile apps, in the store and online. “If you’re innovative and you recognize the consumer that spends online stays online, and if they spend in the store, they spend in the store,” he said. “If you have a customer who spends on both channels, you have much more valuable, loyal customer.”
If retailers can adapt to change, they can succeed. Ullman’s perspective is positive and optimistic and says today’s retailers need to give shoppers a sense of discovery and sense of excitement in the store.
“One thing about JCPenney,” said Ullman, “we operate 900 hair salons because it’s very hard to get your haircut online.”
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