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.”
San Antonio attendees were welcomed by Red McCombs. While the McCombs name is on the building at the business school at UT, he reminded attendees that his priority is not brick & mortar, but rather students’ education and the jobs they will eventually earn.
McCombs shared his philosophy of expecting to win. “Everybody wants to win, but how many expect to win? I try to instill what I’ve tried to do all my life – get up when you are knocked down, get your head on straight, go back to work, work harder and expect to win.”
Back in the 1980s, Southwestern Bell started putting millions of dollars into a technology called fiber optic cable. While it was a new unknown to most people at the time, it meant big changes for San Antonio, according to Marty Wender, the owner of Charles Martin Wender Real Estate and Investments. The changes were in the types of businesses that would populate the city over the next couple of decades: financial service centers and data centers.
They make up a substantial portion of the San Antonio economy, Wender said. Just to cite a few examples, Frost Bank’s client service center in Westover Hills employs 2,000 people; Citicorp, 4,000; Wells Fargo, 4,500. Amerifunds Capital Group has 2,000, and Chase credit card center also employs 2,000 people.
Wender said there are several reasons for all these companies to locate these service centers in San Antonio. Among them: the Central Time Zone, which makes it easier to serve both the East and West coasts; the cost of living is low; the population is young and loyal, making for a good workforce. The city is far enough from the Gulf Coast not to worry about hurricanes, and far enough South not to worry about tornadoes and ice storms.
“But the most important part, is that the fastest and largest growing minority is the Hispanic minority,” Wender said. “So, if you want a bilingual workforce to man these financial service call centers, there’s no better place than San Antonio.”
The same is true of data centers. San Antonio has big data centers operated by Lowe’s, Frost Bank, CyrusOne, and Microsoft has two data centers in Westover Hills. The big one, Wender said, is the NSA – the National Security Agency.
“The big reason we’re getting those is our cost of electricity,” Wender said. “Of the major cities in the U.S., San Antonio has one of the lowest costs of electricity.” The financial service centers and data centers need electricity to power their servers and keep them cool. Wender attributed the low electricity costs to the city-owned power company – CPS. “It’s a great deal for these companies, and a great deal for San Antonio,” Wender said.
Wender forecasts growth in San Antonio to continue on the west side of the city. It’s too hilly, rocky, and environmentally sensitive to the north, he said. Forty-five percent of homes in San Antonio over the next 10 years will be built between Texas 16 and U.S. 90, outside of Loop 1604. “These will be affordable homes,” Wender said.
The challenge for restaurants is to get a piece of the five percent of disposable income that people spend on dining out, said Preston Atkinson, the CEO of Whataburger. One of the ways to do that is to use
technology. “We are trying very hard to connect with the customer over social media,” he said. “Recently, we were very fortunate to be recognized as number one in the social media space by Restaurant News.”
Beyond social media, technology plays a major role in how restaurants operate these days, Atkinson said. “I don’t know what we’d do without the technology to span the geography of the restaurants that we serve,” he added.
While the majority of Whataburger restaurants are company owned, there are a few franchise locations. Whataburger general managers make over six figures, and have sales in the millions of dollars.
The big change on the horizon is the technology of the smartphone, Atkinson said. “Today we have about eight cash registers in the store, and we’re going to have millions of little cash registers with these little things.” He said people will be ordering on their phones and expecting the order to be ready when they arrive. “A lot of change is coming and we’re working on our applications now,” he said.
“One in six jobs in San Antonio is dedicated to the life sciences,” said Dr. William Henrich, the president of the UT Science Center. “This is a $31 billion industry and a leading industry in San Antonio.”
He noted that each of the presidential candidates has made a point that we can’t spend any more on health care than we’re currently spending, which is 17 percent of the GDP. But, he said, “Unless the
ACA kicks in and works – about which the jury is still out – the rise in the amount of spending will continue.”
One problem is the lack of Medicaid expansion in Texas, Henrich said. That has left us with an uninsured rate of 19 percent – the highest in the nation. “The reason to be concerned about that as business people is because there is a cost for not having more Medicaid expansion,” he said, “health care delivered in emergency rooms is inefficient, with no follow up and no prevention.”
It also leads to a duplication of tests. “If you’re seen at the Baptist emergency room on Tuesday last week, then seen at University Health Care on Wednesday of this week, there is no communication between these places because their electronic medical records do not talk to each other,” Henrich said. “The result? A whole battery of expensive tests may be repeated and unnecessary.”
As taxpayers, we pay for the uninsured. “The cost at University Health System is about $350 million a year,” Henrich said. “Dallas, Tarrant, Harris, Travis and Bexar counties pay these costs [through
hospital districts] because the other counties in Texas send us their uninsured and underinsured patients.” He said uncompensated care costs those counties $5.8 billion every year.
The number of physicians in the workforce is going up, Henrich said, but as the population increases, the gap between patients and physicians is growing wider. That’s led to a new system of care. “We have health care providers who are non-physicians providing a significant share of the care going forward because there are not enough doctors – you can’t open more medical schools and you can’t expand classes fast enough to fill the need.”
Although Texas is expected to grow three percent over the next five years, San Antonio will grow eight percent, and the number of those over age 65 will go up 22 percent. “Think about that,” he said. “It’s an incredible demographic shift occurring here in San Antonio. As a result, the health care workforce is going to have to go up.”
Henrich pointed to the consolidation in the health insurance industry as driving greater efficiency and increased quality of care. But in San Antonio, “The hospitals that have the largest market share are all for profit hospitals run by companies outside of San Antonio,” he said. “For them to join together would be a tectonic shift in health care.”
Over the next decade or two, Henrich said there will be growth in personalized care – personalized care is targeted, customized health care. “You’ll go in and have a test, and you’re put on an antibiotic for an infection,” he said. “They will do a profile on your genomic makeup and determine whether or not the antibiotic you’re getting will be metabolized the way it is in most people, or are you one of those patients who metabolizes the antibiotic faster requiring you to get more antibiotic than the average patient for your infection.”
The biggest news in targeted care will be a change in cancer treatment, Henrich said. Immunotherapy will use the patient’s own immune system to kill cancer. “One of the reasons that aging is associated
with cancer, is that as we age our immune system becomes fatigued and it doesn’t do as efficient a job in eradicating cancer,” he said.
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.
Texas CEO Managing Editor Ray Niekamp is a Professor in the School of Journalism & Mass Communication at Texas State University.
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