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.
Austin – Technology and BioScience
The Austin forecast event featured executives from technology – software, hardware, and life sciences. Tyson Tuttle, the CEO of Silicon Labs, said three trends are driving technology: Green technology, with lower power and more efficient devices; the demand for data and the bandwidth explosion, which is an “enabler to grow the economy of the world,” Tuttle said; and thirdly, the Internet of “things.” Things are devices such as light bulbs and sensors that will be connected together online. By 2020, 10 billion devices per year will be connected, Tuttle said. “This is going to change our lives in the same way cell phones and smart phones have changed the world – both for good and for bad.”
For example, green technology has led to smart grids for energy monitoring and smart metering. “If you can turn things off, you don’t have to build as many power plants and if you can see where leaks are in water and gas systems, you can cut back on demand,” Tuttle said. Low cost chips with ARM processors can harvest energy from the sun, and they can sense temperature in every room of a house – or a building – constantly gathering information and sending it back.
Increased bandwidth allows for greater connectivity, and greater security, Tuttle said. Cell phones can monitor lights, fitness devices, and security cameras in the business and the home. Health care costs can be reduced, because those who need home monitoring won’t have to spend money on doctor visits. “These new types of devices are going to create a lot of opportunity for new chips and applications that people haven’t thought of yet,” Tuttle said. Everything from automobiles to buildings can be connected. A lot of the benefits won’t even be seen for the next 20 to 30 years, he said.
These trends provide an “element of hope,” going into 2014, Tuttle said, and over the next decade, the interconnected “things” can have a $14 trillion impact on the technology industry.
Datical CEO Daniel Nelson focused on startups in Austin, and their outlook in the coming year. Although startups in Austin get a lot of attention, Nelson pointed out that startups in Austin are still small, compared to Silicon Valley, which has 80 percent of the startup world. But Austin has more startups than it used to, and Nelson said they’re getting more support, from incubators such as TechStars and UT’s Texas Venture Labs.
“There’s more VC and angel money available,” Nelson said.
“The next trend is on the founder side and they tend to be less experienced and they are focused on solving market problems versus hard business problems,” Nelson asserted. “We have the best minds of my generation trying to figure out how to be the next MySpace versus solving real business problems that make real revenue.”
Still, investors are becoming more active, even if they are doing smaller deals. “The days of doing $10 million Series A and $20 million Series B rounds are over,” said Nelson. “Now, you’re looking at $1.5 million Series A deals and $4 million Series B funding.”
Austin’s growing wealth has brought out more angel investors, Nelson said. “Now the Angels are organizing into networks with experts inside the networks who make investing a much more formalized process,” he said, “which is great for a lot of businesses that could not find funding.”
But more startups are also failing. “When you fail, you should fail quickly and get on to the next thing,” Nelson said. “There are many more startups than there are good managers.”
There is also a lot of talent in Austin. “As a small employer, I get to compete with IBM, Apple, Facebook and Google for exactly the same people,” Nelson said, but even so, some specialties are still very hard to find. “The first is someone who can create a mobile app – anyone who can do that is employed,” Nelson said.
Other trends? More micro VCs and angel investors, said Nelson. And by the end of 2014, many failed startups. “Eventually, those entrepreneurs gain enough experience to become the operators and executives the new startups need,” he said. “It will be very interesting to watch and see if Austin recovers by attracting and maintaining that entrepreneurial talent.”
The medical technology industry got attention from Dennis McWilliams, the CEO of Apollo Endosurgery. He said the impact of biotechnology in Texas is about $75 billion, with 89,000 employees. The state ranks second in clinical trials. “When new companies are developing new innovation in technology, it’s getting tested and evaluated here in our state.” he said. The real impact comes when new technologies move out of the lab and into the community, McWilliams said.
Texas is also educating people in the life sciences. Over the last three years, 50,000 people have graduated in the field. Now, a new medical school is to be built in Austin. That will have an impact on patient care, because they will be able to get treatment locally that they had to travel for in the past.
“The public investment in Texas is big,” said McWilliams. “We talked about the trend of lower investing in information technology companies – it’s the exact opposite in life sciences.” That money is critical, he added. The average cost of translating an idea into a pill is $500 million. “I’m excited about the venture investment taking place in Texas,” he said. “$1.4 billion has been raised here in the last five years and a lot of money is being pumped into the economy.”
Not even California or New York can compare to the resources we have in Texas for new technologies, McWilliams said.
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