The Economist: Forecast for the Texas economy calls for growth
Texas remains well-positioned to outperform the United States economy for the foreseeable future. Growth is stemming from long-time sources of business activity as well as emerging industries, and the short-term outlook for the state calls for moderate growth.
With both resurgence in established fields and discovery of new plays, the energy sector is likely to continue to be an important source of stimulus for the Texas economy. Activity has increased notably over the past several years, particularly in oil exploration.
The Permian Basin rig count, for example, has been in the 400-450 range for much of this year, roughly triple the number operating just three years ago. The statewide total stands at 1,800, with 82 percent of rigs drilling for oil. Thousands of jobs have been added, pushing unemployment rates in affected areas below 4 percent and creating challenges regarding sufficient housing and adequate infrastructure.
Although the oil and gas business is always cyclical, with demand influenced by economic growth patterns and world events contributing to supply levels as well as market prices, a significant "bust" like that of the 1980s is unlikely to be repeated. During the 1980s, political events led to the major spike in oil prices which spurred high levels of drilling.
This time, however, prices are driven by increasing global demand (though tensions in oil-producing regions are also working to push them up). In addition, new technologies are enhancing the economic prospects of exploration and production, even for aging fields. The likelihood of the bottom falling out for prices is very low, though they will certainly fluctuate.
Other Texas industries are also contributing to the state's relatively strong economic position. Recent job gains have been concentrated in professional and business services: trade, transportation, utilities and construction. The Texas housing market continues to improve, with single-family sales and new construction permits trending steadily upward. Employment in the construction sector is contributing to overall growth, and, with housing inventories dropping, further gains are likely.
The Perryman Group's most recent forecast for Texas calls for growth through the 2012-17 period at a relatively healthy pace. The level of output (real gross product) produced by the Texas economy is forecast to expand from $1.2 trillion in 2012 to more than $1.5 trillion in 2017, a 4.66 percent compound annual rate of growth. This pattern of increase is well in excess of that expected for the nation as a whole. The services and mining sectors are projected to see the largest gains, with the information and durable manufacturing industrial groups also experiencing particularly strong growth (in percentage terms).
Texas wage and salary employment is also forecast to see relatively strong gains, expanding at a 2.28 percent annual clip. The result is a gain of more than 1.35 million net new jobs between 2012 and 2017. More than half of these gains (754,570) are likely to occur in services industries, while another 212,390 are generated in the trade segment. Mining is also expected to see a strong rate of growth (in percentage terms).
Although growth is likely, Texas faces its own set of hurdles in the economic path. In addition to the national challenges, state legislators will have to deal with tight budget conditions in the upcoming legislative session. Even so, the needs of a growing population (such as education, infrastructure and water) must be adequately met to ensure future prosperity.
As we go to press, fiscal cliff negotiations are ongoing, but it appears that at least some action will be taken to deal with the worst effects (most likely early next year with key provisions made retroactive). Based on the most likely outcomes with regard to the fiscal cliff and other problems, The Perryman Group's forecast for Texas calls for moderate growth over the next five years.
Dr. M. Ray Perryman is President and Chief Executive Officer of The Perryman Group (perrymangroup.com). He also serves as Institute Distinguished Professor of Economic Theory and Method at the International Institute for Advanced Studies.