Three things driving the Texas economy today

Most of you who are reading this know that Texas has been on a roll as far as optimistic news and job growth the last couple of years.

That said, what are the big economic stories for Texas through the rest of 2014?

Energy

As the U.S. has becoming increasingly energy independent, changes in U.S. energy production are impacting jobs, income growth and the quality of life – key determinants of real estate value and successful investment. The mix of energy types produced – crude oil, natural gas, and alternatives such as wind and solar energy – provide investment opportunity and risks. Nowhere is this more apparent than in Texas.

Still recovering from the recession, weakness in manufacturing and cuts in federal spending (85,000+ jobs lost in civil defense last year in Texas) contributed to the state’s job growth slowdown after leading the nation for a number of years. Still, the economy continued to expand broadly, with employment in oil and business services, and construction growing strongly. Even with slower job expansion, Texas remained the third fastest growing state in 2013, trailing only North Dakota and Florida.

Texas has continued to add jobs faster than the 47 other states in the nation so far this year. The energy industry led the state’s job growth for the 12 months that ended in March with a 5.8 percent increase in jobs. Energy activity continues to be strong and drilling activity continues to increase, according to the Federal Reserve Bank’s Beige Book from late February through early April. The oil and gas rig count was 894 as of April 25, a level not seen in nearly two years. Texas accounted for 60 percent of the increased U.S. drilling. That said, energy job growth should be plateauing this year.

In the Lone Star state, energy is the number one issue affecting real estate. The Texas economy in 2014-15 is well positioned to continue expanding and will likely remain among the nation’s fastest growing. Employment grew 2.5 percent in 2013, down from 3.3 percent in 2012, but 0.7 percentage points above the national average. By 2014, the state of Texas is expected to jump ahead of the oil-producing heavyweights Venezuela, Mexico, Kuwait, and Iraq to become the ninth-largest oil producer in the world. According to one study, the industry has directly created well over half a million new jobs since the start of this energy cycle.

New oil and gas reservoirs continue to be discovered in the Lone Star State. Texas leads the nation in crude oil and natural gas reserves, accounting for 24.2 percent of the nation’s oil reserves and 29.5 percent of the nation’s natural gas reserves. Three big oil-producing areas in the U.S. are “on fire” right now, and two of them are in Texas. First is the Permian Basis in West Texas. A recent forecast on production by Simmons & Company shows a near doubling by 2015 to around 2 million barrels a day. The other is Eagle Ford in South Texas, where production is now up 65 percent. In just the last 12 months, U.S. midstream companies have invested $29 billion for oil and gas infrastructure. That capital investment is going to drive significant job growth in Texas.

Energy is impacting local economies as energy companies are projected to spend $100 billion over a number of years on drilling operations in the Eagle Ford Shale, an oil and gas rich geological formation that scoops through south Texas in normally low income areas surrounding Austin and San Antonio, with San Antonio receiving the lion’s share of spending due to location. The Eagle Ford Shale production surpasses every other oil operation currently operating in the world. This opportunity would not have been made available if it weren’t for the innovations in fracking and horizontal drilling that led to the boom in Texas and around the world lead by a Texan named George Mitchell. At the time, many thought his obsession with finding a new way to access fossil fuels trapped underground was frivolous, but his advances have radically changed the American economy and nobody seems to be questioning the success of it now.

The positive effects of the latest Texas oil boom on communities in south Texas – a historically under-served and poverty-stricken corner of the state – is best illustrated through the town of Cotulla, the county seat of LaSalle County. LaSalle county was one of the poorest counties in the state per capita before oil was found. Former president Lyndon Johnson used to write about the ‘deeply generational poverty’ of the area. Now Cotulla falls within the second largest oil-producing region of the United States. The oil boom has increased sales tax collections in Cotulla over six times, from $445,000 in 2009 to more than $3 million, and in the past two years the town’s population has tripled. Between 2008 and 2012, the property tax base went from $52 million to $137 million—$4.7 billion countywide. That bonanza has transformed the community, providing money for housing, new retail, education and more.

Energy continues to influence positively the fortunes of this state, not just in the large metros, but also in many smaller communities across the state. Barring a catastrophic event, that growth should continue for a while.

Job growth

Besides the strength of the energy industry, other industries will continue to keep the job market to remain strong in Texas in 2014-15. The Texas economy gained 375,300 nonagricultural jobs from May 2013 to May 2014, an annual growth rate of 3.4 percent compared with 1.8 percent for the United States. Strong job creation has had and is expected to continue to have a positive impact on residential real estate in almost all Texas metros and cities. The types of jobs being offered should move up the quality scale, raising average wages and boosting purchasing power for consumers as well as the ability of landlords to extract rents. Demand for office space continues to increase as many employers continue to review per-employee space requirements, carefully considering space needs because of changing technology and noting the younger workforce’s preference for living in cities and working in open format workspaces.

Even while the state is adding a disproportionate share of jobs, its record of robust employment growth has been clouded by questions concerning the quality of the new positions, echoing what appears to be a common percep¬tion of just creating low paying jobs. Average wages have historically been lower in Texas, along with median household income. The state also has a large share of workers earning the federal minimum wage. According to the Bureau of Labor Statistics, 7.5 percent of hourly workers in Texas in 2012 were paid at or below the federal minimum wage, compared with 4.9 percent nationally. Texas’s share was second only to Idaho’s, at 7.7 percent. However, due to Texas’s third lowest cost of living in the US, even those low pay checks afford a better quality of life than in other states. Most Texas economic sectors contributed to the expanding numbers of higher paying jobs since 2000. Employment growth in sectors paying above the me¬dian wage reflects the state’s expanding population and need for more schools and hospitals, the recent strength of the energy sector, and the diversification of the Texas economy.

Let’s look at all jobs being created in Texas. More high paying jobs have been created in Texas than low paying. An example is since 2000, 42% of all jobs in Texas have been created in education and health with the net new high-wage jobs due to growing demand for teach¬ers, doctors, nurses and other positions requiring a college degree.

The energy industry, which in Texas consists mainly of oil and gas extraction and support activities, also contributed strongly (15 percent) to expansion in the top half of the wage distribution between 2000 and 2013. Payroll employment in oil and gas extraction and support activities for mining in Texas more than doubled between 2000 and 2013, according to the Bureau of Labor Statistics Current Employment Statistics. Interestingly, the oil and gas sector pays above-average wages although many oil and gas jobs do not require a college degree.

Critics of Texas job growth often contend that Texas’s exceptional job growth has not produced a high standard of living for its residents due to the low quality of the new positions. However, Texas’s job growth since 2000 has been much more proportional in all levels of employment growth than in the rest of the nation, where net new jobs have been concentrated at the bottom and top of the wage distribution and the middle has shrunk further. Yes, Texas still has a high share of mini¬mum wage jobs, partly due to the state’s relatively low minimum wage (set equal to the federal minimum wage). A low minimum wage and plenty of low-skilled workers ensure that Texas will have a high share of minimum wage jobs. On the other hand, a relatively low cost of living in Texas ensures that workers earnings here will go further than in other large states.

Millennial population growth

With that job growth, Texas has caught the attention of the Millennial generation, those born after 1980, second largest generational cohort after the Baby Boomers. They represent 27+/-% of the U.S. adult population and their influence is far reaching. This group is the first to fully embrace new technology, including the Internet, e-commerce, mobile communications, and social media. Their practices are poised to change the way society interacts, receives information, shops, and lives. Millennials show a strong preference for urban living and working, value mass transit, and “work, live, play” communities. They carry high levels of student loan debt, drive fewer cars, marry later, and often choose smaller living spaces than the typical homes in the suburbs that appealed to their parents a generation ago. Their preferences are already having an effect on both city and suburban residential, multifamily, office, and retail sectors.

Just by the description they would seem destined for the west and east coast metros, right? The good news for us in Texas is our metros rank among the best places for millennials to live. Recent college graduates have a lot to consider when thinking about their next steps. In addition to career paths, they must weigh quality-of-life factors in the cities they may soon call home.

Niche.com has taken out some of the guesswork in its recent list of the top cities and neighborhoods for millennials, and three of the 25 metro areas (with populations of at least 1 million) are in Texas. Austin ranked No. 2, just behind New York City. Dallas earned a respectable No. 8 slot, and Houston landed at No. 21.

To determine the winners, Niche.com looked at data from the U.S. Census American Community Survey and FBI Uniform Crime Reports, plus it surveyed more than 500,000 college students and recent graduates. While the former provided obvious statistics like percentage of population between 25 and 34 years old, median rent and income, racial diversity, and unemployment rate, the surveys helped Niche.com take into account factors such as sports, shopping, nightlife, accessibility and cultural attractions. Do Texas metros offer those things? Obviously, most graduates think so!

In the 50’s, this age group looked to California and other western states to expand. In 2014, Texas has become the ‘land of opportunity’ for many of these young graduates as evidenced by the migration of these age groups out of other states to the Lone Star state.

All three of these will continue to be the big economic strengths of 2014-15. There are many other industries and opportunities helping the state, something we may discuss in future posts. But today these three economic impacts stand above the others in helping the growth of Texas this year and into the future.

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