The strength of the Lone Star State’s economy has led our national economy through the general gloom of the slowest national economic recovery in modern history. Now, with the price of West Texas Intermediate (WTI) crude oil hovering around $45/barrel, and unleaded gasoline selling for as little as $1.89 a gallon, some worry that the energy dependent Texas economy will lapse into recession. Texas has diversified its economy significantly in the last twenty years, but energy is still king. So when oil prices plunge, it has a ripple effect on the state’s economy.
Texas is America’s second most populous state and the world’s 14th largest economy with a GPD of about $1.5 trillion, representing about one tenth of our national output. Since 2009, the Texas GDP has grown 4.4% per year, about twice the national average. In the same time, Texas has been creating approximately one out of every fou new jobs in the nation. A lot of this energy growth is because of the development of fracking to a level where Texas produces more than one-third of the nation’s oil and has seen its oil production double in three years.
This past year, Texas outpaced U.S. economic growth and led the nation in job growth, setting a state record with 421,900 jobs added for the 12 months through October. In 2015, economists expect Texas’s economic and job growth to slow slightly because of lower oil prices, labor shortages in certain industries, and weaker exports. The Federal Reserve Bank of Dallas expects the Texas economy to grow 3.5% in 2015, down from an estimated 4.5% this year. It expects the state’s employment growth to be 2.5 to 3% percent in 2015 vs. 3.5% in 2014.
With the fall in oil prices, which have plunged nearly 47 percent since last June, there have been concerns about the health of the Texas economy. Texas oil production, which has more than doubled in the last three years, drives much of the state’s economic growth — about 12 percent. And while energy accounts for less than 3 percent of Texas employment, energy employment jumped 11 percent for the 12 months through October, more than any other industry.
Lower oil prices can be a double-edged sword for the economy. A price drop generally benefits the U.S. economy: consumers save money on gas and home heating bills, consumer spending rises, and some businesses benefit from lower transportation and shipping costs. But capital investments could suffer, causing a trickle-down effect on other businesses.
Falling crude oil prices will cost Texas 50,000 to 125,000 jobs by the end of 2015, according to the Dallas Fed. Texas produces 36% of the crude oil in the United States, so Texas will be harder hit than other states. The states of North Dakota, Oklahoma and Louisiana also would be hit hard.
In Texas, it’s unlikely that low oil prices will cause a crisis as they did in the late 1980s, because the state’s economy has diversified so much since then. Still, some fear that a prolonged downturn will hurt energy companies and could spread to other businesses such as real estate, restaurants, and retail that have benefited from the increased energy hiring.
The big question is what oil prices will do in 2015. Oil prices are unsustainably low right now – many high-cost oil producers and oil-producing regions are currently operating in the red. That may work in the short-term, but over the medium and long-term, companies will be forced out of the market, precipitating a price rise. The big question is when they will rise, and by how much.
In the waning days of 2014, the U.S. consumed gasoline at the highest daily rate since 2007. Low prices could spark higher demand, which in turn could send oil prices back up. That said, our large metros have seen little slowdown in demand. Businesses are still cautious, but trying to keep up with demand. Low unemployment and improving wages in Texas are a great example of this. Texas has a broad based economy, but the potential loss of 125,000 jobs this year will have a dampening effect on the regional economy.
For those of us of a certain vintage (Baby Boomers), these are not numbers to brag about. Most of us of that vintage remember the boom and bust cycles of the energy industry. The oil depression era of the late 80’s and early 90’s still brings painful memories when oil brought many industries to their knees and buried one arm of the financial industry. The damage in Texas was immense. In those years, more than 700 banks failed, the savings and loan industry went away, nine out of the top ten national builders went away, and most real estate was worth ten cents on the dollar. In Houston alone there was over 88 million square feet of speculative office space and 400,000+ new homes sitting. The result was economically catastrophic in the region with widespread joblessness, empty buildings of all types, and life changing events for many families.
The Texas economic engine is likely to move at a slower speed in 2015, even as the U.S. economy picks up steam. But it still will be one of the leading states for job formation. Why?
First, Texas today has a high level of intellectual capital. The state’s strong annual employment growth over the last few years is because of the jobs added to professional categories, from architects to technology, from banking to health. Whether it is the numerous startups that become global in Austin, or the undisputed capital of energy Houston, the expertise founded here has worldwide economic effects.
Because of that, Texas currently gains more out-of-state residents than any other state and is a leader in home sales from international buyers. National census reports showed that that more than 584,000 people moved to Texas from out of state in 2013. This is more than any other state. This has lead to growth driven by strong demand for Texas real estate, not speculation. The demand is being driven by the thousands of people who move to the Lone Star State for new jobs or the opportunity to start a business. Job growth in almost all economic channels is apparent, even with the slowing of oil hiring.
Secondly, Texas continues to be one of the top states in median household income growth and new home sales, with the median household income of Texas homebuyers increasing 5.9% year-over-year to $97,500, the 2015 Texas Homebuyers and Sellers Report said. This is more than four times the increase in median household income among homebuyers nationally, which rose 1.4% to $84,500 during the same time frame. Additionally, 28% of Texas homes purchased between July 2013 and June 2014 were new homes, a 1% decrease from the previous time period, yet still nearly double the share of new homes among U.S. home sales during the same time period. Nationally, the share of new home sales remained constant at 16% of all U.S. home purchases
Thirdly, Texas banks and their bankers burned by the freewheeling days of the 80’s are downright conservative and state lending rules reflect those concerns. Home equity as well as development loans are considered harsher in the Texas lending environment than most states.
Texas still struggles in some areas due to increased restrictions in lending standards and rising home prices in certain local markets, which stifles the growth of first-time homebuyers in Texas. The percentage of first-time homebuyers in Texas decreased 4% to 29% of all Texas homebuyers between July 2013 and June 2014. Nationally, the percentage of first-time homebuyers decreased 5% to 33% of all U.S. homebuyers during the same time frame.
Lastly, Texas would be a strong economic leader even without energy. The state continues to thrive because it keeps a tight rein on the size of government, emphasizing smart regulation with a minimum of red tape. This is why so many companies like Occidental, Toyota, and Exxon have located in Texas. Low taxes and cost of living are a welcome relief to the costs of other strong job creation states.
Sure, the world price of oil effects Texas. That is why so many of us follow daily the cost of WTI barrel. But everything else considered, the business friendly public policies and job creation should continue to allow 2015-16 to be great years for our Texas economy.