M. Ray Perryman: Long-term Texas economic forecast encouraging

Taking a long-term view of the outlook for the Texas economy, I am encouraged, yet also cautious.

With all of the key ingredients for economic success, the state is well positioned for expansion in business activity and the prosperity that goes with it for decades to come. However, continued economic performance hinges on adapting to the underlying changes in the population and workforce.

Recently, the Texas economy has also seen notable job growth, adding 316,100 jobs over the past year. The state’s seasonally adjusted unemployment rate has fallen to 3.9 percent, the lowest unemployment rate in four decades.

Texas has been a growth leader in the nation and, indeed, the world for a number of years.

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The state weathered the Great Recession and ensuing real estate crisis better than most parts of the United States, survived a major downturn in oil prices and activity and was adding jobs at a notable pace even before the energy sector (a major export sector) began its recovery. The strength and diversity of the economy will clearly help in dealing with challenges on the horizon.

During the next few years, the disruption caused by Hurricane Harvey will affect the performance of the Texas economy and, in particular, the Gulf Coast areas. A number of communities were devastated by the wind and flooding rains, and many are still recovering.

In the short term, some industries will see an increase in activity (such as construction), but the long-term effects are decidedly negative. (The effects will occur over several years and will be partially masked by other positive growth factors.) Moreover, a full recovery for the economy (and then some) is expected.

A positive contributing factor to the state’s economic performance is remarkable recovery in energy.

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The rig count is currently averaging nearly 200 higher than a year ago. According to Baker Hughes, the Texas counts were averaging in the range of 440 through much of the fall of 2017. This additional activity is not only beneficial to the economies of major production regions such as the Permian Basin, but to businesses across the state as well.

Current forecasts of oil prices and demand support continued activity at these levels, with some upward movement in the future as growth in the global economy accelerates.

The industry has always been and will always be cyclical and we may not see $100 crude any time soon, but energy will clearly contribute to long-term growth. In particular, the sector has managed to reduce its costs dramatically in the past few years, thus being able to sustain activity at much lower prices than was the case not too long ago.

Manufacturing is also a source of strength, employing more than 7 percent of Texans, paying high wages and producing hundreds of billions of dollars in goods for export each year. Texas has been adding jobs in manufacturing, even as other states lose them by the thousands.

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Manufacturing businesses generate opportunities for a broad spectrum of other types of firms ranging from suppliers of needed inputs to those providing business services. We recently studied the sector and found that a typical manufacturing job leads to 3.778 additional jobs in the state. Some sectors (such as refining, which frequently uses Texas oil as its primary input) generate even higher benefits.

When you consider the multiplier effects, manufacturing accounts for about 30 percent of Texas employment and an even larger proportion of gross product.

All in all, I think Texas is likely to see somewhat faster growth than the nation, with real gross product up by 3.25 percent per annum through 2040. I am projecting that employment will rise by 1.70 percent per year over the period, which represents a solid rate of expansion.

Looking ahead at what’s in store for the Texas economy, I see challenges with the potential to affect both short-term and long-term growth prospects.

Over the short term, it will take time for the Gulf Coast region to return to normal after Harvey, but long-term economic performance is unlikely to be harmed for the state or for the greater Houston area (though communities sustaining major wind damage, such as Rockport and Port Aransas, may struggle to recover).

Longer-term issues include ensuring adequate investment in infrastructure, improving public education, encouraging higher education and training for young Texans, and enhancing the preparedness of the workforce for the jobs of the future.

The better we deal with these challenges, the better the state economy will perform.

M. Ray Perryman, Ph.D. is president and chief executive officer of The Perryman Group (www.perrymangroup.com). He also serves as Institute Distinguished Professor of Economic Theory and Method at the International Institute for Advanced Studies.