The Economist: Lower Oil Prices and the Texas Economic Forecast
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For several years, Texas has been leading the way in economic growth, with the state and its metropolitan areas ranking among the strongest performing in the nation. The oil surge was a key reason for this strength, with companies and communities across the state benefitting from the entire industry spectrum: drilling to headquarters operations to service companies and everything in between. With the sharp decline in oil prices and resulting scaling back in the industry, the Texas economy has been affected. I recently took a close look at what’s going on and what we can expect going forward.
Here are a few highlights from my updated economic forecast for Texas given lower oil prices.
Looking out over five years, average annual growth is only slightly lower. Over the 2014 to 2019 period, I’m now estimating that the state will add almost 1.2 million net new jobs, a 1.91% compound annual growth rate. Real gross product is likely to expand at a 3.97% yearly pace, for an increase of $321.4 billion over the next five years. This level of growth exceeds the national rate, even though lower oil (and, hence, lower fuel) prices will have a modest positive effect on the US economy.
To put this growth outlook in perspective, I’ll compare it to expectations in our forecast from last fall. As I prepared those projections, oil prices had backed off of the $100 per barrel level where they had been for several years, but were still much higher than they are now. Between the end of July and late November 2014, crude oil prices fell from about $100 to $75 per barrel.
Given that situation, our baseline forecast called for the addition of 1.3 million jobs from 2014 through 2019, a 2.13% rate of growth, and gains in real gross product of $352.3 billion (4.34% growth).
In January 2015, crude prices dipped below $45, stayed in the $40-$50 range for several months, and are now about $60 per barrel. The inevitable result of cutting the price by half (or more on some days) has been a sharp decline in drilling activity. Oil and gas exploration and production is not a huge source of direct employment, with only about 300,000 of the 12 million people working in Texas employed directly in the sector. However, jobs in the industry tend to pay well, capital investments are large, productivity levels are high, and multipliers are significant. Reductions in activity in the industry therefore leads to relatively larger economic fallout than that observed in other sectors.
The timeframe I’m seeing as notably different in terms of economic performance is the next couple of years. This year, we are estimating that Texas will add only about 171,000 jobs (rather than the 284,000 projected under a higher oil price situation like we had in the fall). The pace of growth will pick up fairly soon again after that, but a residual effect remains. Looking at the 2014-2019 span, job growth in Texas comes in at a pace just under 240,000 net new positions per year in our latest projections, rather than the 267,000 per year pace we had been expected. On average over the next five years, we’re coming out only about 10% behind the original projections, though the pattern in intervening years is quite different.
Real gross product tells a similar story, with expected growth during 2015 down from $71.1 billion in the old model run to $36.8 billion in the update. It takes a little more time for momentum to build enough to get the yearly growth rates back up to what I had expected last fall, but in the last couple of years of our forecast horizon, I think growth will begin to exceed what I had projected before (though remain lower over the five-year span).
While the rate of expansion has certainly slowed over the past few months and I’m feeling a little less bullish on the Texas economy than I was with oil at $75-$100 per barrel, it still represents relatively healthy performance. It’s not the 400,000 jobs per year of 2014, the level is consistent with the growth the state was seeing before the recent spurt in energy activity, but will still keep Texas on a modest growth trend.
Energy has not been the only source of growth in Texas; the state economy was growing nicely even before the energy surge, and I don’t think the state economy is likely to experience a prolonged setback given the oil price decline. How rapidly the pace of growth gains momentum depends on how low oil prices go and how long they stay there. As I’ve discussed in prior columns, the difficulty in predicting when oil prices will turn around is that a key determining factor right now is political, not economic. Oil prices at $45 (or even $65) per barrel are below the sustainable long-term equilibrium level, and it is highly unlikely that they will stay in that range for an extended period of time. Once prices recover, drilling activity in Texas will trend upward, with faster economic growth the inevitable result.
High oil prices certainly gave the state (and, in particular, regions with strong energy ties) an economic boost, but other industries continue to expand nicely even now that oil prices have fallen. While our economic growth pace may not be as rapid as it has been, Texas remains a fundamentally strong economy.
Dr. M. Ray Perryman 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.