Economic lessons from the Lone Star state

THERE ARE many things that set the Republic of Texas – as the locals like to call it – apart from the rest of the US. They love their barbecue, their rodeo, their trucks and their churches. And, goddamn, but they love their American football.

But it’s the Lone Star State’s economy that really makes it stand apart. While the rest of the US struggled through 2011 with jobless, anemic growth, the Texas economy moved from “recovery” into “expansion” mode, and by December of last year, employment had edged past its pre-recession peak.

Only North Dakota, Alaska (two scantly populated states, now booming because of shale oil production) and Washington DC have done better, according to a recent report from the Federal Reserve Bank of Dallas.

Employment across the rest of the country remains 4.4 per cent below where it was before the Great Recession took hold.

Despite a recent upswing in job numbers, the Nobel Prize-winning economist Joseph Stiglitz recently described the US labour market as “a shambles”, noting that it would take 13 years – “sometime around 2025” – to reach full employment at the current pace of growth.

So why is Texas bouncing back before the rest?

It has a number of things going for it. Chief among them is the fact that it’s the number-one exporting state in the nation, and has been for more than a decade. Houston is the second-largest port city in the US, and exports are now 15 per cent higher than they were before the recession.

Doubtless, the oil and gas industry has played its part in that, and booming oil prices – while punishing the rest of the economy – are reaping rewards for Texas.

But beyond the highly prized jobs associated with oil and gas mining (highly prized because they pay roughly twice the average salary of workers in other sectors), Texas is a major centre for the refining of petrochemicals – key ingredients in the production of fertiliser, plastics and synthetic rubber.

The petrochemicals industry is now expanding, reinvigorated by the recent discovery of vast – and now reachable – quantities of shale gas and oil all across the US. Ten new plants are under construction along the Gulf Coast.

“Historically, we made these petrochemical plants for the US and exported whatever we could,” says Bill Gilmer, senior economist at the Federal Reserve Bank of Dallas. “These new plants are being set up for exports for Asia and Latin America.”

“With the advent of the supplies from shale, and the low price of gas – the rest of the world produce their petrochemicals from oil – the result now is we have enormous cost advantages in producing these petrochemicals,” he says.

But Texas is not just a one-trick pony. It boasts the headquarters of more than 50 Fortune 500 companies, beaten only by New York and California in that regard. It is also a huge tech hub, particularly around the cities of Austin and Dallas, boasting enviable names such as Dell (Michael Dell is an Austinian), Apple, IBM, HP, AMD, Intel, Texas Instruments, Facebook, Nvidia, Blizzard Entertainment . . . the list goes on. Earlier this month, Apple announced a $304 million investment in a new campus, promising to more than double its current workforce of 3,500 over the next decade.

“Tech was one of the real leaders that came out of the recovery,” says Gilmer, who maintains that, despite coming “late to the recession” in 2008, Texas was not spared the full wrath of the financial crisis. “No place was spared,” he says.

But Gilmer believes Texas rebounded quicker than the rest because of its growth model which, he says, is built on a good business climate. The key features he points to are anti-union “right-to-work” laws, tort reform (making it harder to sue people) and a low-tax system.

“I’m not sure that business climate is so easily replicated,” says Gilmer, in his bright, airy office, that looks out over the sprawl of Houston – a city thousands flock to every month from other parts of the US, looking for work. “To make that work, what goes with it is a limited social safety net compared to other regions, and an assumption that a rising tide lifts most boats. That’s maybe a harder philosophy to sell than you might think,” he says.

In that sense, Texas is the epitome of the American Dream. People feel they’re given a chance to participate in the economy; a chance to make things happen for themselves. But many of them don’t.

According to the most recent data from the US Census Bureau, almost one in five Texans is below the poverty line – earning $22,113 a year or less for a family of four.

Texas also has the highest proportion of people without health insurance of all 50 states, and one of the highest imprisonment rates.

A 60-year-old man holding a sign that read “Homeless Painter – Needs Work” as he stood in the middle of a dual-carriageway outside Austin last Sunday drew little attention from passing motorists.

But that, says Bill Gilmer, is the trade-off. If you fall through the cracks, there’s not much to cushion your fall.

There is one trademark pitfall of the most recent recession that Texas managed, in large part, to avoid – the housing bubble.

“We have adequate land and a developer-friendly attitude that doesn’t impose a lot of restrictions on development,” says Gilmer. “The result is you can put houses on the ground inexpensively and they tend to sell close to the marginal cost of construction.”

House prices across Texas are still down 3.1 per cent from their 2009 peak, but never suffered the huge drops seen in other states.

The state did its fair share of subprime lending, however, which is partly why the housing market is still suffering to a certain extent. One in four homes sold in the Houston area in January of this year was a foreclosed property.

“It makes you a little discouraged about the rest of the country,” Gilmer adds, “because Houston’s had strong growth, and it’s not a price-falling issue, but we’re still trying to work out our foreclosure problem.”

GILMER IS RIGHTto be concerned. The housing sector has led the US out of every recession since the 1970s, but the construction industry is still only building 400,000 new homes a year – a figure that should be closer to one million for a population the size of America's.

In the years leading up to the recession, 1.8 million new units were being built every year.

But depressed demand, continuing foreclosures, tight credit and a weak jobs market are all weighing on sentiment. According to the most recent instalment of the Case-Schiller house-price index, by the end of 2011, prices nationally were down 33.8 per cent from the peak in 2006.

As a result, many potential buyers are now in “wait and see” mode.

There has been some cause for cheer in recent months, however – even in the housing market. Last month, the National Association of Realtors reported that sales of previously owned homes in the US increased 4.3 per cent in January from December, reaching their highest level since May 2010.

The national rate of unemployment has also been falling, from 9.1 per cent in August 2011 to 8.3 per cent in February, while initial claims for unemployment benefits dropped this month to their lowest level since February 2008.

In addition, economic growth for the fourth quarter of 2011 was revised upwards to an annualised rate of 3 per cent (seen as the point at which unemployment can start to come down) last month by the Bureau of Economic Analysis.

Combined, these pieces of data have helped to push the major stock indexes to trade at post-crisis highs this month, as hope gathers for a resurgent US economy.

But not everyone is so confident.

“That 3 per cent figure wasn’t that encouraging because it had a big inventory bulge in it,” says Gilmer, referring to businesses that beefed up their stashes of available merchandise and raw materials.

“Most economists are puzzled as to whether that inventory increase was in expectation of better sales or leftover from a slow summer. Take out inventory and it’s less than 2 per cent.”

Gilmer also says the recent strength in jobs numbers has been something of a mystery. “If you go back to 1980s, 1990s and early 2000s, we expected a quarter-of-a-million jobs per month. We haven’t seen anything close to that until recently, so it looks good.

“But at a time when 30 per cent of factory capacity is still unused and you still have 8.3 per cent unemployment, it’s still just barely enough to bring the unemployment rate down – and that’s if it continues.”

The Federal Reserve Bank of Philadelphia’s widely followed Survey of Professional Forecasters revised its estimate for real GDP growth in the US in 2012 down to 2.2 per cent from 2.4 per cent last month, however – well below the magic tipping point of 3 per cent growth, which the panel of 45 forecasters surveyed does not believe will be reached until 2014.

Dr Barton Smith, a professor of economics at the University of Houston, says there are two things holding it back right now. The first is consumer debt.

“All the attention in the US has been associated with federal government debt and the focus in Europe has been with debt issues in the euro zone. Consumer debt is as important as public sector debt,” he says.

“Americans in general are still way over their heads in debt. That’s one thing that’s made the US economy really slow in coming back,” he adds.

The second issue, according to Smith, is uncertainty. With a messy presidential election looming, many key decisions affecting the economy will be postponed.

“Nobody seems to know what tax policy is going to be a year from now, or if we’re going to be able to control the federal government deficit. That makes the consumer cautious but it also makes the businessman cautious. Until we get past this cycle of uncertainty, it’s going to remain sluggish.”

The threat of a worsening sovereign debt crisis and/or recession in Europe, along with continuing worries about Iran’s agenda affecting oil supply from the Middle East, are also of concern to Dr Smith, who says he’s not expecting to get a clear picture of where the US is headed before the end of this year.

Texas is the epitome of the American Dream. People feel they’re given a chance to participate in the economy; a chance to make things happen for themselves