Energy Sector to Shift Texas Economy into ‘Second Gear’ in 2017

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Federal Reserve Bank of Dallas assistant vice president and senior economist Keith R. Phillips speaks to forecasts the 2017 Texas job economy.

Kathryn Boyd-Batstone / Rivard Report

Economist Keith Phillips forecasts the 2017 Texas economy.

Calling 2016 a slow but positive year, economist Keith Phillips of the Federal Reserve Bank of Dallas delivered his annual outlook for the state’s economy Tuesday. Unlike other parts of the country, he said, Texas will shift into “second gear” in 2017.

The brakes put on last year’s oil and gas prices are slowly being released, Phillips told a room full of local business leaders at the San Antonio branch of the Federal Reserve of Dallas, and both State legislators facing a budget shortfall as well as citizens on the job hunt have reason to be cautiously optimistic.

“The Texas economy was doing very well throughout most of the recovery from the great recession,” Phillips said. “In 2014, Texas was the third fastest growing state in the nation. Oil prices were very high and there was a lot of growth not just in the oil and gas industry, but also in exports and other sectors.

“But in 2015, oil prices fell sharply and remained low throughout last year. So, the Texas economy, after seeing a resurgence in the energy sector due to fracking, experienced a big decline in energy over the last two years.”

Still, despite nationwide declines in both energy and manufacturing, Texas continued to grow, with job growth at 1.3% in 2015 and 1.6% in 2016. “Most energy states saw job losses last year,” he said.

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Due to tight labor markets in the state this year, 2017 will bring just 2% job growth, and while the I-35 corridor between the Capital and San Antonio remains strong, Austin growth has slowed and will experience only 3% job growth this year – up from 1.5% in 2016, but down from its usual 4%. That story, however, is not only about falling oil prices as it was in the 80s.

“We’ve had some slowing in health care after strong growth following the Affordable Care Act launch and a rise in Medicaid enrollments,” Phillips said. “But, manufacturing, while getting some improvements from orders from the energy sector, is still feeling the weight of a very strong dollar, making the goods produced in Texas more expensive internationally. Manufacturing is flattening out and isn’t likely to bounce back. We expect overall better job growth, but not real strong growth, just better than last year.”

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Weakening in both the retail sector and the value of the peso affected San Antonio’s economy in 2016, Phillips said. Though San Antonio saw some slowing in health care last summer, it has bounced back, buffered in part by higher levels of military health care in the city. Job growth will be stronger in San Antonio than Austin in 2017.

“I think overall (the health care) industry in San Antonio will continue to grow,” Phillips said. “I’m much more iffy about the federal government, given the projected deficit in the long run. But, for now, the federal government continues to grow, and in the past, when the government has cut back, San Antonio has done well. One reason is because it’s a lot more cost-effective to run an operation in San Antonio than other big cities. We do have that leverage or advantage.”

Because the projected state budget shortfall is mostly due to a drop in revenue from the energy sector (but also decreased property value and sales tax income), legislators in Austin should remain hopeful. “It’s going to be a challenge, but it could be less of a challenge,” Phillips said. “If oil and gas sees this continued pick-up, there will be less of a problem in the budget than we think right now.

“But oil prices are very hard to predict.”

Across the country, the prospect of a new Republican leader in the White House is driving economic uncertainty.

“There are a lot of promises of lowering regulation and taxes, and also some talk of trade agreement changes, but all that has to go through Congress and takes a long time,” he said. “(Our surveys show) the business community as a whole expects the new administration might be positive for business growth. There’s just a lot of uncertainty about what is actually going to happen.”

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