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The Texas Economy: The Road Ahead After a Crisis Year
Special to the Texas Municipal League
by Glenn Hegar
March 2021
As Texas’ Comptroller, I’m charged with tracking and predicting the course of the state economy. In my article for Texas Town & City last year, I reported on where we saw things headed in 2020, based on the best analysis we could muster.
Needless to say, I didn’t predict what was coming. But then, the emergence of COVID-19 turned everyone’s predictions into wastepaper.
It’s been a humbling year for all of us. No previous recession offers a relevant comparison for 2020, a year that saw the world’s economy contract more sharply and more quickly than ever before in modern times.
Between February and April 2020, Texas lost more than 1.4 million jobs; the unemployment rate more than tripled. We’ve regained a lot of those jobs, but the short-term economic outlook remains uncertain. As I write this, the pandemic is surging again in Texas, despite the initial arrival of vaccines.
We’ve been tracking the course of the pandemic very closely. In our Biennial Revenue Estimate (BRE), released in January, we reported on our economic forecast through the end of the State’s 2023 fiscal year, which will end in August of that year.
Economic Growth
Texas’ inherent advantages — relatively low living costs, an attractive business climate, a central Sunbelt location, and a balanced mix of industries — have allowed its economy to grow faster than the nation’s for many years. In the past decade, Texas’ real gross state product (GSP) grew nearly twice as fast as the national economy. It’s something we’ve come to expect.
The pandemic, however, has reversed this trend, at least temporarily. The United States economy is projected to grow by 1.9 percent in fiscal 2021, while we expect Texas’ GSP to fall by 1.3 percent, due in large part to the collapse in oil prices and other pandemic-related effects.
The good news is that we expect the Texas economy to resume growing faster than the nation’s in fiscal 2022 and 2023, with projected growth rates of 3.7 percent and 4.6 percent, respectively, compared to 2.3 percent and 2.5 percent for the United States.
This return to growth will be buoyed by fast population growth that has been and will continue to be fueled by positive net migration and a relatively high birth rate. Texas remains one of the nation’s most attractive destinations for companies and job seekers alike.
We expect a similar pattern for Texas personal income; after several years of robust growth, we project it will fall by 2.9 percent in 2021. Growth should resume in fiscal 2022 and average 4.8 percent annually in the coming 2022-23 biennium.
Employment
As of December 2020, the Texas unemployment rate was 7.2 percent, higher than the national rate of 6.7 percent.
We project that Texas’ unemployment rate will average 7.2 percent in 2021 before falling to six percent in 2022 and 4.6 percent in 2023.
In December, Texas’ nonfarm employment was 502,600 lower than its February 2020 peak. We don’t expect the state to regain this lost ground by the end of fiscal 2021. State employment has risen in every month since April 2020, but we don’t expect to return to the pre-recession peak until the beginning of fiscal 2023.
Goods and Services
The effects of the pandemic haven’t been distributed equally in our economy. Some sectors have suffered much more than others, lending credence to fears of a “K-shaped recovery,” in which different industries recover at sharply different rates.
Ten of Texas’ 11 major nonfarm industries experienced net job losses in fiscal 2020, reflecting the effects of the pandemic. The job count in the goods-producing industries fell by 7.1 percent, while service-providing industry employment fell by 4.3 percent.
Among the goods-producing industries, the biggest contraction was seen in mining and logging — which, in Texas, largely means oil and gas production. This sector lost 59,300 jobs, a 23.9 percent drop. Employment in oil and natural gas refining and distribution companies also experienced significant declines during the year. We project that Texas mining and logging employment will fall by a further 20.9 percent in fiscal 2021 before resuming modest growth.
In all, we expect employment with goods-producing industries to decline further in the near term, by 10.1 percent in fiscal 2021. Growth should resume thereafter, led by rising employment in mining as demand for energy builds in a recovering economy. We’re projecting growth rates of 1.2 percent in 2022 and 8.7 percent in 2023.
Among the service businesses, those that depend on in-person encounters, such as airlines, hotels and motels, bars and restaurants, felt the effects of lockdowns and travel restrictions most keenly. According to recent reports, Texas-based American Airlines reported $6.7 billion in losses in the first three quarters of 2020, while Southwest lost $2.2 billion. According to the Texas Restaurant Association, about 200,000 Texans employed by restaurants were out of work as of December, while about 15 percent of Texas’ restaurants closed for good last year.
Thus the most sharply affected service providers were those in leisure and hospitality, which lost 246,800 jobs in fiscal 2020, a 17.7 percent decline. Even so, the industry still employed about nine percent of Texans in nonfarm jobs at fiscal 2020’s end. We expect leisure and hospitality employment to rise by 8.2 percent in fiscal 2021, as normal conditions slowly return, and average 3.5 percent annually in the 2022-23 biennium.
This recovery will help boost services employment by 1.6 percent in fiscal 2021 and an average 2.7 percent annually in 2022-23.
Retail Trade and State Revenues
In all, the trade, transportation and utilities industries are Texas’ largest employer, accounting for 20 percent or more than 2.4 million of the state’s nonfarm jobs. In fiscal 2020, however, they lost 73,100 jobs (2.9 percent of the total). We project that the job count in these industries will remain essentially flat in fiscal 2022 and 2023, rising by just 0.3 percent annually.
Of the sectors within these industries, retail trade in particular reflected the changes in consumer behavior prompted by the pandemic. Online shopping, already popular, has increased enormously.
Texas benefited from United States Supreme Court’s decision in the Wayfair case, which required out-of-state online retailers selling goods to Texas consumers to collect taxes on those sales, and from the 2019 passage of H.B. 1525, which requires online marketplace providers (such as eBay and Amazon) to collect and remit sales taxes.
We began collecting sales tax remittances from remote sellers and marketplace providers in November 2019. These began climbing sharply starting in April 2020, and by July exceeded January’s remittances, which reflected December 2019 holiday sales.
In the first 12 months of collections, state sales tax revenue from remote sellers and marketplace providers totaled nearly $1.3 billion. For the most part, this is revenue the state wasn’t collecting before. And while Texas’ sales tax revenues are down, they’d be down much further without online sales.
Construction Activity and Home Inventory
Employment with Texas construction companies fell by 37,600 or 4.8 percent in fiscal 2020, and we expect this trend to continue, with a further 7.1 percent decline in jobs in fiscal 2021. It should turn the corner in 2022 and 2023, with respective increases of 1.8 and 3.3 percent.
On the other hand, Texas housing markets remain extremely robust. Single-family building permits jumped by 15.3 percent in fiscal 2020, to 134,013. According to the Texas A&M Real Estate Center, the median sales price for an existing Texas single-family home rose from $245,000 in August 2019 to $265,000 in August 2020. As of December 2020, Texas had a 1.7-month inventory of existing homes for sale, the lowest level seen since at least 1990.
Foreign Trade and Manufacturing
Texas has led the United States in exports for more than a decade and accounted for 20 percent of the nation’s exports in 2019. Over the years, exports have substantially boosted Texas manufacturers’ sales, most notably for those producing chemicals, electronics, petroleum products, industrial machinery and transportation equipment. But our exports have fallen sharply since the pandemic began in earnest; from January through August 2020, the value of Texas exports was down by 16.5 percent versus the same period in 2019.
Texas manufacturers shed about 40,900 jobs in fiscal 2020, a 4.5 percent decline. The majority of those losses occurred in fabricated metals and machinery manufacturing, two industries closely associated with the oil and natural gas industry.
In fiscal 2021, we expect manufacturing employment to decline again, by 3.1 percent. But we’re projecting a modest return to growth thereafter, at 0.5 percent in fiscal 2022 and 1.7 percent growth in 2023.
Summing Up
In our forecast, we’re assuming continued economic growth through the next biennium, but there’s still a lot of uncertainty about the course of the economy. If we learned anything from 2020, it’s that unforeseen events are the rule, not the exception.
But one thing we can say is that it will take us awhile to get out of the hole the pandemic created. If the vaccines prove effective — and if we can get them widely administered this year — we can hope for a fairly quick return to pre-pandemic growth. In the near term, we don’t expect a repeat of the economic chaos we saw last spring. Fortunately, our economy has seen a lot of positive trends over the last several months, but we also must be mindful of continued headwinds, especially the current surge in cases and hospitalizations.
Energy markets, as always, are a significant source of uncertainty in Texas forecasts. Oil and gas still make significant contributions to the Texas economy, but remain tied to prices that can swing wildly in a short time. April 2020 brought an unprecedented and historical event for the energy market when futures prices turned sharply negative for a day. And low prices affect not just producers but a wide array of related industries and suppliers.
Texas’ rig count, which started drifting lower in 2019, collapsed last summer to levels not seen in more than 50 years of data. It has recovered some, but remains well below the levels of just a year ago. Low production is a continuing brake on Texas’ economic growth.
On the other hand, we see significant reasons for optimism. Personal savings rates are higher; people spent less of their total incomes, including government benefits, in the first three quarters of 2020 than in previous years. Some forms of consumer debt have decreased. Such factors suggest a chance for a substantial surge in consumer spending when people feel safe and secure enough to resume their normal lives.
As long as infection rates remain high, it’s difficult to gauge the ultimate end of the pandemic — and consumer and business behavior thereafter. But Texans are known for their resiliency, and our businesses and industries are working hard to adapt, meeting the economic chaos with creativity, agility and ingenuity. When the crisis passes, these innovations will remain. Amid the disruption, we’ll grow stronger.