Sunday, November 29, 1998

Weak oil prices, other factors slow Texas economy

By MARK BABINECK

Associated Press

HOUSTON -- Weak oil prices, the Asian financial crisis and natural business cycles are finally wearing on the Texas economy, which economists agree should continue slowing down through 1999.

"Most of the 1990s growth has been stronger than the rest of the country and job growth has been stronger than population growth," said Federal Reserve Bank of Dallas economist Fiona Sigalla. "We aren't surprised to see some cooling and have expected to see it for some time."

The Fed's index of leading economic indicators for Texas has slipped every month since February. A similar index compiled by the state comptroller's office reveals the same trend, along with a decrease in consumer confidence.

The state's gaudy economic pace set in 1997 would have been impossible to sustain even under the best of circumstances. And these are not the best of circumstances.

Job growth across Texas in 1999 is expected to drop to roughly half of the 3.5 percent growth rate enjoyed this year. Not terrible, economists say, but not great, either.

For some parts of the state, natural economic ups and downs are to blame, along with the Asian banking crash, which has sharply reduced demand for U.S. goods. Other regions are being stung by a familiar foe: low oil prices.

Two warm winters and continued overproduction have created a glut that has plunged prices per barrel to the $12 to $13 range, a 25 percent drop from a year ago. The severity of the impact, however, depends on what part of the state you're in.

For instance, energy-driven Houston is expected to have a rougher time than Dallas-Fort Worth. But even Houston is more diversified than oil-dependent Midland-Odessa.

"Nobody is in a panic yet, but everyone is concerned and just watching their dollars," said Morris Burns, executive vice president of the Permian Basin Petroleum Association in Midland. "We've had some fairly good-sized layoffs recently and there are rumors on the street every day."

He cited recent Chamber of Commerce figures showing that 5,000 good-paying oil industry jobs in the area have fallen by the wayside, replaced by 4,000 lower-paying service jobs.

Many of those oil executives are moving to Houston as the energy industry continues to consolidate here. "But a lot of those jobs are just flat-out disappearing," Burns added.

The rig count, a measure of drilling activity compiled by Houston-based Baker Hughes Inc., has plummeted by 34 percent in Texas from a year ago, from 372 to 245. An industry in need for workers and equipment just last year is cutting back again on both counts.

Low energy prices are good for just about every other industry except, well, energy. Cheap oil and gas reduce expenses for most other businesses in Texas, which according to a Federal Reserve study is 75 percent less dependent on energy than during the 1980s.

But diversification only works when the new industries thrive. A semiconductor glut has damaged Texas' bustling high-tech industry, and collapsed Asian currencies have ruined some the state's best export markets.

Texas manufacturing should weather the storm if Latin America can avoid succumbing to the Asian flu, economist Bill Gilmer said.

"Economists are terrible at predicting these contagions," said Gilmer, of the Dallas Fed's Houston branch. "I don't think economists have any better insight on these things than anyone else does."

Effects of the Asian crisis and low oil prices already have dampened some economies south of the border, including Mexico.

"The growth of the Mexican economy affects Texas, so border growth should slow quite dramatically," Ms. Sigalla said.

One area that hasn't slowed is construction. Part of the reason is that construction crews are still struggling to meet demand created during the mid-1990s economic surge.

New home construction in Texas spiked by 19.8 percent last September compared with one year before, and other types of building are ongoing at a healthy rate. Ms. Sigalla credits falling interest rates for the construction boom, which also should slow as worries about overbuilding persist.

University of Houston economist Barton Smith said developers aren't grossly overbuilding in the single-family and commercial markets, but he warned that the luxury apartment boom could put a serious strain on the multifamily market.

He added that lenders appear to be tightening up on credit, thereby reining in new construction.

John Speer, president of Houston-based Royce Homes, attributed the apartment boom to the speculative nature of the business. Multifamily developers hustle during good times and stop cold during slowdowns, he said.