Thursday, March 27, 1997

The Economist Pit stop for the state's industries

By Dr. M. RAY PERRYMAN

The Perryman Group

As we coast to the close of the first quarter in 1997, business folks are beginning to get a sense of how their business interests will fare for the year.

Not surprisingly, some industries are at full throttle while others are just putting along. Overall, however, business growth in Texas is out-distancing the nation as a whole. Here's a quick look at what drives the state's economy.

The data indicate the services sector created almost 121,000 jobs in Texas during 1996. This phenomenal expansion reflects the ongoing growth in healthcare services throughout Texas and the nation, a pattern that will continue to emerge as Baby Boomers age.

The spurt also reveals an acceleration in international demand for business and financial services. The state's international business activity is also driving employment growth in the transportation, communication and utilities sector; new gains in productivity will come from advances in technology.

At the other end of the growth spectrum is the state's mining sector - primarily oil and gas extraction in Texas. Between 1995 and 1996, oil and gas activity was the only sector in Texas to have a drop in overall employment (down 2 percent). Firms in the energy industry continue to downsize due to technological advances that short-circuit previously labor-intensive jobs.

One positive sign, however, is a growing global demand for oil in developed and developing nations.

This change, coupled with energy prices, pushed higher during recent tension in the Middle East, creates a volatile environment with the possibility of less-than-expected declines in this industry's employment.

The finance, insurance and real estate sector will increase its share of state output only slightly over the next few years. Once heralded as a paradigm of growth for the state's economy, over the short term, this sector may even suffer slight declines in total employment. (Improved levels of worker productivity account for increases in output.)

Although the banking industry is expected to remain the largest employer within the sector, merchant bankers and venture capitalists will fuel job creation.

The agriculture industry was slowed in 1996 by severe drought conditions and the recent Farm-to-Market Transition Act. The law supports the gradual restoration of marketplace incentives by replacing price supports with declining subsidies.

The drought hit farmers hard early in the growing season, making the removal of crop subsidies doubly painful. Setbacks in agriculture, however, are unlikely to impede overall state economic performance.

The state's expanding economy continues to jump start demand for the construction sector's output. The number of building permits issued in the first part of 1997 is impressive, boding well for employment in the construction sector. Construction will likely stay revved up over the next few years.

Employment in the state's manufacture of non-durable goods (items quickly consumed such as paper, bread and gasoline) is expected to increase somewhat over the next few years, although the percentage contribution to total state output may fall. Over the next few years, demand for durable goods (long-use items such as computers or automobiles) should fuel healthy growth in employment and output.

The state's government sector, on the whole, is in good shape. The current trend toward devolution of power from the federal government should increase the significance of both state and local governments, although military employment and output may sputter.

The trade-related sector (wholesale and retail trade) is one of the state's top contributors to total output and second only to services in employment; many of these jobs come from retail eating and drinking companies.

Trade with foreign countries, especially Mexico, will play an increasingly important role in the state's economic well-being. In sum, while the Texas economy may not be racing at quite the speed of the last few years, it is definitely purring along. If you're doin'b'ness in Texas, you're in the right place.

Dr. M. Ray Perryman is president and chief executive officer of The Perryman Group and business economist-in-residence at the Edwin L. Cox School of Business at Southern Methodist University.