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Thorny Housing Issues

This article was written by Jim Russell and appeared in Pacific Standard on November 3, 2014.

Does Population Change Drive Demand for Housing?

Most conversations about housing affordability define demand in terms of population change, but income is a far better measure.

Brian Kelsey provides the provocation for this post, “78704 population didn’t change much 2000-2012 but % w/ bachelor’s degree or higher increased 37% to 50%.” Translating character-restricted Twitter lingo, “78704” is an Austin, Texas, zip code. For that part of the metro, residents didn’t become more numerous so much as they became more educated. Brian was discussing housing affordability in Austin (hence the hash tag “#atxaffordability”). Real estate appreciates without population gains or more restrictive regulations on building.

If population growth isn’t driving demand for housing in 78704, then will greater supply drive down prices? That’s not the matter of debate, but it should be. I can subscribe to basic supply and demand theory while questioning the efficacy of increasing housing units as a solution to the affordability crisis. Define demand.

Most conversations about housing affordability define demand in terms of population change. No one defines housing demand in terms of income, save the scholars worried about gentrification. Regarding gentrification, higher incomes displace lower incomes. The population in a neighborhood could go down. Tenured residents are still forced out of their homes. Vacancy rates can increase.

I wouldn’t put much stock in population numbers. I learned my lesson from studying Rust Belt population decline, particularly the recent good fortune of the shrinking city of Pittsburgh. You’ll find a similar story in St. Louis:

“American families have changed dramatically over the past half century. The average household size in St. Louis in 1950 was 3.1 and in 2010, 2.2. With every other factor held constant, the decrease in city population would have been 248K or 29%. This means that with the same number of homes, the same number of apartments, and the same number of families as resided in the city in 1950, the decrease in average household size could account for 46% of the city’s population loss.”

I do notice that a shrinking household does not account for all of the population decline in St. Louis. Still, a drop of almost 250,000 people would constitute a substantial dent in demand. And yet, the same number of houses would be occupied. Population decreased by a quarter of a million residents and demand for housing remained constant. What a lousy way to measure demand.

Instead of population, I recommend using income to measure demand. The income variable has warts, too. It’s still better than using population change. A household earning $60,000/year eyes another household in a different neighborhood making $30,000/year. The wealthier household is currently paying 50 percent of its income on shelter to be near the city center. This household could pay a lot more than the poorer household for the same home a bit further from the city center and still have more disposable income. Demand goes up without any population change.

Just because I have redefined demand in terms of income doesn’t mean that increased housing supply can’t help balance the real estate market. The policy geography for increasing supply is different. Birth of a gentrifier:

“In the opposite scenario where housing and office development remains static, the resulting paucity of workers to meet labour demand leads to an increasingly tighter labour market, sparking a bidding war, which in turn leads to wages spiralling higher, which finally leads to still higher housing costs and eventually an out-migration of precisely the kinds of workers that are needed.”

I don’t expect the feedback loop described would price such highly skilled talent out of the regional labor market. But it could push workers into other parts of the city. Hello gentrification. Instead of building more in the destination neighborhood, the target would be the source (of the gentrifier) neighborhood. Note how greater supply is addressing the upward pressure on wages, not greater numbers of people piling into the same place. This is the Financial Times talking and the prescription for the problem is to liberalize land use and building regulations. The author believes in supply and demand theory while linking higher wages with higher housing prices. Build baby build.

I wish the solution were so simple. Let migration theory explain. Most people, when they move, move short distances. Long-distance relocation is rare. Why? Long-distance relocation is scary. You leave your social network behind. The new place is, well, new. It is filled with known unknowns and unknown unknowns. Thus, the new-to-town cluster in the same neighborhoods where they are less likely to encounter townies who hate them. The new-to-town make more money—much more—than the average household in the area. Gateway neighborhoods for outsiders tend to sport some of the most expensive real estate in the metro. Meanwhile, locals moving around the region (most migration) are seeking some sort of return on their intimacy with place, “Can I have it all at half the price?” Eventually, newcomers transform into tenured residents and join the hunt. And the erstwhile newcomers enjoy a greater return for their labor. They ruin everything. They ruined Austin, Texas.

Places such as Austin are importing higher labor costs which will eventually diffuse. Places such as San Francisco not only import higher labor costs, they also offer attractive investment opportunities for the wealthy living and making money in other countries. Effectively, San Francisco’s real estate market imports higher wages without offering such jobs locally. The price for shelter has long been disconnected from local population change. Increasingly, the price for shelter is disconnected from local wages. Supply-side solutions to the housing affordability problem have a woefully anachronistic definition of demand.

Economic Impact of Google Fiber

This story was written by Brian Gaar and appeared in the Austin American-Statesman on November 2, 2014.

Austin business leaders: Google Fiber can’t get here soon enough

Google Fiber hasn’t officially arrived in Austin yet, but local business and technology leaders say the ultrafast Internet service will be a game-changer when it debuts here next month.

While Google has only announced its residential service and hasn’t yet given details about commercial availability, business leaders and entrepreneurs say the prospect of 1 gigabit-per-second Internet speeds will enhance Austin’s reputation as a tech hub and spark new innovations. The service is more than 100 times faster than today’s typical broadband Internet access.

“I think it’s going to be awesome,” said William “Whurley” Hurley, an Austin entrepreneur who co-founded mobile developer Chaotic Moon and is planning to launch another startup next year. “It’s going to be revolutionary for a lot of businesses that I don’t think see it as that now, but it will be.”

Hurley, who is no longer with Chaotic Moon, predicted residents will flock to areas of Austin where Google Fiber is rolling out first. Google recently announced that parts of South and Southeast Austin will be the first to get the new service starting in December.

Part of the allure is reducing the time that many tech businesses spend uploading — and downloading — data to the cloud, for such operations as data processing.

That represents a lot of downtime, Hurley said.

“Speed is part of the new business formula,” he said. “You have to be able to work fast, and speed becomes an advantage.”

With only a handful of other cities in the queue for Google Fiber at this time, Austin will have a huge advantage over most of the country with the increased Internet speeds, said Manny Flores, CEO of Austin advertising firm LatinWorks.

“Austin will be able to work harder and faster, and I’m looking forward to seeing the results,” Flores said.

Advertising in particular is a fast-paced business, he said, with clients looking to push boundaries and outpace their competition. Internally, there’s also the need to be more efficient in the way that LatinWorks conducts business on a daily basis, he said.

“Faster Internet speeds will allow us to communicate seamlessly across departments and with our clients,” Flores said. “Our increased ability to download and process big data will allow for more efficient optimizations across all of our digital campaigns, as well as a more efficient work flow for our creative teams who are constantly downloading and working with large files.”

Gary Gattis, CEO of Austin gaming studio Spacetime Studios, said he’d love to be wired with Google Fiber at home and at work.

“We transmit a huge amount of data whenever we work from home,” he said. “Google Fiber would make it much more manageable.”

Faster Internet service has proven to be a lure for fledgling businesses in other communities where Google Fiber has landed. In Kansas City, where Google Fiber first launched, startups sprouted in a number of neighborhoods. The movement has dubbed the “Silicon Prairie.”

The advantage for startups is simple: A faster Internet pipe makes it easier to handle large files and eliminates buffering problems that plague online video, live conferencing or other network-intensive tasks.

Infrastructure of that caliber has certainly been an asset for other communities’ business attraction and retention efforts, said Brian Kelsey, principal of Civic Analytics, an Austin-based economic development firm.

He pointed to Chattanooga, Tenn., which is running a municipally owned fiber-optic network “that has really improved their position among peer communities.”

Chattanooga’s taxpayer-owned network has indeed sparked growth.

Former factory buildings on its Main Street and Warehouse Row on Market Street have been converted to loft apartments, open-space offices, restaurants and shops. The city has welcomed a new population of computer programmers, entrepreneurs and investors.

“It created a catalytic moment here,” said Sheldon Grizzle, founder of the Company Lab, which helps startups refine their ideas and bring their products to market. “The Gig,” as Chattanooga’s fiber-optic network is known, “allowed us to attract capital and talent into this community that never would have been here otherwise.”

Another benefit, business owners point out, is that Google’s entrance into the Austin market has prompted other providers, including AT&T and Time Warner, to roll out faster Internet speeds on their Austin networks.

“Competition is a beautiful thing, and all of us benefit from it when it’s allowed to happen in the marketplace,” said David Kaelin, who owns the Austin-based retro gaming chain Game Over Videogames.

Austin-area business owners also say faster Internet service leads to innovations that weren’t possible with slower connections. Just as broadband connections made Internet video and online gaming more accessible to the masses, gigabit Internet will likely prompt another round of innovation.

Hurley said the faster Internet speeds will enable a whole host of new ideas and services. Tech incubators at the University of Texas and Capital Factory will benefit to a huge degree, he said.

“I think it’s really going to take things to a whole new level and allow for a whole new set of ideas,” he said.

In the advertising realm, more and more of the industry is shifting to digital, and Flores said he’s looking forward to seeing how the landscape will continue to evolve.

“We’ve seen so many great new technologies and offerings arise over the past few years and can’t wait for what comes next,” he said.

Adjusting to Life as The Human Capital

Note to non-Austin readers: most of the data analysis we share here is for Austin because we live in Austin and want to generate awareness about how and why Austin is changing, and, perhaps, what we can or should do about it. But nearly everything posted here can be recreated for other communities using readily available public data. ~ Brian


Austin, Texas: A Theory of Everything (cont’d)

Why being The Human Capital is, in the immortal words of Homer Simpson, the cause of, and solution to, all of life’s problems

The Austin Chamber ran a campaign a few years ago branding Austin as The Human Capital. The tagline is still featured as the core message to site selection consultants. We’re certainly in the running for that title. The Austin-Round Rock MSA has added an average of 17,000 highly-educated people (bachelor’s degree or higher) per year to the region’s population since 2000–an 80% growth rate that ranks #4 among large U.S. metro areas with at least one million in population.

And while Austin appears to be squarely in the path of the Silver Tsunami, most of this “brain gain” has directly impacted Austin’s labor force. People age 65+ make up about 12% of the approximately 507,000 residents of the Austin-Round Rock MSA with a bachelor’s degree or higher (bachelor’s+). If we assume that people age 65+ are a similar share (12%) of net change in Austin’s total bachelor’s+ population, then that means Austin’s primary working age population has gained about 198,000 bachelor’s+ people since 2000. According to the Census Bureau, 87% of bachelor’s+ people age 25-64 in Austin are in the labor force. So that works out to about 173,000 bachelor’s+ people joining the labor force in Austin since 2000, or roughly 13,000 per year.

To put that in perspective, excluding everybody in Austin age 65+, a gain of 198,000 bachelor’s+ people would drop Austin in the rankings among large metro areas only three spots, from #4 to #7, still well ahead of fast-growing, economically successful places such as Orlando, Portland, and Denver.

Being The Human Capital also makes good economic sense. As with most things in life and data, correlation should not be mistaken for causation. But the signal is pretty strong. Here’s a chart showing the growth rate of nominal gross domestic product (GDP) and the growth rate of bachelor’s+ population for the top 100 metro areas ranked by population. Clearly, human capital is playing a role in driving economic growth across the U.S., and Austin is among the winners of this “war for talent.”

2014-10-29 Growth in GDP vs Bachelor's+ Population MSA

Now, the downside risk, as they say. While we love touting our place at the top of the latest “best of” list, Austin is struggling to come to grips with its rapid ascent. Nowhere is that more evident, especially during this campaign season, than in conversations about inequality, gentrification, and affordability.

I’ll get to housing in detail in a future post. For now, let’s just focus on how adding 13,000 highly-educated people to the labor force per year could be impacting Austin, generally. First, there’s the obvious: growing prosperity, at least in the aggregate. Average earnings for bachelor’s+ workers age 25+ in Austin are $85,608, according to the Census Bureau. That’s about $30,000 more per year than the average for all employees in Austin, which goes a long way toward explaining the explosion of discretionary income that’s fueling our local culinary scene.

Next, growing disparity. Bachelor’s+ workers in Austin, on average, earn about $30,000 more per year than workers with some college or an associate’s degree, and about $40,000 more than workers with only high school. And while the bachelor’s+ population may be growing at the fastest rate, other segments of Austin’s workforce are growing at a healthy pace, as well. Workers with a high school diploma or less make up somewhere between 275,000 and 300,000 employees in the Austin-Round Rock MSA; the high school diploma population has grown by 54% since 2000.

Further, Austin’s rapidly growing bachelor’s+ population is likely exacerbating inequality along race/ethnicity lines, although it’s difficult to say for sure until we have better data available (innovative research efforts like the Central Texas Student Futures Project are certainly helping). For example, according to the latest available census data, only 23% of Black employees and 17% of Hispanic employees in Austin have a bachelor’s degree or higher, compared to 49% of Whites and an astounding 67% of Asians. While each race/ethnicity group in Austin has more education, on average, than its peers nationwide, inequality in educational attainment in Austin translates to significant wage inequality. Average earnings for Black employees in Austin are $39,072 per year, which at 30% of total income, converts to affordable monthly housing costs of $977.

Spend ten minutes looking online for rental housing of passable quality at $977 or less per month in centrally located neighborhoods around Austin and you’ll quickly understand why gentrification has been a dominant theme this campaign season.

Inequality of that magnitude isn’t unique to Austin, of course, but the gaps are wider here compared to some other regions. In my hometown of Raleigh, NC, for example (#5 right behind Austin in bachelor’s+ population growth), average earnings for bachelor’s+ workers are $75,228, and the gap between bachelor’s+ workers and some college or associate’s degree workers is about $5,000 smaller than it is in Austin. I have no idea what difference, if any, $5,000-$10,000 per year could make in shaping our perceptions of inequality and affordability in Austin, compared to other fast-growing, economically successful places like Raleigh. But it’s large enough to get your attention, especially considering the pace at which we are adding highly educated people to the population. More on this later when I take up housing in more detail.

Finally, there’s underemployment. Recall that we’re adding about 13,000 bachelor’s+ people to Austin’s labor force every year. It’s difficult to sort out exactly how many jobs requiring bachelor’s+ education we’re adding to absorb that increase in the labor force, but at the risk of raising the ire of the nuance police, we can take a shot at it. According to data from EMSI, we’ve added, on average, about 4,000 jobs per year since 2001 in the Austin-Round Rock MSA in occupations where the typical education needed for entry-level employment is a bachelor’s degree or higher. So that’s 13,000 more bachelor’s+ candidates competing for 4,000 more bachelor’s+ jobs each year. Moreover, even in “boom” years of higher than average job growth for Austin, we’re adding only about 8,000 bachelor’s+ jobs, which is still not enough to meet the demand of 13,000 new bachelor’s+ candidates in the region.

Thus, if you are highly educated and finding it difficult to navigate Austin’s labor market, you’re not imagining it. The Human Capital is getting pretty crowded these days. Now consider what it’s like for the other 63% of Austin’s adult population, which includes approximately three out of four Black employees and four out of five Hispanic employees, struggling to keep up with the rising cost of living in Austin with no bachelor’s+ and on no more than $1,000 per month for housing costs (i.e. rent plus utilities, etc.) and you can quickly see why inequality, gentrification, and affordability are the key topics in most city council races right now.

Austin’s standing as The Human Capital should be celebrated, but the invited guest list needs to be more inclusive.

Austin, Texas: A Theory of Everything

There’s a term from physics I’ve always liked: theory of everything. It refers to the holy grail in physics of a unifying theoretical framework that can satisfactorily explain how everything in the universe works. The physicists you can name off the top of your head have all contributed pieces to the puzzle, but nobody has yet discovered the underlying structure that ties everything together convincingly. Many experts would say that no such unifying theory exists, but that doesn’t stop their pursuit of it. Historical consequence, after all, is a mighty large and tasty carrot.

Urban planners and economic geographers are on a similar quest. While the geographic scope–and thankfully the math–may be less ambitious, the search for that single unifying theory that can explain how cities and regions work is no less tempting. Nor is it less consequential, I would argue, at least for people concerned with the future of their communities. Whether it’s concentrated, inter-generational poverty on one end of the spectrum or rising inequality and gentrification on the other, urban and rural planners are analyzing data, building and testing models, and exploring “best practices” that can help make sense of what they see happening on the ground. Jane Jacobs. Richard Florida. Ed Glaeser. Enrico Moretti. Michael Porter. All rock-star thinkers and writers with massive popular appeal because they’ve offered important pieces of the puzzle: clusters, creative class, urban externalities, etc. A theory of everything, for politicians, planners, and pundits.

We’ve reached somewhat of a fever pitch here in Austin lately, even by our own navel-gazing standards. The confluence of housing costs, traffic, property taxes, gentrification, and 78 candidates running for mayor or city council in Austin’s new single-member districts–not to mention a $1.4 billion rail proposal seeking voter approval–has generated a level of awareness about city planning issues that I haven’t seen since moving here in 2002.

It’s exhausting, but important. And, for planners and civic-minded people in general, encouraging.

So, naturally, it’s my turn to take a shot at a theory of everything:

2014-10-16 Austin Theory of Everything Title Slide

Click on the image to download a PDF copy of the presentation. Thanks to the Austin Board of REALTORS for giving me an opportunity to pilot test this presentation at their 2014 Realty Round Up event.

The narrative goes something like this:

While Austin is indeed a special place–ask anybody–we’re not unique in the growth management challenges we’re facing. Fast-growing cities across the developed world have all experienced a version of what we’re experiencing. However, the reason it may “feel” different here is that Austin is experiencing these changes on an accelerated timetable. Rapidly appreciating property values and rents, especially in the urban core. Growing inequality in an environment of significant wealth creation (in the aggregate). Traffic gridlock. Most other cities on this development path experience this process over several decades. Marking the exact start line in Austin is open to debate, but we’re out for a speed record.

Over the next couple of weeks I’ll do a series of posts expanding on several of the points made in the presentation. Topics will include:

  • Why being The Human Capital is, in the immortal words of Homer Simpson, the cause of, and solution to, all of life’s problems
  • Austin’s perceived lack of “middle-wage” jobs–i.e. economic development is ruining the city because it’s all software developers
  • Why we should be organizing civic leadership trips to Raleigh, Charlotte, and Nashville. Not San Francisco.

Brookings: next-best options for incentives

This article was written by Amy Liu and Owen Washburn and appeared in The Avenue, a blog hosted by the Metropolitan Policy Program at the Brookings Institution, on September 28, 2014.

If No End to Incentives for Jobs, then What?

Nevada’s recent incentive package, valued at $1.25 billion, to bring Tesla’s battery production near Reno has reignited a longstanding debate about the merits of state and local economic development subsidies to attract or retain firms and whether to ban the practice all together.

Let’s be honest: The ingrained practice of taxpayer-funded business recruitment has not lessened despite the mounting evidence that many incentives don’t actually pay off. The firms that receive incentives do not tend to generate more jobs than firms that don’t get them. And the overwhelming majority of state job growth comes from births of new establishments or expansion of existing establishments, not from firms moving to the state.

But we are seeing hopeful attempts by states and metro areas to do business attraction and job creation smarter, in five main categories:

1. Sign a truce.

Some municipalities within a region have signed a “code of ethics” to collaborate and coordinate on business location strategies so the entire region wins, including ending the practice of “poaching” jobs and firms from each other, which produces no new benefit or growth. In Denver, as Good Jobs First explains, the Metro Denver Economic Development Corporation has such a code of ethics, followed by every city and town in the metropolitan area, which ensures regional collaboration on every business location decision. Similarly, members of the Milwaukee 7, a seven-county, multi-sector economic initiative, adopted its own detailed code of ethics, including a pledge that “Members will not solicit intra-region company relocations” and that a “Violation of this commitment shall be viewed as a breach of our membership pledge.”

2. End single-firm incentives.

Providing tax breaks to individual firms distorts markets and is a highly inefficient use of public resources. Some states are moving to provide broader tax incentives for firm activities in priority industry clusters as they come into or expand in a local market. While being approached by Google, Iowa decided not to give that company its own tax break but instead passed legislation to provide tax abatements on equipment and infrastructure purchases by any data centers coming into the state. This broader approach helped attract multiple high-tech firms bringing their data storage facilities to the state.

3. Lure firms with assets, not just cost reductions.

South Carolina, one of the best in attracting and deepening foreign investments in key clusters from target markets like Germany, often leads their attraction efforts with their investments in world class workforce training programs, modern port and infrastructure, and responsive business climate. The state has also adopted a German-inspired apprenticeship program, Apprenticeship Carolina, which pairs subsidized on-the-job training for workers at firms like Robert Bosch and BMW with industry-focused technical college skills development. And it has invested in advanced R&D programs, including the Clemson University International Center for Automotive Research, to bolster the state’s highly-competitive auto-related clusters.

4. Make incentive strategies and practices more responsible and effective.

As Tim Bartik, Brian Kelsey and others have argued, incentives should be both transparent, so that the public understands the costs and benefits before a deal is finalized, and aimed at high-quality jobs that raise the standard of living. The states of Oregon, Washington and Rhode Island have all integrated evaluation processes into their incentive strategies,including public hearings and formal budgetary review, to ensure public input and review into their business recruitment practices.

5. Focus on what matters to economic growth.

Finally, the best regional economic leaders know that, while firm movements are always afoot, the real opportunities to grow sustained prosperity comes from a focus on local assets and clusters. The Kansas City region, which straddles Kansas and Missouri, has embarked on a renewed regional conversation about the factors that can contribute to economic competitiveness. Rather than have the border war between its two governors dominate economic debate, Kansas City area leaders are actively working together to expand the economic development toolkit to strategies that strengthen trade, innovation and talent development as the course to better jobs and opportunity.

By adopting these approaches, cities, states and regions can move toward a more effective and efficient model of economic growth, one that relies less on traditional incentives.

State of Small Business in Austin

This article was written by Dan Zehr and appeared in the Austin American-Statesman on September 25, 2014.

Austin officials: Small businesses provide base for growth

Austin’s small businesses drove the metro area’s post-recession recovery, but local officials said Thursday that a sustained effort to help those firms thrive will be required if Central Texas is to spread the benefits of that economic growth to more local residents.

While local businesses with fewer than 100 employees collectively employ about 35 percent of the Austin workforce, said Brian Kelsey, principal at Civic Analytics, the same set of companies added more than 8,400 jobs from 2009 to 2011. Those gains offset the sharp job losses at the area’s largest employers in the years following the recession, Kelsey said.

All told, the more than 31,000 small businesses in the region provided about 228,000 jobs as of 2011—giving Austin’s small business community a greater share of local employment than their counterparts in Houston, Dallas, San Antonio and the country as a whole.

Kelsey presented the data Thursday at the city’s “State of Small Business in Austin” luncheon, part of a daylong event designed to bring together and local officials and service providers together with area entrepreneurs and small business owners.

“As small businesses go, Austin goes,” he said.

Each year from 2001 to 2011, the metro area gained an average of 650 small businesses that collectively added about 4,000 jobs, Kelsey said. Many of those companies were concentrated in industries such as construction and real estate, the data show, but the area small businesses also accounted for many jobs in manufacturing and other key middle-wage occupations.

Yet a closer look at the area’s small firms also reveals a sharp disparity in the revenues and productivity levels by ownership category.

While sales at most of the region’s small businesses ranked higher than average levels nationwide — local Asian-owned firms actually doubled the U.S. average — Hispanic- and women-owned firms generated lower sales, according to 2007 Census data.

Those levels might have changed in the intermediate years. The Census Bureau conducted its 2012 business survey but has not yet released that data for metro areas.

Regardless, as a source of jobs and incomes for so many Austin workers, finding ways to promote small business growth overall, but especially in struggling categories, has become a primary focus for city development officials, said Kevin Johns, the city’s economic development director.

“We have the top economy in America,” Johns said. “If we can’t correct this, no one can.”

The daylong “Getting Connected” event was created in part to help address some of those issues. Held at the Palmer Events Center, the program included a range of classes, exhibits and resources to help small businesses connect to anything from financing to potential business partnerships.

Jonathan Taylor, executive director of the Economic Development and Tourism Division at the governor’s office, said those sorts of resources remain critical for small business development and growth.

Some 15 years ago, Taylor said, the division held its first forum, which it focused on concerns expressed by the state’s small business owners. The topics that year included access to capital, access to government contracts and how to promote and conduct business on the Web.

“The topics we had 15 years ago are still the topics we have today,” he said. “Those challenges remain the same.”

A 2013 needs assessment conducted by the city’s Small Business Program found that most local businesses want similar information. In panels and surveys, local small firms said they would like more online resources, information tailored for specific industries, and increased networking opportunities.

Classes at the Getting Connected program included tutorials on writing government proposals, owning your web presence and tips for exporting. Almost all of them were booked to capacity, city organizers said.

“We used to host an event that was just for business owners to meet lenders,” said Joy Miller, business information coordinator for the city’s Small Business Development Program. “This year, we’re combining it with an event that brings any kind of business resource you need.”

Economic growth slowing in Austin?

This story was written by Dan Zehr and appeared in the Austin American-Statesman on September 19, 2014.

Austin’s economic expansion cooled last year, federal data show
Revisions to earlier years reveal a larger local economy than previously thought, but initial data show slower growth in 2013.

The Austin metropolitan area economy expanded faster in 2012 than initially reported – surpassing the $100 billion mark a year earlier than expected – but the region’s economic growth rate slowed considerably last year, according to data released this week.

After adjusting for inflation, the Austin-area economy grew 2.2 percent in 2013 — faster than the average U.S. metro area but slower than 141 of the country’s other metro areas, according to advance gross domestic product data from the U.S. Bureau of Economic Analysis.

While the agency regularly revises its advance data in subsequent years, the magnitude of deceleration suggested that the Austin economy didn’t maintain the scorching growth it had posted in the three years since the recession.

In that span, the slowest year of growth came in 2011, when the Austin-area economy expanded 4.4 percent – double the Bureau of Economic Analysis’ preliminary estimate for 2013.

“Employment growth has not slowed, so it’s difficult to know what to expect out of a future revision,” said Brian Kelsey, principal of Civic Analytics, an Austin-based economic development consultancy. “But I would be concerned to see such a sharp drop-off, especially relative to the higher growth rates in other (metro areas). That’s not what we’ve come to expect in Austin.”

The potential for revisions lends some murkiness to the local economic picture, but 2013 wasn’t a banner economic year across the country. The federal government slashed billions of dollars in outlays through the budget sequestration that started in March, and it then endured a 16-day shutdown in October.

Meanwhile, in Texas, the hangover from the Legislature’s 2011 budget cuts lingered into the start of 2013, before some of that spending was restored, said Pia Orrenius, vice president and senior economist at the Federal Reserve Bank of Dallas. In fact, economic growth slowed in all five of Texas’ largest metro areas, according to the federal data.

This year, all indications suggest that the state and metro economies will bounce back, Orrenius said. Employment growth has soared. The construction and energy sectors are booming, and the high-tech sector is continuing the rebound it began toward the end of last year.

“It (2013) was not a great year for us, but we’re not there anymore,” Orrenius said. “We’re off the charts again this year. I think you’re going to see a big rebound in 2014.”

In Austin, that could mean significant growth for an economy that was already larger than originally thought. When the Bureau of Economic Analysis released its initial figures for 2012, it pegged the Austin economy at $98.7 billion, leading many local economic experts to suggest the area would easily surpass the $100 billion mark in 2013.

Yet in its revisions released Tuesday, the agency said the local economy had actually nicked that mark back in 2012, coming in at a revised $100.1 billion in 2012 dollars. The agency said the metro area’s gross domestic product rose to $103.9 billion last year, before accounting for inflation.

While the changes to 2012 and prior years weren’t unusually large, an agency official said, at least part of the upward revision stemmed from a change in the way the Bureau of Economic Analysis handles certain business expenditures. It now counts such items as research and development spending as investments rather than expenses, a change that added to GDP totals.

That changed appeared to contribute at least part of the upward revisions to Austin’s GDP, said Sharon Panek, a Bureau of Economic Analysis section chief who helps oversee metro-area and state data.

More people than production?

Despite the rebound Orrenius and others expect to see in 2014, last year’s slower economic growth in Central Texas raised some questions about the area’s ongoing innovation and productivity.

While an imperfect measure, per capita GDP provides at least a rough proxy of living standards — and in Austin, that measure actually ticked lower in 2013, to $52,110 from $52,355 in 2012, according to the Bureau of Economic Analysis.

“I think it is concerning that, despite all the job growth, GDP growth and wealth creation we’ve experienced in Austin, we aren’t gaining ground on GDP per capita, even measured against the U.S. average,” Kelsey said.

By this measure, Austin ranked 60th out of the country’s 382 metro areas and was essentially even with the U.S. metro-area average, which ticked up to $52,093.

In the past, Kelsey said, Central Texas boosters justified the region’s lower per capita GDP or per capita income levels by noting the area’s lower cost of living. Those measures didn’t matter as much because a dollar could go further here than in many other big cities.

“You don’t hear that much anymore,” he said.

As the economic theory goes, innovation tends to increase productivity and drive higher standards of living. Yet Austin’s booming population growth might be overwhelming any such gains.

Diverse job base

Still, the diversity of the Central Texas job base and the rapid rise of its employment levels suggest a fundamentally sound and vibrant metro-area economy, said Karl Kuykendall, an economist at IHS Global Insight Inc.

Kuykendall said the new economic data shows expansion in several key Austin sectors, including the financial and the professional and business services industries. It was two smaller sectors — transportation and utilities, and natural resources and mining—that appeared to drag most on the local economy, according to the Bureau of Economic Analysis data.

In a June report for the U.S. Conference of Mayors, IHS predicted the Central Texas economy would grow 3.9 percent his year and 4.7 percent in 2015, after adjusting for inflation. And from 2013 to 2012, IHS forecast the Austin area’s inflation-adjusted economic growth would average 4.4 percent annually from 2013 to 2020 — fastest among the country’s 100 largest metro areas.

“They are disappointing results for 2013, but it doesn’t reverse our thinking there,” Kuykendall said. “We’re still projecting Austin to be a very fast-growing metro in the coming years.”