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Report: Austin’s advanced-industry growth fastest in U.S. since 1980

This article was written by Dan Zehr and appeared in the Austin American-Statesman on 02/03/15.

Report: Austin’s advanced-industry growth fastest in U.S. since 1980

The rapid growth of high-tech and other advanced industries transformed many of the country’s metro-area economies over the past three decades, but no metro changed as quickly as Austin, according to a new study from the Brookings Institution.

Since 1980, when Central Texas featured a staid economy based primarily on higher education and state government, the area’s high-tech and other research-intensive industries have boomed, adding jobs and expanding their output at rates faster than any of the country’s 100 largest metro areas, according to the Brookings Institution study of 50 advanced industries.

Austin maintained its momentum in recent years as well, the report said, with the area’s 2010-2013 job and output growth rates both ranking among the top 10 nationally.

“Austin wasn’t built primarily on firm attraction. That’s what’s interesting,” said Mark Muro, a policy director and fellow at the organization’s Metropolitan Policy Program.

Instead, a leading research university, a strong workforce, an entrepreneurial ecosystem and an attractive quality of life helped drive the area’s rapid transformation, Muro said.

“Austin strikes me as a product of some good fundamentals, some luck and then synergies,” he said. “You’re now seeing the interrelationships of manufacturing, energy and services activities.”

As for 2013, local employers in Brookings’ 50 advanced industries provided more than 106,000 jobs – roughly 12 percent of all the jobs in the metro area, the report said. Those workers brought in average earnings of $103,950, almost double the average earnings in all industries.

Those workers helped produce $24.1 billion of output in 2013, the report said, accounting for almost a quarter of the regional economy and good for the eighth-highest share in the country.

The current figures were consistent with previous analyses of the Central Texas tech economy. In a 2013 study for the Austin Technology Council, local economic development consultant Brian Kelsey found that the area’s tech-specific industries accounted for roughly 21 percent of the region’s economic output and 9 percent of its job base.

At the time, Kelsey said Austin had maintained a strong advantage in its existing tech industries while starting to develop new areas of expertise.

The Brookings report underscored that point. Muro and his colleagues looked at location quotients—essentially, the concentration of industry activity in an area versus the country as a whole —and found that Austin had a very high measure in 11 different industries.

“The depth and breadth of the Austin advanced industries economy has become really compelling,” Muro said, “and it includes manufacturing industries, which I think nationally is less known.”

Such diversity could help shield Austin from the disruptions that can sweep through advanced industries, he said. However, the report urged both the public and private sector to heighten its investments in science, technology, engineering and math (STEM) education to insure a sufficient pool of talent to fill these high- and middle-skill jobs – an issue consistently raised by many of the area’s tech companies and the Greater Austin Chamber of Commerce.

In its most recent monthly analysis of online job openings, the chamber again found that many of the 10 most common openings required computer and programming skills. Six of the 10 occupations in highest demand fell into the advanced industries studied by the Brookings report.

“These are fast industries with a lot of disruptive trends in them,” Muro said. “You can be disrupted, but that likely won’t happen if you maintain the good … innovation system inputs (and) a STEM workforce. Clearly, training and skills of enough people, and the right people with the right skills, is a challenge everywhere.”

Abbott: Time to kill state’s Emerging Technology Fund

This article was written by Laylan Copelin, Brian Gaar, and Lori Hawkins and appeared in the Austin American-Statesman on 01/30/15.

Abbott: Time to kill state’s Emerging Technology Fund

Moving to stop using state money to fund startup businesses, Gov. Greg Abbott on Thursday proposed killing the Texas Emerging Technology Fund and using part of the fund’s unspent balance to bolster research at Texas universities.

Abbott’s proposal — which would need approval from the Legislature — comes after an audit that criticized some of the technology fund’s operations and some high-profile bankruptcies of startups it had helped. That combination has soured state leaders on using taxpayers’ dollars to underwrite risky ventures.

The plan would create the Governor’s University Research Initiative, which would provide matching funds to help Texas institutions of higher education recruit prestigious, nationally recognized researchers to their faculties — which would both elevate Texas’ public universities and serve as catalysts for economic development. A portion of the Emerging Technology Fund is already used to recruit top researchers and faculty to universities.

The other half of the tech fund’s balances would go to the Texas Enterprise Fund, a deal-closing fund used to encourage companies to relocate or expand in Texas.

Abbott’s office says there is slightly more than $100 million available in the fund.

While acknowledging the Emerging Technology Fund’s impact on the state’s — and Austin’s — high-tech sectors, industry experts and economists said that with venture capital once again flowing to early-stage companies, it makes sense to reconsider how the state supports research and innovation.

“The ETF generated a lot of controversy, and there was a lot of politics involved,” said Bernard Weinstein, an economist at Southern Methodist University’s Cox School of Business. “On the surface, this proposal sounds like a sensible policy change. I’m always pleased to see more resources going into universities, particularly in research. Hopefully this eventually leads to technological change, inventions and commercial applications.”

Austin economist Brian Kelsey, principal of economic development firm Civic Analytics, called the move unfortunate, but said it’s not surprising “given Abbott’s skepticism about the state’s role in economic development under Perry.”

“Even critics of incentives in general viewed the ETF in a more positive light than some of the other tools, especially the Enterprise Fund,” Kelsey said. “Not every firm wants the state as an equity partner, but overall the ETF has been a valuable tool for supporting innovation-based economic development in Austin.”

State Sen. Troy Fraser, R-Horseshoe Bay, said he has agreed to sponsor legislation to make Abbott’s proposal a reality.

“The criticism was that we were investing in some startups without knowing what we were getting,” said Fraser, whose district includes part of Travis County. “We tried to remove some of the risk.”

Jenny LaCoste-Caputo, a University of Texas System spokeswoman, said, “We appreciate Gov. Abbott’s recognition of the value of the state helping universities recruit faculty to advance learning, research and the state’s economy, and look forward to working with him and the Legislature as his proposal works its way through the process.”

The Legislature created the Emerging Technology Fund in 2005 at former Gov. Rick Perry’s request. The fund was intended to expand and diversify the Texas economy by assisting startups and encouraging commercialization of university research.

As of September, the fund had awarded more than $442 million to companies, state universities, foundations and research consortia, according to the fund’s most recent report from the governor’s office.

Of the 144 companies receiving taxpayer investments, nine have been purchased or had other successful exits from the tech program while 18 have ceased operations, often failing to repay the state, according to the Emerging Technology Fund’s 2013 annual report. The jury is out on the others. Nationally, about 40 percent of venture-backed companies fail, 40 percent return moderate amounts of capital and 20 percent or fewer produce high returns, according to the National Venture Capital Association.

Isaac Barchas, Austin Technology Incubator executive director, said the Emerging Technology Fund played a crucial role in providing seed stage money to Texas startups following the financial downturn that began in 2008.

“It was a nuclear winter in 2009, and the only funder actually up and running was the Emerging Technology Fund,” Barchas said. “The fact that we had that was extraordinarily important because it helped a bunch of promising companies that wouldn’t have otherwise been funded.”

Austin entrepreneur Brendan Coffey said his company, HeatGenie, wouldn’t have gotten off the ground without the $250,000 it received from the fund in 2008.

The company, which received a total of $1 million, has developed technology that allows prepared foods to be heated in their containers without using a stove or microwave. HeatGenie is now partnering with two major brands to commercialize its product.

“We didn’t have a prototype or a model, so we needed someone who could buy into the concept,” Coffey said. “ETF had a good system for analyzing the business opportunity and the technology. We wouldn’t be here without that seed funding.”

Barchas said that while Abbott’s plan would change how the state involves itself in technology, he’s encouraged that the proposal would continue to invest millions in university research.

“The state of Texas is effectively renewing its commitment to innovation. We’re just going to bet on innovation in a slightly different way,” Barchas said. “No other state can afford to do this — not California, not New York, Michigan or Illinois. And that gives us a big advantage.”

2014 was boom year for Austin auto sales

This article was written by Claudia Grisales and appeared in the Austin American-Statesman on 01/25/15.

2014 was boom year for Austin auto sales

For new car dealers in Austin, 2014 was a very good year.

The area’s auto sales industry continued its rebound from the economic downturn, as new car sales in the Austin area hit record numbers last year.

Sales of new vehicles in the Central Texas area surged to 130,021, up almost 8 percent from a year earlier, according to data from Dallas-based Freeman Auto Report, which tracks new auto registrations in Travis, Williamson, Hays, Bastrop, Burnet, Blanco and Caldwell counties. The 2014 sales total was an 80 percent increase from 2009, the region’s low point during the recession.

It was the region’s highest sales figure in more than a decade, with the rebound fueled by healthy local economy, strong population growth and lower gasoline prices, experts say.

The past year “was marked by continued low interest rates, falling gas prices and improving consumer confidence,” said Austin economist Brian Kelsey, founder and principal at economics research firm Civic Analytics. “We’ve even seen a bit of positive movement in wages and household income, which probably helped fuel the increase in auto sales.”

Sales of new vehicles are a key indicator of an area’s consumer confidence, as purchases of big-ticket items such as a new car tend to indicate consumers aren’t worried about their job status or economic stability.

“It was a really, really good year for us,” said Alan Cirota, general manager at Jaguar Land Rover of Austin located in the downtown area. “Sales were strong, so strong, it was a good year. And I look forward to 2015 to build on that.”

New car sales in the region reached 100,090 in 2007 before falling dramatically during the downtown. In 2009, the low point of the downturn, new vehicle sales in the Austin area fell 18 percent from a year earlier to 72,277.

However, since 2010, new car sales have increased annually 8 percent or more.

In 2014, Austin area auto dealers saw an upward sales trend for most of the year, posting their biggest monthly gain in July when sales rose 11.4 percent compared to the same month a year earlier.

Last year also was a busy one for Austin area dealership completing expansions and upgrades.

Eager to stand out in a competitive market, a number of Austin-area dealers transformed their facilities into high-end showplaces complete with expansive event spaces, gourmet coffee, designer furniture, Wi-Fi, flat-panel TVs and kid-friendly play zones.

About a dozen Central Texas auto dealerships either have undergone or announced plans for extreme makeovers in the past year, pumping millions of dollars into the Austin economy as they added larger showrooms with a slew of guest perks.

Dealerships are increasingly fighting for customers who are doing more shopping online rather than visit bricks-and-mortar stores.

For example, AutoNation Toyota South Austin completed an $18 million, four-year renovation project last summer, adding an air-conditioned “indoor delivery zone” for newly purchased vehicles, a service center with 75 stalls and a quick-lube center.

Meanwhile, Fiat/Alfa Romeo of Austin, moved from a 6,000-square foot Domain location to a 29,000-square foot former Lincoln dealership on U.S. 183. There, it modernized the facility with a contemporary look featuring Italian floor tiles, music, snacks and coffee along with Wi-Fi, Keurig stations, children’s play center and an Internet café.

And at Cirota’s dealership, Jaguar Land Rover of Austin, the company added the Jaguar brand and more than doubled its indoor facility to 10,000-plus square feet. The 17-year-old dealership now has a seating area with a 70-inch flat-panel TV, two iPads for customer use, eight kinds of coffee, tea and hot chocolate, and a daily selection of Sweetish Hill Bakery treats. The dealership also sells a clothing collection for both brands.

“Basically you come into the showroom, you got Jaguar and Land Rover, both British brands all under one roof,” Cirota said. “We have more capacity, we have a really nice waiting area and a bigger service department. We have more service, more capacity, more loaner cars and take care of customer when they come in. It’s all about taking care of the customer.”

Overall for 2014, the top sellers in the Austin area for new vehicles was Ford, which saw 19,169 in sales of cars, trucks and sport-utility vehicles, according to the Freeman Auto Report.

Ford was followed by Chevrolet, which saw 17,318 sales, and Toyota with 13,377. Nissan posted the next top sales figure with 11,120, followed by Honda, Hyundai and Kia, which all posted at least 5,000 in sales each last year.

Greg Kimball, general manager at Town North Nissan, says he isn’t surprised by the sales surge in the Austin area last year. At his dealership, sales were up about 23.5 percent for the year, Kimball said.

Among their popular models, the Altima, Rogue, Leaf and Sentra, were among their top sellers, Kimball said. And today, Town North Nissan is now the largest seller of the Nissan Leaf in at least four states: Texas, Oklahoma, New Mexico and Louisiana, Kimball said.

“We had some record breaking Leaf sales this time,” Kimball said of last year’s sales.

Part of what fueled the gains, Kimball said, was an aggressive push by Nissan to capture a larger share of the overall market. Also, Kimball said, lower gasoline sales played a role in fueling the purchases.

This month, average gasoline prices reached below $2 a gallon in Austin and Texas for the first time in more than five years.

Prices have continued to fall in January, and reached $1.85 in Austin, driven by a continued dramatic slide in global crude prices.

“We had a very big year and Nissan in general made a big push,” Kimball said. “The recovering economy, the new car market, is in a much better spot now. So it was just good, healthy growth. We had a bunch of people not buying cars in the recession years.”

And Kimball is betting strong sales will continue, especially as gasoline prices look to remain low again this year.

“We should see this kind of performance for the next couple of years,” Kimball said of new car sales for Nissan. “I think especially with gas prices where they are and in the foreseeable future.”

Austin’s economy in 2015: Momentum likely to continue

This article was written by Dan Zehr and appeared in the Austin American-Statesman on 01/03/15.

Austin’s economy in 2015: Momentum likely to continue

Austin’s economic growth moderated over the past couple years, and most projections suggest the same general trend for 2015.

But consider the context.

For years, Central Texas had been “punching above (its) weight,” said Brian Kelsey, principle of Civic Analytics in Austin. And yes, he told 350-plus people at the Greater Austin Chamber of Commerce’s recent economic outlook luncheon, the area’s rapid growth has eased a bit.

“But you always have to keep in mind,” he added, “that moderation for us is explosive growth for the rest of the country.”

Austin averaged 5.7 percent annual economic growth from 2002 to 2013, Kelsey said. Only twice in that span, in 2002 and 2007, did the national gross domestic product fare better than Austin’s.

So a year of moderate growth in 2015 shouldn’t sound all that bad. A compilation of forecasts for the metro area suggests that 2014’s employment growth should come in around 3.8 percent this year. That will slow slightly to 3.1 percent in 2015, the projections say.

In an area gaining better-educated people — and adding enough jobs to absorb all those new residents — there’s plenty of room for upside. A June report from IHS Global Insight estimated 3.9 percent economic growth this year, followed by a jump to 4.7 percent growth in 2015. At that rate, the report said, the Central Texas GDP would hit $117.5 billion.

Barring another world-shaking event, not much should threaten that expansion in the near future. But as Austin’s economic progress picks up speed, so also do the headwinds it faces.

Soaring property taxes and a higher cost of living might make the region less attractive to some companies and workers, particularly when combined with Austin’s tepid wage growth in recent years. And although Austin has less exposure to the oil and gas industry, the sharp drop in oil prices as 2014 closes could drag on the local and state economies.

But those factors will do little to slow the metro economy in 2015. Growth might be moderate, but as the following forecasts for the area’s business sectors suggest, Austin’s version of moderate will still look awfully good.

Here’s a sector-by-sector look at what we might be able to expect for Austin’s economy in 2015:

TECHNOLOGY

Prognosticating the technology business is always tough, and analysts say the fortunes of Austin’s tech sector will be tied to the larger economy.

But analysts say 2015 could be a good year for Dell Inc., the Austin area’s largest private employer. Many of Dell’s rivals are going through transitional phases, and that could open up opportunities for Dell to gain market share in both its client hardware and enterprise solutions businesses, said Roger Kay, an analyst with Endpoint Technologies Associates.

On the client hardware side, Hewlett-Packard Co. announced a breakup of the company this year, and Kay said that could allow competitors such as Dell and Lenovo to pounce.

As for enterprise solutions, Dell has been putting together its portfolio, acquiring software businesses and growing others organically. Meanwhile, rivals like IBM have strategies that are “a bit up in the air,” Kay said, and that again creates an opening for Dell.

“(Dell) can gather momentum while their rivals are still trying to put their stuff together,” he said.

Overall, the success or failure of commercial technology markets is tied to the wider economy, which is also true of most Austin tech companies, said analyst Patrick Moorhead of Moor Insights & Strategy.

“The U.S. and Europe will more than likely improve, but could be pulled down by troubles in Brazil, Russia and a flat China,” he said. “So net-net, it’ll probably be flat, but there’s still a possibility that we could get into another global recession.”

One potentially risky situation could be South Korea-based Samsung Electronics Co., which has a huge Austin presence and is very tied to the consumer market. Samsung is losing mobile market share to both Apple Inc. and Chinese competitors like Xiaomi and Coolpad, Moorhead said.

“It will be a defining year for Samsung, as they need to show they can muscle through this difficult time in mobility,” Moorhead said.

— Brian Gaar

RETAIL

New shops and restaurants popped up across Central Texas at a rapid pace in 2014, and industry experts expect more of the same in the coming year.

With occupancy approaching 95.5 percent – the highest rate in nearly a decade – developers have been busy adding space to meet demand, according to Michele Gary, vice president at Austin-based Endeavor Real Estate Group.

Work is in varying stages on several major retail projects, Gary said, including the Plaza Saltillo mixed-use development near downtown, a 250,000-square-foot shopping center near Cedar Park’s new Costco store and a third phase of the Domain in North Austin that will include a Nordstrom store set to open in 2016.

“This is a very exciting time in Austin; Austin is shining,” she said. “We’re in communications with several exciting retailers that aren’t just new to Austin, but new to Texas. Phase 3 of the Domain, in particular, has attracted numerous retailers and restaurants that Austin hasn’t seen or experienced yet.”

The city’s restaurant scene has been an especially bright spot in recent years, Gary said, with local restaurateurs driving much of the growth.

“One obvious trend is the coast-to-coast recognition that Austin restaurants and chefs are receiving,” she said. “Austin’s culinary talent level is off the charts and I predict our local chef-owned restaurants will continue to experience national recognition.”

— Gary Dinges

REAL ESTATE

The Austin-area housing market has been on a hot streak the past few years, with monthly sales volumes and median prices heading in one direction: up. Fueled by the region’s job and population growth, housing demand has outpaced supply, driving prices higher.

Those rising prices will likely continue in 2015 as well, as Austin continues add people and jobs, but the pace of home-price escalation should ease somewhat, said Eldon Rude, a local housing market expert.

“A likely increase in the number of homes for sale in 2015, as well as some level of increasing buyer resistance to higher prices, will combine to slow the pace of price increases in most areas,” said Rude, principal of 360 Real Estate Analytics.

If so, it would be welcome news for prospective buyers, including renters who are hoping to become home owners. The median price of single family home in the Austin region is up over 34 percent in the last four years, Rude said, with citywide apartment rents up 31 percent.

With apartment rents up so sharply in recent years, Rude said, more prospective first-time home buyers are looking to take advantage of low mortgage interest rates and lock in their housing costs. And while builders will continue to focus on the high-demand $300,000 to $700,000 range they’ve filled in recent years, some of shifted their focus to include more lower-cost options.

But like the Austin economy as a whole, the biggest threats to the metro’s housing market would likely be “outside our control,” Rude said.

“With the price of oil down nearly 50 percent in the last six months, it is becoming increasingly evident that the State’s economy will be negatively impacted,” he said. “While the greatest impacts will likely be in Houston and South Texas, it is not out of the question that if Houston catches the flu, Austin may catch a cold.”

— Shonda Novak

VENTURE CAPITAL

With venture capital flowing into established companies and angel investors continuing to back early-stage entrepreneurs, 2015 promises to be a strong year for Austin’s software industry.

Austin’s strength in hot investment areas — such as e-commerce, mobile technology, cyber security and cloud computing — should continue to draw investment dollars from both coasts as well from Austin-based venture firms that are putting new funds to work.

S3 Ventures and Silverton Partners, which each raised $75 million funds last year, are expected to be actively pursuing Austin deals in the new year. And LiveOak Venture Partners, which closed on its first fund of $100 million this year, will also be looking for new opportunities in Austin and the Southwest.

“The balance of investors we have now, both outside of Austin and those based here, is good for everybody,” said Kirk Walden, an adjunct business professor at Texas State University and principal of Austin-based Walden Consulting, which follows the venture capital industry. “When you can go to more than one door, it’s always better for the entrepreneur, and that’s what we’re seeing now.”

Meanwhile, the Austin startup ecosystem will feel the ripple effects from this year’s robust investment activity. In the fourth quarter alone, five companies each received $25 million or more for expansion.

The companies, which include e-commerce software firm Bigcommerce and cloud-computing software makers Gravitant and Transverse, will use the new funding to add more workers, invest in new equipment, hire service providers, such as accounting and law firms, and ramp up product development and marketing.

Also look for more out-of-state software companies to open development offices here to leverage the region’s software industry workforce. In 2014, more than a half a dozen software companies including Veraction of Tennessee, Taulia of San Francisco and ProjectManager.com of New Zealand, announced plans to ramp up in Austin in 2015.

— Lori Hawkins

WHOLE FOODS

Whole Foods Market might finally be steadying itself after a rollercoaster ride in 2014. After launching a turnaround initiative in the fall, the Austin-based organic foods giant has seen its stock rally back nearly 30 percent since one of its worst days as a public company.

The retailer started out the year facing high expectations. But by May, after tighter competition took a bigger bite out of their robust earnings and forced their profit below expectations, Whole Foods shares fell 20 percent to $38.93.

“It was difficult. The competition took them a bit by surprise,” said Brian Yarbrough, an industry analyst for Edward Jones. “But it seems like in the later part of the year, things started to improve.”

Expectations moderated, and in the fall Whole Foods launched an aggressive new gameplan, which included the company’s first national ad campaign, a new national grocery delivery and pickup service and a customer rewards program, among other moves.

In November, it passed a critical earnings test, regaining confidence from Wall Street, boosting its stock and putting a positive cap on an otherwise tough fiscal year. By mid-December, the stock was back to the $48 mark.

Analysts now are watching to see whether Whole Foods can hold on to those gains — and find a way to build on them — in the new year.

“We still see a great story long term,” Yarbrough said. This year “was difficult. But hopefully we will continue to see improvement.”

— Claudia Grisales

TAX INCENTIVES

The debate over taxpayer incentives for businesses will reach from the state Capitol to City Hall next year.

The Austin economy has a stake in the debate. Since 2005, the Texas Emerging Technology Fund sent a quarter of the tech fund’s first $200 million to Central Texas startups,

The state also used the Texas Enterprise Fund to help local officials close deals to bring Apple, eBay, Facebook and Visa to Austin, as well as persuading Charles Schwab and Samsung to expand their local operations.

State leaders are not abandoning the two funds, though the technology money may be targeted only for universities and to recruit top researchers. Money for startups may be out.

Also some lawmakers favor a share-the-wealth approach to incentives, directing more of the money to rural areas or regions that are lagging the overall state economy.

Locally, city council and county candidates raised questions during the campaign whether locals still need to juice the economy with incentives. The Greater Austin Chamber of Commerce has left no doubt where it stands: Among its top legislative priorities is continued support for the state’s major incentives, which require local participation.

— Laylan Copelin

Herman: Low gas prices are good. Low gas prices are bad.

This column was written by Ken Herman and appeared in the Austin American-Statesman on 12/24/14.

Herman: Low gas prices are good. Low gas prices are bad.

This is the holiday season of our consternation. Many of us are deeply consternated. (That sounds uncomfortable.)

The source of our consternation is gas. (This is getting worse.) Specifically, it’s the price of gas.

I don’t know about you, but I grow downright giddy while pumping $2.059-a-gallon gas. Maybe it’s the fumes. But who doesn’t like paying less for anything?

And then I read, in my very own newspaper and written by one of my very own colleagues, that low gas prices might be bad for us — us being Texans, all of whom have an oil well out back, right next to our cattle and the shack where we store our firearms.

Remember when high gas prices were bad for us?

Let’s review: High gas prices, bad. Low gas prices, bad. This makes it kind of difficult to know what to root for, kind of like when OU plays A&M.

The benefits of low gas prices are obvious. If I remember my advanced economics, when gas prices are low it costs less. Less, of course, is relative. It’s still too high. The lowest I ever paid for a gas was back in the early 1970s as a high school kid in North Miami. The benchmark price was 29.9 cents a gallon. One price war chopped the price to 19.9 cents.

Back to today, or, actually, Dec. 19 when American-Statesman business writer Claudia “The Grinch” Grisales inflicted reality upon us in a story explaining that low gas prices are bad for us. Thanks a lot, Claudia, way to screw up the festive holiday season.

The headline: “Experts: Lower oil prices a threat to Texas economy.” Experts. They think they’re such experts. Who needs ‘em?

The experts Grisales quoted reminded us Texas, despite recent diversification (largely the proliferation of Buc-ee’s stores), remains linked to oil.

Local economist Brian Kelsey did some math. Economists are like that. Always showing off by doing math. His math says if oil and gas industry earnings fall 20 percent in Texas, the state could lose 212,000 jobs and $13.5 billion in earnings.

“Earnings in the oil and gas sector drive a significant portion of overall economic activity in Texas,” Kelsey said in Grisales’ story. “So consumers may enjoy seeing lower gas prices, but falling oil prices can hurt more in other ways.”

I get it. I was around the Capitol in 1986 when plummeting oil prices caused significant fiscal heartburn for the state. Nevertheless, I’m still feeling that pleasant, light-headed feeling when I’m paying a dollar less per gallon than I did not that long ago. Does that make me a bad man?

So I called Michael Webber, deputy director of the Energy Institute at the University of Texas. Mr. Webber, am I a bad man for enjoying declining gas prices?

“If you are a person who consumes energy, which is everybody, then you should be happy about the lower energy prices,” Webber said, making me feel better about myself.

“If you are a producer of energy — the guy who pulls oil out of the ground or an investor or employee of those companies — you should be unhappy,” Webber said.

I produce no energy, and remain sufficiently immature to chuckle when a legislator lists his occupation as “gas producer.”

But what of the indirect economic impact on me, the bad stuff predicted by the expert sayers of doom?

Yes, Webber said, if oil prices drop too far too quickly, “the economy could collapse.”

I’m no expert, but I think that would not be good for me.

Webber talked about 1986 and falling oil prices and failed real estate investments and savings and loans scandals and bailouts and all manner of economic mayhem. (On the positive side, my New York Mets won the World Series in ‘86.)

Webber seems to think everything will be fine. In general, he made me feel OK about feeling great about paying $2.05.9 a gallon at Costco (where — and I hate to brag — I’m a Gold Star Member, and where the price dropped another penny this week).

Webber summed up thusly: “Even a dead cat will bounce if you drop it.”

Job growth remains strong, but slowdown could be ahead

This article was written by L.M. Sixel and Collin Eaton and appeared in the Houston Chronicle on 12/19/14.

Job growth remains strong, but slowdown could be ahead

Houston-area employers added a record-setting 125,300 jobs over the last 12 months, state officials reported Friday, even as two other reports pointed to the potential for pain in the coming year due to slumping oil prices.

The monthly jobs numbers released by the Texas Workforce Commission show a healthy year-over-year growth rate of 4.4 percent – evidence that crude’s dramatic fall has yet to shake the local economy.

But the bellwether U.S. rig count was down for the second consecutive week, and an analysis from JPMorgan Chase raised the possibility the state could slide into a regional recession should oil remain as cheap as it is today. Despite the rise of health care, high technology and other industries in Texas, the state still has about 11 percent of its gross state product tied up in oil and gas, the banking giant said.

Barton Smith, professor emeritus of economics at the University of Houston and a longtime observer of the local economy, said oil prices would have to remain low for about six months before the energy industry takes a hit. He said it would be even longer before sectors such as construction, which is still trying to catch up with the surge in Houston’s population, feel the pinch.

“I’m confident we’re growing at 4 percent or better,” he said, echoing the Workforce Commission estimates.

‘A lot of momentum’

The future depends largely on the price of oil, which has fallen by about 45 percent since this summer as excess crude supply has intersected with weakening demand and a sputtering global economy. The U.S. benchmark oil price closed Friday at $56.52, up $2.41 for the day but still far below the $100-plus highs common in the first half of the year.

“I think we have a lot of momentum heading into 2015,” said Ross Harvison, chairman of the Institute for Supply Management-Houston Business Survey Committee.

He said he expects solid employment growth the first few months. But after that, he said, lower oil prices could cause job growth to dip below the current estimates of 50,000 to 60,000 next year.

Another local economist said he’s already found troubling signs of economic stress in Friday’s jobs report. Some of Houston’s most important job-creating industries are slicing their payrolls, said Patrick Jankowski, vice president of research for the Greater Houston Partnership.

Between October and November, oil and gas exploration and production firms cut 700 local jobs, including 400 in support activities for drilling.

The construction industry, which has been on a tear putting up office buildings, single-family homes and multifamily apartments, trimmed 700 jobs from its payrolls. And the high-paying, revenue-generating manufacturing industry eliminated 800 jobs between October and November.

Jankowski said he wasn’t expecting to see those job losses until next year. Though relatively small, he said, they could signal that Houston’s much-envied economy is starting to downshift.

“Is this the turning point?” he asked.

Jankowski said the next few months could show whether the trend plays out. He’s also keeping his eye on the rig count.

The number of rigs searching and drilling for oil and gas across the United States fell by 18 this week to 1,875, according to data from oil service company Baker Hughes. Last week, the count fell by 27. Texas’ rig count fell this week by four, to 868, bringing the two-week total slide for the state to 28.

The weekly rig count is a closely watched indicator of how much oil will be extracted in the future. The tally often tracks the price of crude oil, as most companies choose to drill fewer wells if the resource is less valuable.

But because drilling rigs are contracted out for long periods of time, falling oil prices can take months to translate into a lower rig count.

Meanwhile, the head U.S. economist for JPMorgan Chase, the nation’s biggest bank, uttered a word this week that Texans haven’t heard in years: Recession.

Chain reaction?

The report also raised troubling comparisons with the painful bust that began in the mid-1980s.

After a surge in shale energy, the state now bears 40 percent of the nation’s oil production, the highest share of any state. And 2.7 percent of Texas jobs are in oil and gas.

Compare that to 1986, the bank report said, when sliding oil prices set off a painful chain reaction that extended from the oil industry to real estate and finally to the financial sector, which saw hundreds of banks fail in the late ’80s.

Back then, 11 percent of the state’s economic output and 3.7 percent of its workers were in oil and gas. Though fewer of the state’s jobs are now in that industry, “we’re not talking about night and day,” JPMorgan chief U.S. economist Michael Feroli wrote.

“There are some reasons to think that it may not be as bad this time around, but there are better reasons not to be complacent about the risk of a regional recession in Texas,” Feroli said.

The U.S. benchmark oil price fell 60 percent in the first half of 1986, while in the second half of 2015 it has fallen by a smidgen under 50 percent. In 1986, Texas’ jobless rate rose 2.6 percentage points higher than the national rate, to about 9 percent.

It’s not yet clear how long oil will stay this cheap, but if it’s for an extended period, it could “be a big danger for the banks” that lend money to homeowners, for automobiles and small businesses, said Gil Baker, district deputy comptroller in the southern district for the Office of the Comptroller for the Currency.

Barker said Texas bank examiners are already starting to see financial problems with less stable bank borrowers “on the margins,” as well as layoffs and cutbacks among smaller banking customers.

“When there’s a price drop this significant and this quick, it’s definitely going to have an impact,” Barker said.

That impact could take the form of 212,000 job losses across Texas, if oil and gas production companies see earnings fall by 20 percent, or $13.5 billion, said Brian Kelsey, economist and founder of Austin-based Civic Analytics.

Those job losses would wipe out two-thirds of the projected gains expected in Texas next year, Kelsey said. That could translate into 79,500 jobs lost in the Houston metropolitan area, he said.

Oil companies’ plans

Drillers and oil field service companies projected more pain this week as oil producers slash their spending budgets for next year. On Friday, the world’s biggest offshore rig contractor said it would scrap seven of its older drilling vessels and expects a $140 million charge in the fourth quarter as it puts the rigs on the sales block.

That’s after Transocean’s string of announced rig retirements in November and a projected loss of $2.76 billion in value for its drilling business, as oil companies place fewer orders for big rigs.

Earlier this week, Houston oil producer Rosetta Resources said it expects to cut its budget to $700 million to $800 million in 2015, from $1.1 billion this year. So far, a handful of other oil companies, including Houston-based Conoco-Phillips, have reported they’ll cut spending next year.

Robert Grattan contributed to this story.

Texas banks already seeing some problem borrowers as oil slides

This article was written by Collin Eaton and appeared in Fuel Fix on 12/19/14.

Texas banks already seeing some problem borrowers as oil slides, regulator says

HOUSTON – One of the top federal regulators for Texas community banks says examiners are already catching some problems with less financially stable bank borrowers, and if oil remains cheap for long, it could get a lot worse.

“If we get into an extended period of lower prices, it’s going to be a big danger for the banks,” said Gil Barker, Office of the Comptroller of the Currency’s district deputy comptroller for the Southern District, which includes Texas and a few surrounding states.

The oil-price crash of the 1980s still brings back painful memories for Texas bankers, who saw hundreds of financial institutions fail in the late 1980s during an economic dry spell after crude slid 50 percent in the first half of 1986. U.S. benchmark crude has fallen almost that much in the second half of this year.

The community banks that Barker follows have $10 billion in assets or less, so they don’t typically lend money to U.S. independent producers – but they can feel it when big companies in the Permian Basin and in the Eagle Ford Shale suddenly cut costs or lose money.

These banks make retail loans to homeowners, for automobiles and small businesses, like the apartments and restaurants that have cropped up in oil-producing Texas regions. The OCC is starting to see layoffs and cutbacks among those smaller banking customers, and “on the margins,” some financially weak borrowers are seeing more problems, Barker said.

“When there’s a price drop this significant and this quick, it’s definitely going to have an impact,” he said.

Texas bankers, Barker said, should start taking borrowers’ financial information with a grain of salt, because past income statements were probably based on revenue gains when oil prices were higher.

From OCC exams, it appears banks are well-prepared for a cyclical downturn, but if it’s for an extended period of time, it could cause a lot of financial problems for borrowers and lenders, Barker said.

“There’s no question that if there’s a longer duration in downturned prices, the chance for a regional decline here in economic activity is very real,” he said.

Brian Kelsey, economist and founder of Austin-based Civic Analytics, said Texas could lose 212,000 jobs next year if oil and gas producers see a 20 percent, or $13.5 billion, drop in earnings – defined as wages, salaries, benefits and business profits. Those job losses would wipe out around two-thirds of the state’s projected 2015 job growth, Kelsey said.

The Houston metropolitan statistical area, Kelsey estimates, could see 79,500 jobs lose if the oil extraction earnings fall by $6.6 billion.

Lower oil prices a threat to Texas economy

This story was written by Claudia Grisales and appeared in the Austin American-Statesman on 12/19/14.

Experts: Lower oil prices a threat to Texas economy

These days, Texas consumers are celebrating the lowest gasoline prices in more than five years.

But lower oil prices are also a risk factor for the overall Texas economy, which depends heavily on the energy industry. In fact, some experts say Texas is in danger of losing billions in revenues and hundreds of thousands of jobs due to the declining price of oil.

Thanks to booms in the Eagle Ford Shale and the Permian Basin, oil production in Texas has soared to more than 3 million barrels per day. Oil and gas extraction accounted for 11.9 percent of Texas’ nongovernment gross domestic product in 2012, according to the federal Bureau of Economic Analysis.

Austin economist Brian Kelsey, concerned about the potential impact of falling oil prices on the state’s economy, is examining what could happen to the state’s revenue and jobs under a continued decline for the energy industry.

If oil and gas industry earnings in Texas fall 20 percent, Kelsey estimates, the state could lose 212,000 jobs and $13.5 billion in total earnings. In turn, the Austin metro area could see a loss of 4,200 jobs and $210 million in earnings.

A significant decline for the energy industry, Kelsey said, would ripple throughout the state’s economy.

“Earnings in the oil and gas sector drive a significant portion of overall economic activity in Texas,” Kelsey said. “So consumers may enjoy seeing lower gas prices, but falling oil prices can hurt more in other ways.”

Michael Feroli, J.P. Morgan Chase’s chief U.S. economist, made an even more dire prediction in a Thursday note to clients. He compared the current situation in Texas to the 1986 state recession, which happened after oil prices dropped by about 50 percent in a six-month period.

“As we weigh the evidence, we think Texas will, at the least, have a rough 2015 ahead, and is at risk of slipping into a regional recession,” Feroli wrote.

The oil and gas sector, which includes a dozen related industries, accounts for 411,372 jobs throughout Texas, about 3.2 percent of jobs statewide, according to Kelsey’s analysis of workforce data from EMSI. The core oil and gas extraction industry on its own accounted for 111,422 jobs, about 0.9 percent of Texas payrolls.

Robert “Bill” Gilmer, director of the Institute for Regional Forecasting at the University of Houston’s C. T. Bauer College of Business, has warned that oil prices below $60 a barrel could lead to significant cuts in domestic oil exploration and drilling. Brent crude prices fell to $59.27 per barrel Thursday, while West Texas Intermediate crude oil has dropped below $54 a barrel, marking a five-year low.

Gilmer, who has called the scenario of low gasoline prices versus low oil prices a “strange mix of good news and bad news,” said the lower oil prices could be felt in a range of Texas businesses, from machine shops and factories to office towers.

Texas lawmakers and some economists, however, say the state’s economy has become diversified enough to weather a downturn in the oil and gas sector.

“The good thing for Texas is we are in a pretty good position,” said Michael Seman, senior research associate with the University of North Texas Center for Economic Development and Research. “Texas is now a much more diverse economy.”

State Rep. Jim Keffer, R-Eastland, chairman of the House Energy Committee, said he doesn’t see “any doom and gloom.”

“But I see the obvious realities of an economy, and we are world player now,” Keffer said. “We’ve been here before. We are positioned to ride the storm very well. I think we can blunt some of the sharp edges of an oil and gas downturn.”

However, Keffer said a decline in oil and gas industry revenues could impact the state’s rainy day fund and other areas of the state’s budget.

Budget surpluses driven by oil and gas revenues “may be slimmed up for the next session,” Keffer said. So “we have to be judicious in how we look at the future.”

“It’s good to be reminded that this is a commodity,” Keffer said. “We are being reminded it’s not always such a rosy picture, and we have to make our decisions based on a cycle or a trend, not just what we are doing now.”

Meanwhile, Texas consumers continue to bask in the glow of the lowest prices at the pump since May 2009. On Thursday, the statewide average for a gallon of gasoline reached $2.26, while Austin was at $2.31, down 37 percent in the past six months, according to AAA Texas.

The lower prices, AAA Texas estimates, are translating into savings of $400 million each day compared with higher prices earlier this year. It’s also forecasting 8.1 million Texans will travel this holiday season, marking the highest growth rate since 2009.

“Lower oil prices mean lower prices at the pump and translates into more money for consumer spending,” said Seman, the University of North Texas researcher. “It’s also at the time when we are buying gifts, and there’s more money for that.”

So while the current energy price declines “are not without some belt-tightening and some uncomfortable economic situations,” Seman said he doesn’t see reason to panic.

“If history is a guide,” he said, “this is just a dip in a long series of ups and downs.”

Staff writer Dan Zehr contributed to this report.

What do falling oil prices mean for economic developers?

The falling price of oil will compete for economic story of the year in 2014, but what does it mean for economic developers heading into 2015? Most of the attention so far has been paid to oil-producing states like Texas and North Dakota, but for economic developers in non-production states, could lower oil prices create opportunities for leveraging their own competitive advantages?

Economic developers have access to many tools that can help frame the situation for their communities. The first step is to understand how oil and gas impacts your economic geography. Using the fabulous new and improved U.S. Cluster Mapping Project, developed by Michael Porter’s team at Harvard Business School and funded by the U.S. Economic Development Administration, and 2014 estimates from EMSI, I ranked the top fifteen counties by jobs in the Oil & Gas Production & Transportation Cluster in Table 1.

Harris County (Houston) is the obvious outlier, but falling oil prices will have even more severe impacts on smaller counties where the oil and gas cluster makes up a larger share of total employment and carries a huge multiplier effect, such as in Midland and Ector County, Lafayette Parish, Williams County (Williston), and Lea County. Larger and more diversified counties, such as Dallas, Tarrant, and Los Angeles, will no doubt feel the impact of lower oil prices through declines in corporate profits, lower earnings, and reduced consumer spending, but the shock should be absorbed to some extent by virtue of having other industries to lean on.

So how strong might that shock be? Oil and gas industry market forecasts seem to be all over the place, but some analysts are projecting declines of up to 30 percent:

According to Porter’s team at Harvard, there are twelve industries in the oil and gas cluster. Let’s assume that lower oil prices result in a 20% decline in earnings across all industries in the oil and gas cluster. That’s probably a bit steep in terms of how lower corporate earnings would translate to wages and salaries of workers, and it’s unlikely that lower oil prices would produce the same 20% decline across different industries in the cluster (e.g., extraction vs. oilfield machinery manufacturing). But we’ll use it here for the sake of illustration.

Table 2 (second tab if you’re using the link) shows how a 20% decrease in earnings may impact the counties in Table 1, based on my analysis of EMSI data and accounting for direct and multiplier effects.

Whatever your experience and/or intuition says about oil prices in 2015, economic developers working on behalf of communities with strong oil and gas clusters should be doing scenario analysis like this right now, evaluating a range of potential impacts of lower oil prices and how public services, such as the workforce development system, may be affected. Further, many community colleges and technical schools have added new programs or expanded capacity to meet the strong demand for oil and gas workers during times of higher prices. Seek out and collaborate with your education partners, too, so they can weigh in and benefit from the results of your analysis. Many of them have likely been through this before.

Economic developers everywhere would be wise to follow suit, even in communities with little or no obvious oil and gas industry presence. Austin, for example, is known for technology, not oil and gas. But as Dan Zehr, who covers finance and the economy at the Austin American-Statesman, explains in his excellent deep-dive on Austin’s oil and gas industry, the “Blueberry in the Tomato Soup” will not escape the downsides of falling oil prices because earnings from oil and gas holdings are a key driver of the regional economy.

Earnings are wages, salaries, supplements (employee benefits), and proprietor income. As Zehr points out, investors, owners of holding companies, and the like derive significant income from oil and gas while living in Austin–with very few oil and gas jobs showing up in an analysis of the local economy. In fact, according to EMSI estimates, oil and gas extraction is the eleventh largest contributor to Austin’s GDP at $1.63 billion per year in value added, but only accounts for approximately 1,300 jobs (0.1% of total employment). Yet, the same 20% decline in earnings modeled above for the oil and gas cluster results in a loss of an estimated $307 million in earnings and 5,700 jobs for the Austin-Round Rock MSA, according to my analysis of EMSI data.

And it’s not just places in major production states. The oil and gas cluster accounts for at least $200 million in earnings in Contra Costa County, CA, Lake County, IN, Salt Lake County, UT, Jackson County, MS, Yellowstone County, MT, Dakota County, MN, Orange County, CA, Lucas County, OH, and Duchesne County, UT, as well as several higher-profile counties in Pennsylvania, according to EMSI estimates.

What about the upside of lower oil prices? Indeed, lower oil prices may present an opportunity for some economic developers. According to other data from EMSI, approximately 85 percent of total sales in oil and gas extraction go to petroleum refineries, which are part of the oil and gas cluster as defined by Porter’s team at Harvard. Sorting out and measuring the feedback loops within the same cluster is complicated. However, there are several industries not in the oil and gas cluster that use oil and gas extraction products as inputs that may benefit from lower prices.

Economic developers in places such as Salem County, NJ, Orangeburg County, SC, and Morgan County, AL (petrochemicals), Clayton County, GA (air transportation), Sarpy County, NE (trucking), and McCracken County, KY, and Unicoi County, TN (chemicals) all have major employers in industries that represent $200 million or more in sales nationally for the oil and gas extraction industry.

I have no idea what lower oil prices may mean for those industries, but it’s a good conversation starter for economic developers who want to approach local industry representatives about business retention and expansion, getting a cluster initiative up and running, recruitment and/or entrepreneurship possibilities through supply chain analysis and import substitution, etc.

Economic developers are in a unique position as experts on their local economies. They stand at the intersection of the public and private sectors, and the best economic developers can leverage their expertise on the local economy to identify opportunities for public-private partnerships.

For economic developers in regions with strong oil and gas clusters, now is the time to evaluate what sustained lower oil prices may mean for your economic geographies. Economic developers in non-oil and gas regions should take advantage of the tools at their disposal, as well, to explain to community leaders how lower oil prices may impact their local economies, aside from the price at the pump.

Most seasoned economic developers I’ve worked with have at least one success story that began with a seemingly trivial conversation, perhaps about something like gas prices. But armed with the right information, you never know where those conversations may lead.