The Texas Economy and Employment: Short Term Forecast Analysis, Prepared by:

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1 The Texas Economy and Employment: Short Term Forecast Analysis, Prepared by: IHS Global Insight October 5, 2012

2 Table of Contents Introduction... 3 Background: U.S. and Global Economic Outlook... 3 Texas: General Near Term Outlook... 8 Outlook by Sector... 9 ENERGY... 9 Oil... 9 Natural Gas Chemicals Renewable Energy CONSTRUCTION MANUFACTURING Chemical Manufacturing Computer and Electronic Products Manufacturing Fabricated Metal Manufacturing Machinery Manufacturing Transportation Manufacturing SERVICES Health Care Services Education Services Professional, Business, and Technical Services Leisure & Hospitality Services Retail Services GOVERNMENT Uncertainty Associated with Forecasts Appendix A: IHS Model of the U.S. Economy IHS Global Insights Short term Forecast November 2012 Page 2

3 Introduction The Texas Workforce Commission (TWC), Labor Market and Career Information (LMCI) Department, has solicited IHS Global Insight to produce short term industry employment forecasts for Texas statewide and each of the 28 Local Workforce Development Areas (LWDAs) through In addition to the database, a summary of our assumptions, methodology, and findings is provided in this report. Background: U.S. and Global Economic Outlook The data, models, and forecasts utilized by IHS analyze and assess economic impact by county and industry, thereby incorporating the unique trends of specific industries as well as the structural characteristics of Texas's local economy. More importantly, they are linked, which provides a comprehensive, consistent, and detailed view of the global, U.S., state, and local economy (See Appendix A for complete model documentation.) Therefore, it is important to understand our assumptions at the U.S. and global macroeconomic levels in order to put the outlook for Texas and each of its LWDA s into perspective. Our view is that the recovery from the Great Recession of 2008 continues on a modest track. We expect second half 2012 GDP growth in the U.S., averaging 1.4%, to be little different from the second quarter's 1.5% pace. However, some of the drivers that were previously supporting growth exports and business fixed investment are showing signs of flagging in the face of global economic headwinds and domestic policy uncertainty. As a result, manufacturing has at least temporarily run out of steam, and overall growth in output and employment is likely to remain at only a modest pace. IHS expects the Eurozone to remain in mild recession for much of the next year, before recovering. The baseline forecast assumes that a Greek Eurozone exit evokes a strong policy response from the European Central Bank (ECB). The Greek exit, expected in 2013, could well be the "wake up call" that prompts further economic and financial integration in Europe. Strict conditionality on fiscal consolidation and structural reforms from the ECB will help to mitigate the economic damage caused by IHS Global Insights Short term Forecast November 2012 Page 3

4 a Greek exit. After policy actions help to stabilize financial markets and growth resumes, the euro is likely to bounce back in Although the global macroeconomic impact of a Greek exit and worsening Eurozone crisis may not be large, the ramifications for multinational corporations and specific industries will be greater (e.g. high tech). The profits earned by European operations of large global companies are already being hammered. Moreover, some industries such as high tech, pharmaceuticals, and high value manufacturing generate more of their top line growth in Europe. Many of these companies are taking defensive actions such as moving cash back to North America, keeping inventories lean, trimming costs further, and preparing for slower sales. Meanwhile, United States financial institutions have been reducing their exposure to Europe and matching assets to liabilities for example, they are trying to cover loans to Spanish borrowers with funds from Spain. As European banks "de globalize", the upside for U.S. banks is that they can increase their market share, especially in emerging markets. This, combined with the greatly improved capital positions of U.S. banks, puts these institutions in a good position to weather all but the worst storms emanating from Europe. Weakness in the Eurozone and, to a lesser extent, the United States has significantly slowed down China s exports. Chinese exports will continue to cool owing to worsening demand in Europe. With the more challenging external demand conditions, the Chinese government will probably remain cautious in its exchange policy moves. China's currency policy is likely to remain conservative during the export downturn, in order to limit the negative impact on the low margin, labor intensive export sectors. Continued steady depreciation of the renminbi during this time of economic slowdown is unlikely, given it could induce capital flight. China's domestic economy has still not resolved the problems created by the excessive liquidity injections in intended to combat the global recession. Besides inflation, the massively bloated local government debt, officially reported at 10 trillion renminbi (25% of GDP) that contributed to China's real estate bubble could be even more dangerous to China's economic well being. With an increasingly fragile global economy that further dampens China's business conditions, debt payment abilities of the local entities will be even more constrained. A local debt crisis could lead to a banking IHS Global Insights Short term Forecast November 2012 Page 4

5 crisis and trigger a hard landing in China. In such a scenario, investment spending will be severely hampered, as much investment is financed by bank lending. The combination of investment downturn (drag on growth) and real estate market collapse (drag on wealth) will hurt China's normally resilient consumer demand. Export orders in the United States are declining in the face of an unofficial but deepening Eurozone recession and a marked slowdown in growth in the emerging world, largely driven by China. Manufacturing output growth in the U.S. slowed in the second quarter, and it was only thanks to the continuing revival in motor vehicle production that it remained in the black. Durable goods reports suggest that the momentum behind business capital spending has weakened, too. Global weakness and uncertainty over the policy outlook in Washington are the obvious candidates for blame. In the United States, we do not expect the economy to go off the "fiscal cliff." But uncertainties about the cliff and more broadly, about the direction of federal tax and spending policy are unlikely to be resolved quickly unless November's elections deliver an extremely decisive result. Our assumption is that the lame duck Congress will punt the problem down the road with a "stay of execution" that will postpone the tax hikes and spending cuts for a few months. That will remove the immediate risk, but delay a final resolution. As a result, extreme uncertainty over fiscal policy is likely to remain a fact of life and a deterrent to risk taking well into The fact that the debt ceiling will need to be raised some time in the first few months of 2013 adds an unwelcome extra complication. Households face too many negatives to allow a robust consumer spending recovery high debt burdens, low house prices, modest employment growth, and a lack of confidence in the government's ability to make things better. Overall, we expect consumer spending growth of 1.9% in 2012, down from 2.5% in 2011, followed by 2.1% growth in Light vehicle sales remain a bright spot, as pent up demand is coming through, but our forecast for 2012 has been lowered fractionally to 14.1 million units, from 14.2 million units. Our 2013 projection remains 14.8 million. On the employment front, July showed marked improvement after three consecutive months of sub 100,000 job creation. We believe that a "warm winter" payback and other seasonal adjustment issues IHS Global Insights Short term Forecast November 2012 Page 5

6 exaggerated the slowdown. Over the rest of 2012, we anticipate job growth averaging around 140,000 per month, which helps the unemployment rate edge down to 8.1% by year end, from 8.3% in July. Pent up demand for housing is building as young adults stay at home. It is already supporting a modest improvement in housing activity, and at some point (helped by job growth) will spark a major revival. We expect a 24% increase in housing starts in 2012, albeit from a low base (761,000 units, compared with 610,000 in 2011), concentrated in the multifamily segment, where pent up demand is helping the rental market. We expect starts to improve to 935,000 in 2013 and 1.23 million in Recent evidence suggests that home prices are stabilizing. We expect a 2.7% house price increase in 2012, as measured by the FHFA purchase only index, fourth quarter to fourth quarter. Capital equipment remains an important driver of GDP growth. Business equipment and software spending growth improved to 7.2% in the second quarter, from 5.4% in the first. However, the latest evidence shows a weakening in orders for capital equipment, indicating that firms became more cautious on capital investment plans, along with employment, in the second quarter. As a result, we expect equipment spending growth to slow again (to 5.5%) in the third quarter. IHS Global Insights Short term Forecast November 2012 Page 6

7 A summary of the key assumptions behind our U.S. and global economic outlook are below: Key Forecast Assumptions Fiscal Policy: Discretionary Spending. We assume that real nondefense federal government spending on goods and services falls 1.1% in calendar 2012 and 2.5% in 2013 as budget cuts bite. We assume that real defense spending falls 3.6% in 2012 and 3.4% in 2013, reflecting a combination of budget cuts and overseas contingency operations winding down. Fiscal Policy: Expiring Stimulus. We assume that the 2% payroll tax cut and emergency unemployment insurance benefits are extended for 2013, and then phased out over several years, rather than disappearing overnight. We assume that the present 50% bonus depreciation incentive is not extended for Fiscal Policy: Automatic Spending Cuts and the Bush Tax Cuts. We do not expect the automatic spending cuts now scheduled to begin in January 2013 to take effect. We assume that the lame duck Congress will delay the cuts, giving time for the new Congress and president to produce a package of spending cuts and tax increases, mostly sparing discretionary spending since the cuts there are already aggressive. We have assumed a combination of cuts in Medicare, Medicaid, and Social Security, and increases in income taxes. The measures mostly begin in January 2014; we assume that the Bush tax cuts are extended for The Drought and Food Prices. The US drought has undermined this year's corn and soybean crops, and the resulting higher farm commodity prices will gradually pass through to the consumer. We have raised our projection of consumer food price inflation in 2013 to 3.0%, from 1.2%. Weak Global Growth Assumed to Keep a Lid on Oil Prices. Increased tensions in the Middle East have pushed oil prices up from their June lows, but we still expect weak global growth to dominate the immediate outlook. We expect the refiners acquisition cost for crude oil to average $91/barrel in the second half of 2012, up from our July projection of $88/barrel. But we still assume an average refiners' acquisition cost price of $88/barrel in 2013, little changed from last month's $89/barrel. That corresponds to an average Brent oil price of $93/barrel in Federal Reserve to Hold Rates Near Zero Until Late 2014; More Quantitative Easing Assumed in September. The Fed has said that it expects to keep its federal funds target in the % range until at least late We anticipate that it will wait until November We assume another round of quantitative easing ($600 billion), to be announced in September 2012, concentrated on mortgage backed securities. Dollar to Gain on the Euro. The Eurozone economic downturn is worsening, the sovereigndebt crisis has further to run, and we expect the ECB to cut interest rates further. As a result, we expect the euro to weaken to $1.10 by August Given the weakening in Chinese growth, we expect only a 0.9% appreciation of the Chinese renminbi in 2012 (year end to year end). Weaker Global Growth. We expect GDP growth in the United States major currency trading partners to weaken to 1.1% in 2012 and 1.2% in 2013, from 1.7% in GDP growth for other important trading partners is projected to slow to 4.3% in 2012 and 4.6% in 2013, from 5.2% in IHS Global Insights Short term Forecast November 2012 Page 7

8 Texas: General Near Term Outlook The Texas economy will continue to expand in the medium term. The gross state product (GSP) for Texas, which measures output and illustrates the economic health of the state, is expected to grow at a compound annual growth rate (CAGR) of 3.2% from in real terms. This growth rate makes Texas the third fastest growing state in the nation (after North Dakota and Alaska). As the state s economy has expanded over the past decades, Texas contribution to the national GDP has increased from 6.7% in 1990 to 8.7% in 2011 (comparatively, North Dakota and Alaska each make up less than 0.5% of national GDP). As one of the leading drivers behind the nation s recovery, the state of Texas is expected to play an increasing role in the U.S. economy even beyond While one of the best performing states in the nation, the Texas economy cannot completely escape the shadows of the Eurozone crisis, the impending fiscal cliff, and the ongoing drought. Weak consumer and business confidence nationally, contributing to slower global growth in manufacturing and energy, will also keep the outlook for Texan manufacturing and mining output moderate. Other industries however, such as professional services, which have not been as susceptible the global and national crises, to are expected to see a turnaround in Texas as we continue to see more diversification in the local economies. Houston, for example, which has traditionally been dependent on energy related industries, has seen rapid expansions recently in both education and health care and business services. In the outlook, in fact, these are the fastest growing employment sectors in Houston, growing 4.1% and 3.9%, respectively over the period. Meanwhile, employment in Texas is expected to grow at a CAGR of 1.7% from in real terms. While expansion is slow, Texas continues to be a top performer nationwide and is one of only seven states to have employment return to its prerecession level (other states include North Dakota, Alaska, Washington DC, Louisiana, New York and West Virginia). Despite the slow growing payrolls, the unemployment rate will remain close to 7.0% for much of 2012 and will decline to 6.9% and 6.6% in 2013 and 2014, respectively. Bringing the unemployment rate down will prove a slow process because there are many previously discouraged workers ready to jump back into the labor force, renewing their job searches as conditions begin to improve. Continued payroll gains will drive wages and personal income higher, but growth rates will remain below those achieved in the prerecession years. IHS Global Insights Short term Forecast November 2012 Page 8

9 The employment outlook for Texas ranks third in the country in terms of medium term growth. Unlike Texas, some of the states in the top five, such Arizona, were among the hardest hit by the recession so they will be posting high growth rates from a very low base. The fastest growing industry for employment in Texas over the medium term is expected to be professional and business services, while the state is expected to see declines in agriculture, forestry, fishing and hunting as well as government employment. Outlook by Sector ENERGY Oil and natural gas production have been strong drivers of the Texas economy. While the relative role of energy in the Texas economy has declined as the state has become more diversified, Texas still remains the country s leading natural gas and oil producer. Texas currently accounts for 20 percent of oil and 33 percent of natural gas extraction in the United States. Out of 254 counties in Texas, 223 are actively producing oil and natural gas. 1 As a very capital intensive industry, the direct employment contribution of oil and natural gas extraction to state employment figures is relatively minor in Texas. In fact, the proportion of jobs in Texas making up oil and gas extraction alone is less than 1%. However, it is the indirect contributions and induced economic benefits to the state in terms of employment which are much more significant. That is, the benefits of oil and gas extraction to state employment figures extend far beyond the mining sector; professional and technical services, retail and wholesale trade, manufacturing, transportation, construction, agriculture, and government employment are all positively affected. Oil Many headlines driving the price of oil in 2012 have the words euro or Iran in them. Prices have gyrated as the market alternates between pessimism over the health of the world economy and oil demand and anxiety over the availability and adequacy of future supply. In the meantime, however, the Great Revival in U.S. crude oil production that began in 2008 has accelerated. Driven primarily by 1 Yucel, Mine K. and Jackson Thies, Oil and Gas Rises Again in a Diversified Texas, The Federal Reserve Bank of Dallas, 2011Q1, p. 1 IHS Global Insights Short term Forecast November 2012 Page 9

10 output from tight crude oil plays such as the Eagle Ford Shale play (as well as the Bakken in North Dakota), U.S. production of crude oil/condensate and natural gas liquids (NGLs) has increased about 1.9 million barrels per day (mbd) from 2008 through the first quarter of Between 2011 and 2014, IHS CERA expects tight oil production to continue on that path. The growth of the Eagle Ford Shale play, rich in both oil and natural gas, has been explosive. In 2008, 33 drilling permits were issued for the exploration of the Eagle Ford Shale play; by 2011, that number exceeded 2,800. As referenced earlier, the economic impacts of the Eagle Ford Shale play are not limited to the drilling sites. Given San Antonio s proximity to the majority of shale play sites, Bexar County in the Alamo LWDA is likely to have a significant role in staging exploration, and as a result, the energy boom is expected to bring in new investment and generate thousands of jobs in San Antonio. Oil and gas extraction employment in the Alamo LWDA is expected to increase 21.4% in 2012; after that, employment growth will begin to decline to a 4.9% CAGR Energy companies such as EOG Resources and Chesapeake Energy have already opened satellite offices in the San Antonio metro area, but the biggest announcement so far has come from oil field services giant Halliburton. At the end of 2011, Halliburton began work on a $50 million base of operations in San Antonio, for which it will need 1,500 workers to support its operations in the Eagle Ford shale play. The company said it hopes to fill 75%, or more than 1,100, of these high paying positions by hiring locally. Halliburton is not the only oil field services company interested in operating in San Antonio. Houstonbased Baker Hughes, Inc. has said it plans to build a $30 million operations center and administrative headquarters in southeastern Bexar County, which will employ 400. Meanwhile, Schlumberger Ltd., the world's largest oil field services company, has told local economic development officials it wishes to establish a site in southern Bexar County as well. 2 Of course, there remains great uncertainty about the ultimate pace and sustainability of the current boom in U.S. production, particularly for Texas. For one, it is still early days for the development of tight oil resources in North America, much less beyond. There are still many untested plays, and decline rates may ultimately prove steeper than anticipated. Backlash over environmental concerns related to 2 Gonzalez, John W., Baker Hughes plans major South Side facility. My San Antonio, Hughes plans major South Side facility php IHS Global Insights Short term Forecast November 2012 Page 10

11 hydraulic fracturing especially in regions unaccustomed to hydrocarbon production could also slow growth. Threatening to Texas in particular are U.S. tight oil producers, especially those in North Dakota, who are offering steep price discounts not only to Brent but also to West Texas Intermediate (WTI) because of insufficient pipeline capacity to bring new production to market. A WTI price in the $70s with Bakken producers receiving well below this could discourage some upstream capital investment in Texas. The move by the U.S. government to defer a decision to approve the Keystone XL pipeline (a proposed 1,700 mile line from Alberta to the Texas Gulf) underscores this point. Major pipeline projects will be needed to serve both Canadian oil sands producers and North American tight oil light crude producers in the coming years. Without enough overall pipeline capacity, both types of producers could potentially end up underserved. If Keystone XL is not ultimately approved and other alternatives (pipeline or rail) do not develop, oil sands producers will face deeper and deeper discounts for their crudes over the coming years, increasing the likelihood that Canadian oil sands will seek Asian markets instead. On the other hand, the experience of the shale gas revolution in North America shows that productivity rates can increase dramatically as industry gains knowledge and experience using new production technologies. Moreover, until now, the Great Revival has been driven principally by independent oil companies. As major oil companies begin to move into the tight oil space, they are likely to bring greater economies of scale and efficiency, which may ultimately lower costs. The bottom line is that our current production outlook could prove to be conservative, and oil prices could stay lower for an even longer period than we currently anticipate. While unconventional oil continues to be a top story in the headlines, oil reserves in Texas Permian Basin also remain a source of growth for the state. The basin is home to 20 of the nation s top 100 oil fields, and the state's crude oil reserves represent almost one fourth of the U.S. total. Economic activity in this region has pushed unemployment rates well below the full employment level. Texas 26 petroleum refineries can process nearly 4.8 million barrels of crude oil per day, and they account for more than one fourth of total U.S. refining capacity. Most of the refineries are clustered near major ports along the Gulf Coast, including Houston of the Gulf Coast LWDA, Port Arthur of South East Texas LWDA, and Corpus Christi of Rural Coastal LWDA. The employment in each of those LWDA s will increase IHS Global Insights Short term Forecast November 2012 Page 11

12 in the medium term with the Gulf Coast LWDA s employment growing the fastest at CAGR 1.9% from Refineries in the Houston area, including the Baytown refinery make up the largest refining center in the United States. From Houston, refined product pipelines spread across the country, allowing Texas petroleum products to reach virtually every major consumption market east of the Rocky Mountains. Also located in the Permian Basin is the Wolfcamp shale formation, a natural gas and oil field that that is located below the Spraberry Field. Pioneer Natural Resources (PNR) is the largest acreage holder, driller and producer in the Spraberry Field. According to the company s website, production in the first two horizontal wells drilled in Upton County has been split 75% oil, 20% natural gas liquids and 5% dry gas. The company has also recently revealed its intention to sell its properties in the Barnett shale region and use the sale proceeds in the Wolfcamp and Spraberry shale fields, which it considers to be more productive areas.. With new investments and growing production, the Wolfcamp shale fields will continue to create direct jobs for engineers, geoscientists, well and pump service professions as well as a multiplication of indirect and induced jobs for the region. Natural Gas New sources of natural gas from shale formations have changed the U.S. energy outlook and the economy. In 2010, shale gas represented 27% of U.S. natural gas production. Within the next five years, this share will grow to 43% and is expected to increase to 60% by Texas' natural gas reserves account for almost 30% of total U.S. reserves and the state is the country's leading natural gas producer accounting for nearly one third of total domestic production. While the Eagle Ford Shale play contains natural gas along with oil fields, the largest gas fields are concentrated in the Bend Arch Fort Worth Basin located in north central Texas. The Barnett shale play, located in the Bend Arch Fort Worth Basin, is the largest U.S. shale gas play in the region. This shale formation contains over 40 trillion cubic feet of recoverable gas reserves 3. According to the Railroad Commission of Texas, as of July 19, 2012, there were 16,213 total gas wells drilled to date in the Barnett 3 U.S. Energy Information Administration, Review of Emerging Resources: U.S. Shale Gas and Shale Oil Plays, IHS Global Insights Short term Forecast November 2012 Page 12

13 Shale field 4. Since 2006, the number of vertical wells in the Barnett field has been declining; however, as the horizontal well technology became more prevalent, the number of horizontal wells is growing rapidly 5. The number of drilling permits issued for Barnett Shale drilling had been rapidly trending upwards reaching a maximum of 4,145 in However, the economic downturn and sharp natural gas price declines that followed price peaks in 2008 led to a decline in Barnett Shale drilling permits in The shale gas industry varies from other infrastructure intensive commercial undertakings in that employment effects do not dissipate as construction and infrastructure build outs come to an end. In a study from IHS Global Insight for America s Natural Gas Alliance (ANGA), IHS found that shale gas investment contributes a relatively consistent share of employment by industry, showing that the high levels of capital indicative of the infrastructure phase will continue throughout the next 25 years, as natural gas production grows in step with natural gas demand. This will help to sustain direct mining, construction and manufacturing jobs. In turn, those direct investments and jobs help sustain indirect and induced manufacturing and services jobs, as well as jobs in retail and wholesale trade. The fact that only 10 12% of the jobs produced by shale gas investment will be in the mining sector (where gas extraction jobs are categorized) illustrates that the economic contribution of shale gas industry extends far beyond the mining sector. A key reason for these profound economic contributions is the shale gas industry's "employment multiplier." The employment multiplier measures the contribution that jobs make to the economy through the indirect and induced jobs created to support an industry. Some industries generate a larger contribution than other industries. The larger the multiplier, the greater the ripple effect of every dollar spent within an industry in terms of creating additional jobs across the broader economy. It is striking that, when compared with other industrial sectors, the shale gas industry, on average, demonstrates one of the larger employment multipliers: for every direct job created in the shale gas sector, more than three jobs are added across indirect and induced contributions. This employment multiplier places the 4 Railroad Commission of Texas, 5 Institute for Energy Research, Barnett Shale Fact Sheet, content/uploads/2012/08/barnett Shale Fact Sheet.pdf 6 Railroad Commission of Texas, IHS Global Insights Short term Forecast November 2012 Page 13

14 shale gas sector ahead of such notable industries as the finance, construction, and many of the manufacturing sectors. This remarkable employment multiplier is the result of two primary factors that drive the industry's indirect and induced job creation. First, the shale gas sector is capital intensive and spends nearly 50% of revenues on materials and services, with suppliers in construction, fabricated metals, computer design, and chemicals, and in a broad range of service sectors such as legal and financial services. However, it's not just the large capital expenditures or the wide ranging supplier base that lead to the impressive employment multiplier. Another critical reason is the strength of domestic suppliers, especially in Texas. While the United States is the world leader in shale gas industry, Texas is the state leader; unlike other industries in this country, there is a broad domestic supply chain, which means that a larger portion of the dollars spent here stay here and support American jobs. Second, the economic contribution does not end with the creation of jobs within the industry and among its suppliers; the quality of the jobs created is also high. Given the technologically innovative nature of the shale gas sector, the jobs attributed to this sector stand out from other employment opportunities. Workers in the oil and natural gas sector are currently paid an average of $28.30 per hour more than the wages paid in manufacturing, wholesale trade, education and many other industries. IHS Global Insight estimated broader average hourly earnings for the shale gas sector, which incorporates not only shale gas production but also immediate equipment producers, site builders, and service providers. The estimated average earnings for these employees register at $23.16 per hour. Americans working directly in these industries are paid more than workers in the manufacturing, transportation and warehousing, education, and hospitality sectors, where pay ranges from $13.10 to $22.00 per hour for production, professional, and business services workers. Given the relatively high wages paid directly to employees in the shale gas sector and in the various supplier industries that support shale gas, employees have higher than average spending, resulting in relatively larger induced income contributions. Chemicals The surge in shale gas production has led to significantly lower prices for gas and electricity than otherwise would have existed. Between 2009 and 2010, as shale production started to ramp up in IHS Global Insights Short term Forecast November 2012 Page 14

15 significant volumes, the price average has dropped from $6.73 per MMBtu (average Henry Hub Price) to $4.17 MMBtu in constant 2010 dollars. Natural gas prices are and will continue to be over two times lower than they otherwise would have been prior to the shale gale. Moreover, from 2011 through 2035, IHS projects that the price will average $4.79 MMBtu in constant 2010 dollars. Unlike plants in Europe and Asia that use oil, chemical plants in the U.S. that use natural gas as a raw material input. Therefore, even if the oil prices continue to rebound amidst greater uncertainty in the Middle East, Texas chemical plants will maintain their competitive advantage over their global competitors by benefiting from the differential between oil and gas prices. Several major corporations have made announcements in recent months to expand the downstream chemical opportunities in Texas. Exxon Mobil Corp, for example, has announced it is considering plans to build a multibillion dollar chemical plant at its existing Baytown complex in the Gulf Coast LWDA. The plant, which could be complete in 2016, is expected to create 350 permanent jobs once operational and produce 1.5 million tons/year of ethylene, a key chemical in plastics production. In May 2012, Irvingbased chemical company, Celanese Corp., announced it is considering building a $1 billion plant in Clear Lake; and in April 2012, Michigan based Dow Chemical Co. said it is spending $4 billion on new chemical facilities in the Houston area. Renewable Energy Texas is also rich in renewable energy potential, and leads the nation in wind powered generation capacity. Today, there are over 2,000 wind turbines in West Texas alone, and the numbers continue to increase as development costs fall and wind turbine technology improves. At 736 MW, the Horse Hollow Wind Energy Center in West Central Texas LWDA is the largest wind power facility in the world. Wind energy generation is already transforming the economies of relatively poor West Texas counties: creating new job opportunities that span beyond wind power generation alone and include education, transportation, construction and other local business jobs. For example, Texas State Technical College has introduced new curriculum programs focusing on wind and solar energy technologies 7. 7 Texas State Technical College, IHS Global Insights Short term Forecast November 2012 Page 15

16 The state government also continues to actively support renewable energy investments and through the Texas Enterprise Fund, the state has invested over $4.7 million in renewable energy related projects since These investments are expected to create over 900 jobs, according to the governor s office 8. PEW Charitable Trusts, a nonprofit organization conducting clean energy markets research, has estimated that between 1998 and 2007, clean energy jobs in Texas were growing at an average annual rate of 1.7% and in 2007 Texas had 55,646 clean energy jobs 9. While those jobs account for less than 0.5% of the total number of jobs, they also underline the growth potential of the state s renewable energy employment. Despite the rapid increase in renewable energy production, renewable technologies remain relatively more expensive and the state s clean energy employment as a share of total employment is very small. The extraordinary growth in shale gas production has driven natural gas prices down from their peak of over $11 in 2008 to under $3 today. Since electricity prices are driven primarily by natural gas prices, it is even more difficult for renewable technologies to remain price competitive 10. As a result, further increases in consumption of the renewable energy will depend on improvements in production efficiency of the renewable technologies. CONSTRUCTION Texas construction sector has proved to be relatively more resilient during the economic downturn as compared to the construction sectors in other states. Due to an ample supply of land, less restrictive building policies and more restrictive lending standards, the housing market in Texas did not experience the big boom in housing prices before the recession. As a consequence, the recessionary decline in Texas was relatively mild as compared to the rest of the country. Nonetheless, the market did take a dive. 8 Office of the Governor, Economic Development & Tourism, Texas Renewable Energy Industry Report, July 2012, 9 The PEW Charitable Trusts, The Clean Energy Economy: Repowering Jobs, Businesses and Investments Across America, 10 Office of the Governor, Economic Development & Tourism, Texas Renewable Energy Industry Report, July 2012, IHS Global Insights Short term Forecast November 2012 Page 16

17 While total real construction investment in the U.S. declined 27% between 2008 and 2011, construction investment in Texas declined by 17% over the same period. Residential construction in Texas declined a mere 12.1% as compared to the national decline of 28.8%. Nonresidential construction investment was more significantly impacted in Texas, falling 19.5% between 2008 and By comparison, Arizona and Nevada s nonresidential construction markets were most severely impacted, falling 34.4% and 45.9%, respectively, during the same period. While faring better than the rest of the nation, employment in the construction sector in Texas was not impervious to the decline. Texas lost nearly 16% of all construction jobs between 2008 and This decline, however, was significantly less severe than the nationwide construction employment drop of 24% during the same period. Nevada, Arizona and Florida were the biggest losers shedding 54%, 40% and 36% of the construction jobs, respectively. In the outlook, employment in construction will be one of the strongest sources of growth in Texas. The sector is expected to grow from 4.6% of the total employment market in 2011 to 4.9% in 2014, a pace of 3.7% CAGR. Only the professional and technical services sector is expected to grow at a faster pace in the short term outlook. While nonresidential construction in the state is expected remain sluggish/flat over the next three years, residential construction is expected to grow at CAGR 11.7% between 2011and By 2015, housing starts in Texas are expected to reach their prerecession levels. Aiding in this recovery is the pent up housing demand that exists in Texas. Currently at 4.4%, the foreclosure rate remains well below the national average of 7.4%, and this figure is expected to continue to improve in the upcoming quarters. Also unlike most rest of the country, home prices in Texas have increased nearly 3.8% from their trough; one of only six states to see appreciation over that period. Residential housing growth and household formation will be further supported by favorable demographic changes. As the 2010 U.S. Census has revealed, the U.S. population has been shifting to the South and West in the past decade. While natural growth is responsible for over 50% of the population increase in Texas, the international and domestic migration makes Texas one of the five fastest growing states in the nation (in terms of population). The U.S. Census Bureau also expects that IHS Global Insights Short term Forecast November 2012 Page 17

18 over the next two decades Texas will remain the second fastest growing state in the nation after California. By 2030, the state s population is expected to increase to 33.3 million. The U.S. Census Bureau has also shown that, in general, the U.S. population is shifting toward the suburbs of major metropolitan areas a trend which can be highlighted in Texas as well. Fort Bend and Montgomery counties near Houston area (Gulf Coast LWDA) saw population increases of 63.2% and 53.3% respectively over the past decade. Collin and Rockwall counties near Dallas (North Central Texas LWDA) have respectively added 56.4% and 78.5% to their populations over the same period. In Williamson and Hays counties near Austin (Rural Capital Area LWDA) the populations have grown by 65.8% and 58.6% respectively since Collectively, these major metro areas make up the Texas Triangle, drawing population from both inside and outside the state. As nonresidential construction tends to lag the residential market, the outlook for nonresidential construction is expected to pick up in the longer term. Housing affordability, relatively low costs of doing business, and a favorable tax environment are what will support the state's ability to attract new businesses. In fact, some real estate developers are starting now with large investment projects in Texas. Westcott LLC and JaRyCo Development LLC, for example, are planning to invest nearly $150 million toward the construction of a 28 acre office park in northern Dallas called Preston Bend Office Park 11. While construction documents are yet to be filed, Westcott is determined to unroll the project stating that the time to proceed with Preston Bend One is now. The project will be located in Collin county of North Central Texas LWDA. Also on the nonresidential side, developments of several major corporations investing in energy plants in the region will certainly provide a boost to construction employment (See Energy section). Dow Chemical Company s plans to build a world scale ethylene production plant in Freeport, TX, for example, is estimated to employ up to 2,000 workers at the construction peak. As shale gas expansion makes downstream production more profitable, other petrochemical companies are also expected to make 11 Jones Land LaSalle, Westcott LLC and JaRyCo Development LLC Select Jones Lang LaSalle to Lease New Office Development in North Tollway Corridor, us/pages/newsitem.aspx?itemid=25710 IHS Global Insights Short term Forecast November 2012 Page 18

19 large capital investments in Texas, which will certainly continue to drive growth in construction employment. MANUFACTURING Output in Texas manufacturing sector had grown steadily, 3.7% (CAGR) per year since 1990, reaching $1.1 billion (real dollars) in Following the economic downturn, the state s manufacturing output shrank by 1.8% in 2009; however, growth was quickly resumed in the following year. In 2011, the manufacturing sector in Texas comprised 14.5% of the state s gross output and employed almost 7% of the state s workforce (over 830,000 people). While Texas manufacturing output has more than doubled since 1990, employment in the sector has declined in Texas. From its peak in 1998, to its trough in 2010, more than 276,000 manufacturing jobs (over 25%) have been lost in the state. Especially with increasing advances in technology and incentives to move overseas, this trend in Texas exactly follows the rest of the country; where peak to trough declines in employment in manufacturing fell 35% over the same period, While employment in manufacturing began to grow in 2011, and is expected to continue modestly in the outlook, it is still expected to remain significantly below its pre recessionary (2007) levels through Chemical Manufacturing As the country s top producer of petrochemicals, accounting for 60% of U.S. total petrochemical production 12, chemical manufacturing in Texas is a significant portion of total manufacturing employment. According to the Texas Chemical Council, the state is home to at least 70 chemical companies with over 200 separate facilities 13 providing more than 70,000 jobs. As the expansion of shale gas production continues to help provide lower input prices to petrochemical plants, at least a dozen companies are expected to move forward with capital investment projects in the medium term. Additionally, as one of the country s leading biotech states, Texas hosts over 3,400 biotechnology manufacturing and R&D firms (such as Novartis, Abbott and Medtronic). 12 Yucel, Mine. What Drives Texas?, Federal Reserve Bank of Dallas, June 13, 2012 IHS Global Insights Short term Forecast November 2012 Page 19

20 However, the petrochemical industry s growth is taking place amidst higher concerns over water shortages and pollution. The unusually warm summer and the water intensive process of hydraulic fracturing have heightened concerns over water supply. Formosa Plastics facility near Point Comfort, for example, already had to adjust to a temporary 20% water reduction as a result of the recent draught 14. A growing number of air permit applications at the Texas Commission on Environment Quality bring attention to the air pollution caused by the petrochemical plants. The environmental impacts of petrochemical production may result in tighter regulation that could limit industry s growth in the longer term. In 2011, 48% of all chemical manufacturing jobs were in the Gulf Coast LWDA (see Energy: Chemicals section). Dallas LWDA is the second largest center for chemical manufacturing employment providing 9% of chemical manufacturing jobs. However, both LWDAs have been losing these jobs slowly over the past decade, mostly through productivity enhancements. Computer and Electronic Products Manufacturing Since the 1990s, the Texas high tech industry sector has been expanding rapidly. Today, Texas is home to more than 14,000 telecommunication, semiconductor production, video game developers and other IT related companies. According to the Federal Reserve Bank of Dallas, over the past two decades, the high tech industry s output grew 20 times as fast as Texas gross state product reaching nearly $43 billion in Despite this rapid growth in output, employment in this sector has been declining at an average annual rate of 0.2% over the past decade. In 2012, employment in computer and electronic manufacturing in Texas is expected to average 11.1% of the state s total employment in manufacturing. Dallas, Gulf Coast and Austin/Travis LWDAs together account for three quarters of the state s employment in computer and electronic manufacturing. Fabricated Metal Manufacturing Fabricated metal product manufacturing is the single largest contributor to the state s manufacturing in employment; accounting for 15% of total manufacturing employment in The success of this 14 Galbraith, Kate. Boom Promises 20,000 New Jobs but Shortages Too, New York Times, July 14, Yucel, Mine. What Drives Texas?, Federal Reserve Bank of Dallas, June 13, 2012 IHS Global Insights Short term Forecast November 2012 Page 20

21 manufacturing sector is largely dependent upon demand in other industries, such as the housing market or the transportation industry. As the economic crisis destroyed the U.S. housing market and suffocated the demand for the transportation industry output, the fabricated metal product sector shed nearly 23,000 jobs between 2008 and However, the sector started adding jobs back in 2011 and that total employment in fabricated metal product manufacturing is expected to exceed its pre recessionary peak in 2013 reaching 130,514 jobs. As the economic recovery brings back the demand for housing, automobiles and other durable goods, fabricated metal product manufacturing employment will continue to grow. Gulf Coast LWDA accounts for 43% of employment in fabricated metal products manufacturing. North Central, Fort Worth, Dallas and East Texas LWDAs account for another 26% of employment. Fort Worth and Middle Rio Grande LWDAs will show the strongest increase in fabricated metal product employment between 2011 and 2014 growing at the average annual rates of 6.3% and 6.7% respectively. Machinery Manufacturing Machinery manufacturing is the second largest subsector, employing nearly 12% of the manufacturing workforce in Gulf Coast LWDA employs 53% of those workers. Between 2011 and 2014, Gulf Coast machinery manufacturing employment is expected to grow at an annual average rate of 8.3% adding another 13,000 jobs by Some of the major industry s employers include Halliburton Co. and Schlumberger Ltd. Both companies produce oilfield equipment and are located in Houston (Gulf Coast LWDA). Trane Inc, a manufacturer of air conditioning units and compressors, is located in Tyler County, which is part of Deep East Texas LWDA. Caterpillar Inc., the world s largest manufacturer of construction equipment, has recently announced opening of its new hydraulic excavator facility in Victoria, Texas (Golden Crescent LWDA). The new facility is 1.1 million square foot big representing an investment of $200 million 16. Transportation Manufacturing Transportation equipment manufacturing employs nearly 11% of the manufacturing labor force in Texas. Both General Motors (Arlington) and Toyota (San Antonio) operate assembly plants in the state, 16 Caterpillar Celebrates Grand Opening of New Hydraulic Excavator Facility in Victoria, Texas. traders.com/caterpillar INC 4817/news/Caterpillar Inc Caterpillar Celebrates Grand Opening of New Hydraulic Excavator Facility in Victo / IHS Global Insights Short term Forecast November 2012 Page 21

22 as well as a number of other automotive manufacturers (and suppliers). In the outlook, employment in transportation manufacturing is expected to grow at a CAGR 5.6% from , making it one of the healthiest sectors in the state in terms of employment. Both government initiatives and Texas proximity to Mexico (aiding it to become a major NAFTA trading partner) have supported, and will continue to support, the growth in the state s automotive manufacturing industry. SERVICES The services industries will be an impetus for the economy in Texas in the medium term, particularly in education and health services. A study of the demographic profile of the state (specifically, its growth) helps to explain why this is the case. According to the most recent census results, Texas is the second most populous state in the country, after California. The population of Texas reached 25.7 million in However, Texas surpasses California as the fastest growing state. Over , the population in Texas had grown by nearly 25%. By 2020, the state s population is expected to reach 30 million. While most of the population growth remains natural, migration (both domestic and international) as a proportion of the total population growth has increased to over 45%. Domestically, it is the state s robust economy, favorable business climate, and relatively low cost of living which attract the second highest number of migrants (after Florida). Across the border, Texas proximity with Mexico helps to explain why international migration accounts for slightly more than half of the migration to Texas. As projected by Texas State Data Center, the Hispanic population will account for more than half of the state s population by Health Care Services The health services industry is the second largest source of employment for the state of Texas (behind government), and it is also the third fastest for employment growth (behind professional, scientific, and technical services and construction). In 2011, health services made up 10.8% of the employment market (government employment was 20.9%); by 2014, health service employment is expected to grow 2.9% CAGR, IHS Global Insights Short term Forecast November 2012 Page 22