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The Texas economy: lessons for economic diversification.

The increased volatility of the Texas economy during the 1980s has spurred discussion about industrial diversification as a goal of state policy. With fluctuations in the energy sector identified as a primary cause of state economic instability, many policy makers define diversification as growth in anything but energy. This view assumes that the severity of a recession within a state is related solely to the extent of diversification in the state's industrial base, but in fact the situation is considerably more complex. Individual recessions, in addition to differing in their severity, display unique patterns of industry responses. For example, at the national level the mining industry gained 84,000 jobs during the 1973-75 recession, but lost 145,000 jobs during the 1981-82 recession. Clearly, a state like Texas that had a significant share of its employment in this industry experienced vastly different responses to the two recessions even if the structure of its industrial base remained unchanged. In addition to the different industry responses at the national level, a state may also experience differential responses in each state industry. The plants located within a state may bear the brunt of the industry's production cuts in one recession but be spared in another.

Negative growth of a state during a national recession can be related to a high concentration of state employment in those industries most affected by a national recession, poor performance of the state's industries relative to those industries at the national level, the severity of a recession, or a combination of the above. Mead and Ramsay have extended the shift-share model to provide a means for introducing these variables in the analysis of the differential response of a state to two recessions.' To analyze the experience of Texas-a state that responded quite differently to the recessions of 1973-75 and 1981-82-we used their approach, incorporating seasonally adjusted employment data for 21 economic sectors (which account for about 95 percent of total employment in the state). Results indicate that:

* Total employment in the Texas industrial base grew from 4.2 to 6.2 million between 1973 and 1981. Increases in employment were most significant in retail trade, services, wholesale trade, and state and local government-these four sectors accounted for more than 60 percent of total employment in the state during both recession periods.

* Texas gained 149,230 new jobs (in the sectors selected for this study) between the peak and trough of the first recession period (1973-75), but lost 24,660 jobs between the peak and trough of the later recession (1981-82).

* A state has a favorable industrial mix when it specializes in industries that are growing faster than the average rate of employment in the country as a whole. The industrial mix in Texas in 1981-82 was less favorable than its industrial mix in 1973-75. The main Texas economic sectors-retail trade, wholesale trade, and state and local government-had positive rates of growth in the United States during the 1973-75 recession period, but experienced negative rates during the 1981-82 recession. By contrast, services showed positive rates of growth in the United States during both recession periods.

* A state has a competitive industrial base when its industries are growing faster than the same industries in the United States. Texas had a more competitive industrial mix in die 1973-75 than in the 1981-82 recession period. Retail trade, services, wholesale trade, and state and local government grew- faster in Texas than in the United States during both recession periods. However, differences between the rates of growth in the Texas industries and those in the same industries at the national level were smaller during the later recession.

What can be learned from previous recessions for future economic policy in Texas? The absolute value of the state's industrial base and the dynamics of development of Texas industries can be altered. But the state has no control over either the behavior of the national economy or the dynamics of the national industrial base. Like Mead and Ramsay, we found the largest effect to be exogenous and therefore beyond the scope of the state policy makers to influence. The severity of the later recession and its negative impact on the rate of growth of employment of almost every sector of the U.S. economy proved die stronger exogenous influence in the slowdown of the Texas economy. While 7 sectors of 21 had positive growth rates of employment in the United States during the 1973-75 recession period, only services and finance, insurance, and real estate experienced positive growth rates in the 1981-82 recession period. Correlation analysis between changes in employment in the United States and in Texas indicates that the performance of industrial sectors in Texas during both recession periods was strongly correlated with the performance of those industries at the national level during the same time frames.

Employment differences in the state between recession periods were explained by an increasing specialization in sectors that showed positive rates of growth in the United States during the 1973-75 recession period, but were badly affected by the 1981-82 national economic downturn (retail trade, wholesale trade, and state and local government). These sectors showed negative rates of growth not only at the national level, but also in Texas during the 1981-82 recession period. A vigorous growth of the service sector, in the nation and in Texas, and a greater participation of this sector in the state's industrial base could not compensate for the negative impact upon the Texas economy of a larger participation of sectors that showed negative rates of growth in the United States and slower rates of growth in Texas during the later recession (i.e., retail trade, wholesale trade, and state and local government).

The state economic development policy since the second half of the 1980s has been dominated by the belief that the dependency of the state economy on the energy industry made the state vulnerable to low oil prices. However, our dependency on the energy sector in fact helped us during the earlier recession when this sector experienced the highest rate of growth in the United States. Furthermore, oil field machinery, petroleum refining, mining, and chemicals-the key energy industries-accounted for 5.8 percent of total state employment in 1973, while wholesale trade, retail trade, services, and state and local government shared 55.2 percent of total employment in Texas during the same year. More recent statistics indicate that the employment share of the energy sector fell to 4.6 percent in 1989, while employment in the four previously mentioned sectors increased to 62.3 percent of the total during the same period. The energy sector accounted for about 19.8 percent of GSP in 1989; the share of the four top employers was 36.8 percent.

Our study stressed the importance of exogenous factors as explanatory variables in the slowing of the Texas economy during the 1981-82 national recession. In view of these findings, perhaps the assumption that the slowdown of the Texas economy in the 1980s was solely produced by the stronger specialization of the state in the oil industry should be reevaluated. Although the slowdown of the energy sector in the Texas economy affected the growth of other sectors, such as retail and wholesale trade and state and local government, our study indicates that the increasing specialization of the state in these sectors and the increasing dependency of these sectors on the national economy also played an important role in explaining the state's response to the national recession during the periods of analysis.

Elsie Echeverri-Carroll

Economist

and

M. E. T Scioli

Research Assistant

Bureau of Business Research

Notes

1. A.C. Mead and G.A. Ramsay, Analyzing Differential Responses of a Region to Business Cycles," Growth and Change 13 July 1982).

2. For a detailed description of the results, consult: E.L. Echeverri-Carroll and M.E.T. Scioli, "Differential Responses of Texas to the Recessions of the 1970s and 1980s," Working Paper 1990-01, Bureau of Business Research, University of Texas at Austin, 1990.
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Author:Echevarri-Carroll, Elsie; Scioli, M.E.T.
Publication:Texas Business Review
Date:Dec 1, 1990
Words:1329
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