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The Texas economy: manufacturing is the key to recovery.

The Texas Economy: Manufacturing Is the Key To Recovery

As the Texas economy continues to recover, the economic outlook for 1989 and beyond is promising. Efforts to attract a variety of new activities and revitalize existing ones have begun to improve the economy after the trough of 1987. In fact, economic diversification and promotion of sectors of the economy with value-added emphases - activities essential for recovery - should have lasting effects on business optimism and future investment in Texas.

The performance of the two major economic indicators - real gross state product (GSP), the state counterpart of the nation's real gross domestic product, and nonfarm employment - help us to assess the recent economic recovery. The annual growth rate of real GSP in Texas in 1985, the peak before the drastic collapse of oil prices in early 1986, was 3.6 percent. In 1986 and 1987 real GSP grew at annual rates of -2.5 percent and -1.9 percent, respectively. According to the fall 1988 forecast of the Texas Comptroller of Public Accounts, the annual growth rate of real GSP in 1989 will be 2.4 percent, and further recovery will translate into an average annual growth rate of 3.5 percent for the 1990-1992 period. Similarly, total nonfarm employment, with an annual growth rate of 2.6 percent in 1985, experienced growth rates of -1.5 percent and -1 percent in 1986 and 1987. The forecast for 1989 indicates that nonfarm employment will rise with an annual rate of 1.4 percent and an average annual growth of 1.9 percent for the 1990-1992 period.

Recession and Recovery

Various sectors of the Texas economy experienced the recent economic downturn differently. Some sectors even had positive growth in employment from 1985 to 1987: services; government; and transportation, communication, and public utilities. As shown in the accompanying table, the average annual growth rate of employment in the services sector was 3 percent, the highest growth rate among the sectors of the Texas economy for the period from 1985 to 1987. Major contributors to this sector are medical and other health services and business services. The impressive growth in the health and medical services reflects the activity of the medical research centers in Texas, while business services growth can be attributed in part to the expansion of high-tech manufacturing industries and their demand for business services. The government sector also had a positive annual growth rate in employment between 1985 and 1987.

On the other hand, the manufacturing sector experienced a significant downturn from 1985 through 1987. The upturn in this sector, which began in 1988, is in part the result of higher growth in the durable goods industries.

While the overall Texas economy continues to recover, sectors of the economy such as mining, construction, finance, and real estate are still struggling to rebound. As a result of the decline in oil prices, the most hard-hit sector in the Texas economy has been the mining sector. More than 95 percent of mining activities in Texas are related to oil and gas extraction, which experienced an employment decline of over 16.3 percent per year between its peak in 1985 and its trough in 1987. A recovery in this sector is not predicted unless there is a greater and sustained increase in world oil prices (and there is no reason to believe the most recent increase is permanent) or the U.S. government adopts new policies designed to stimulate domestic oil and gas extraction.

Manufacturing and the Recovery

One of the main forces behind the current economic upturn and recovery in the Texas economy is the increase in manufacturing activities. The devaluation of the dollar after 1985 created opportunities for Texas manufacturing industries to become competitive not only in foreign markets but also in domestic markets. In 1987 this sector generated about $44.2 billion (1982 dollars) of real gross state product, and it is predicted that by 1992 this sector will generate $50.6 billion. This amounts to 16.3 and 18.7 percent of the total gross state product in the respective years. The manufacturing sector is second only to the trade sector in terms of contributing to real gross state product.

The economic importance of manufacturing industries is not, however, evenly distributed among different industries. For instance, in 1987 about 62 percent of manufacturing employment and 70 percent of the real GSP of the manufacturing sector were generated by six industries: nonelectrical machinery, electronics and electronic equipment, chemical and allied products, petroleum and coal products, food and kindred products, and transportation equipment.

Employment in the electronics and electronic equipment industries is predicted to achieve the highest average annual growth rate of these industries for the period of 1987 to 1992 - 3 percent. This means that high-tech manufacturing is the key to future manufacturing growth and expansion, which in turn will promote economic growth throughout the Texas economy. Among the durable goods, nonelectrical machinery is expected to have a 2.9 percent annual growth rate in employment during the 1987-1992 period. Of the nondurables, the plastics industry will have the highest annual growth rate of employment, and printing and publishing will achieve the second highest growth rate.

The industries that fared the worst in terms of employment during the 1985-1987 period were those linked to oil and gas extraction: nonelectrical machinery, with a -13.6 percent average annual growth rate in employment; primary metals, with -10.1 percent; fabricated metals, with -6.9 percent; and petroleum products, with -5.7 percent. By 1992, however, it is predicted that these industries will show a positive annual growth rate in employment.

Other industries showing large downturns are lumber and wood, with a -8.6 annual growth rate in employment, and stone, clay, and glass, with -6.3 percent. These sectors were mainly affected by the decline in construction activity, but they are predicted to recover during the 1990-1992 period. The textile and apparel industry experienced a significant downturn in employment as a result of the high penetration of imports into the United States, and this decline will carry over to the year 1992.

Except for a few industries, the manufacturing sector will recover and will experience some expansion by 1992. According to the 1989 Directory of Texas Manufacturers, published by the Bureau of Business Research, manufacturing firms operating in Texas during 1988 totaled 16,329, 7 percent higher than the comparable number for 1987. This can be interpreted as one indication that the manufacturing sector is expanding.

In summary, the manufacturing sector has been the main force behind the economic recovery in Texas, and it is predicted to be one of the main forces for economic expansion in the future. The restructuring of the Texas economy has, however, made it more sensitive to changes in the U.S. economy, so a national recession would have an adverse effect on the recovery and expansion in Texas.

Mina Mohammadioun Research Associate Bureau of Business Research
COPYRIGHT 1989 University of Texas at Austin, Bureau of Business Research
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1989 Gale, Cengage Learning. All rights reserved.

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Author:Mohammadioun, Mina
Publication:Texas Business Review
Date:Jun 1, 1989
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