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. Last Updated: 07/27/2016

It's Big, It's Back: Texas' Economy Is Booming Again

HOUSTON, Texas -- A decade after an economic bust that saw its biggest banks fail and its real estate market collapse, Texas is back.


Throughout the 1990s, the state has led the nation in job creation and is expected to do so again in 1996, although at a more moderate pace due to the slowdown in the national economy.


Signs everywhere are positive. Employment grew by nearly 300,000 jobs in 1995 and should increase by around 250,000, or 2.5 percent, this year, economists say. From 1990 to 1995, the state added 1.2 million jobs, or 14 percent of the national total of 8.4 million.


By comparison, from 1982 to 1986, when oil prices plummeted and the state's economy went into a tailspin, Houston alone lost 221,000 jobs.


Real estate, once plagued by millions of square feet of empty office space built before the bust but unused afterwards, is filling up.


According to real estate consultants O'Connor & Associates, Houston ended 1995 with 80.8 percent of its office space occupied, a level not seen since 1981.


In Dallas, occupancy rates hit 90 percent in some suburban office markets last year, said real estate firm Grubb & Ellis.


"It's been a long and difficult road back for our industry. But maybe it's safe now to talk openly about what was once only a hopeful fantasy -- this market is now fully recovered and back on its feet," said Grubb & Ellis vice president Samuel Haynes.


Only one of the state's ten top banks -- San Antonio-based Cullen/Frost Bankers Inc. -- survived the 1980s bust, but now it is performing well. It earned $4.08 a share in 1995, up from $3.33 the year before, with loan volumes jumping 23 percent to $1.8 billion.


"Given the turbulent economic times we Texans have survived, the coming year suggests we have many reasons to be thankful," economist Ray Perryman said. He predicted the gross state product would increase 3.3 percent in 1996.


Economists attribute the state's robustness to a combination of demographics, low costs, proximity to Mexico and, above all, diversification away from dependence on oil and gas.


A decade ago, according to the state comptroller's office, 25 percent of the Texas economy was driven by energy. Today, that figure is down to 15 percent and is expected to continue falling as energy production in Texas oil fields declines and other industries expand. Employment in high-tech industries has risen from 2 percent in the mid-1970s to 3.4 percent, according to the Federal Reserve Bank of Dallas.


In 1994, the last full year for which figures are available, Texas exports were led by electronic components. It was the first time that oil-related products had not topped the list since the state began keeping export statistics in 1987.


"We're a much more diversified economy today. Looking back, there were some positive things about the bust and one of them was that Texas is no longer hostage to whatever someone in the Middle East wants to do," said Jared Hazelton, director of Texas A&M University's Center for Business and Economic Analysis.


The bust was in many ways responsible for the fundamental changes that have taken place in Texas.


Unused real estate created a perfect haven for companies seeking low-cost facilities, so many firms came here in search of bargains -- and found them.


At the same time, state leaders, desperate to create jobs and escape the eternal boom-and-bust cycles of the energy industry, stepped up efforts to attract new industry.


This paid off particularly in Austin, where technology companies flooded in after the city landed some prestigious computer research consortiums.


Today, Austin, once a sleepy university town dominated job-wise by state government, is home to more than 500 software companies and is among the country's fastest growing cities. The number of jobs in Austin rose 6.5 percent in 1995.


The North American Free Trade Agreement, or NAFTA, which links the United States, Mexico and Canada in the world's largest trade bloc, was a factor too.


NAFTA brought in companies that either wanted to sell products across the Rio Grande in Mexico or establish twin plants to produce goods that could be assembled in Mexican maquiladoras, factories just across the border that take advantage of special trade status.


According to the Texas Department of Commerce, the state exported $60 billion in goods in 1994. More than a third -- $23.84 billion worth -- went to Mexico.


For the first three quarters of 1995, when Mexico's economy collapsed following a peso crisis, exports were down 6.5 percent from the same period in 1994 to $16.2 billion, but were expected to rebound later in 1996 as Mexico recovers, experts said.


Texas' current growth is primarily in the service, retail and construction sectors, said Hazelton. All are benefitting from a population that is, on average, two years younger -- and therefore more free-spending -- than the national average and growing at a faster clip. According to U.S. Census Bureau statistics, Texas was the nation's fastest growing state in the 12 months ending last July. With 18 million residents, it is now second only to California in population.


It is unlikely, said Bill Gilmer, economist for the Federal Reserve Bank of Houston, that Texas will again swing as high or as low as it did in the 1970s and '80s when its fate was tied to the oil price pendulum.


"The 1980s bust was a fundamental misunderstanding about oil and some bad bets on real estate, fueled by energy. (People thought) oil prices were going up and we were running out of oil, but I don't think we'll see that kind of herd mentality again," he said.


Instead, the state should enjoy solid growth for a long time to come, outstripping the national economy by a percentage point or two every year, and perhaps more if Mexico comes back strongly, said University of Houston economist Barton Smith. The down side, said Smith, is that in its rush to diversify, Texas has lost some of the cultural and economic uniqueness that its vast oil fields once gave. The U.S. economy is replacing oil prices as the main driver of the state's economy.


"As we become more diversified, we become more like the rest of the country. The economy will be tied more to national economic cycles," he said.