Economic Outlook — 1997-98 Economic Outlook Each year the City of Austin hosts an Economic Roundtable- an open discussion with a panel of experts on the national, state and local economy. This year we were again fortunate to have as returning panelist David C. Jordan, Tucson Economic Consulting, Jon Hockenyos, Texas Perspectives, and Art Cory, Chief Appraiser, Travis Central Appraisal District. Their insight has been very useful in the preparation of the financial forecast. The following economic outlook is excerpted with permission from Mr. Jordon’s report. Summary: The economic outlook for the city, state, and country indicates the high rates of growth we have experienced over the last 4 years have slowed and will continue at moderate levels through the turn of the century. Austin will not face the same relative economic slowdown as other cities due to its diversified economy. The national economy turned in an unexpectedly strong performance in the fourth quarter of 1996, although recent revisions to this figure seem to have toned down the initial strong growth estimate of over 4.0 percent. Austin’s expansion pace was clearly moderating in 1996, but the preliminary data being reported for the area was probably overstating the rate at which its growth rate was decelerating. Now with the national economy expected to enter a period of slower, more stable, “full employment” type of growth, the question becomes where will Austin’s economic fortunes fit in this environment. The Austin area’s advantages are still many, including: an educated, skilled work force, being in a state with generally favorable business tax laws, a base of quality, highly competitive manufacturing companies, a major university with accompanying research support organizations- both public and private- and we haven’t even mentioned the climate or living ambiance yet. Despite all of the local area advantages mentioned in the above paragraph, there are other considerations in giving a balanced inventory of factors likely to impact the local economy and how it will evolve in the slower national economic environment. Principally among these is that other areas of the country, eager to share in some of Austin’s prosperity, are actively and aggressively courting firms Austin normally offers a locational advantage to. Additionally, local land and housing prices have risen considerably in the last several years and Austin clearly faces tight labor markets for skilled workers, just as is also occurring in many other parts of the country. With all of these forces in play it is still Tucson Economic Consulting’s projection that the Austin economy will continue to expand, but at more moderate rates than experienced over the last four years. Total nonagricultural employment growth rates should average 3.0 to 3.5 percent over the next decade. They may dip below this briefly in 1997 depending upon how fast the area adjusts to coming down off the prior mini boom. 16% NONAG EMPLOYMENT GROWTH AUSTIN MSA 12% 8% 4% 2.8 3.0 3.2 3.3 3.3 0% (4%) 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 Source: Tucson Economic Consulting Austin has clearly outperformed the nation as well as the state as a whole over the last several years, even with the national economy having finally having broken free in 1994 from its anemic recovery Economic Outlook — 1997-98 growth following the 1991 recession. Austin’s favorable relative economic performance reflects the many locational advantages of the area in terms of new high-tech business expansions and its own “cyclical rebound” from the prior bust in 1986-97. Moving beyond the current transition from a “cyclical rebound” to more stable rates of expansion, Austin’s economy will be faced with a national market which Data Resources Inc. (DRI) projects to experience modest growth rates over the next decade. Additionally, it is the nature of regional markets to lose some of their favorable locational advantages as they grow rapidly and local labor and land prices rise. Austin of course still retains many advantages for high tech firms considering where to locate or expand production as is inherent in TEC’s forecast of manufacturing employment for the area. Accompanying the expected manufacturing sector increases will be the local construction expansion which, though it may begin to grow less rapidly, is still expected to support an on-going local expansion. Finally, state government employment will most likely resume rising and should contribute more to growth. On net then, the Austin area should experience more modest trend rates of growth in employment (3.2 percent between 1996 and 2006) than it has experienced historically. While these forecast rates may seem slow for the Austin area, they are expected to be occurring in the context of a national economy in which total nonagricultural employment for the U.S. will only be averaging a 1.4 percent increase annually during the upcoming decade. By these standards then, Austin’s projected growth rates should be judged as “robust” given the environment. Manufacturing A key element in this long-term forecast for the Austin MSA is the prospect for manufacturing. With an increasing number of high-tech firms in the semiconductor, computer and communications equipment industry, the area is well positioned to benefit from the strong long-term national outlook for these industries expected by DRI. While 1997 may be a slow year for these industries for Austin (actual slowdown being in 1996) 1998 through 2002 should pick up as the new Samsung and Dell plants add to the local growth. Thousands MANUFACTURING EMPLOYMENT 80 AUSTIN MSA 60 40 20 0 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 88 89 90 91 92 93 94 95 96 Source: Tucson Economic Consulting With slower expansion in the national economy (and particularly for certain markets such as autos, homes, etc.) and intense competition from Europe, Japan and several emerging economies in Asia, the Economic Outlook — 1997-98 successful manufacturing industries in Austin will feel these effects, though they are still expected to expand and prosper. Even with manufacturing plant expansions at several of Austin’s larger major high- tech employers helping to cushion the local industry from feeling the full effects of the competitive international suppliers and the local constraining factors mentioned previously (i.e., tight labor markets, land prices, etc.), overall manufacturing growth rates are expected to moderate. Thousands MANUFACTURING EMPLOYMENT 100 20% AUSTIN MSA G J R O O B W S 4.5% 4.7% 4.4% T 3.7% 3.2% H 20 0% 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Source: Tucson Economic Consulting Beyond 2002, the current forecast for Austin’s manufacturing calls for fairly modest average rate of growth 2.5 percent annually. While these growth rates may seem anemic compared to past manufacturing growth in Austin, they compare very favorably with the overall national manufacturing growth during this period. For the U.S. the DRI forecast calls for overall manufacturing employment to actually decline during this time. Additionally, by 2002, the manufacturing sectors in Austin will have grown to over 88,00 employees so even a 2.5 percent annual growth means over 2,000 new jobs for the area in manufacturing each year. Austin’s durable manufacturing is dominated by firms in electronic components, computers and communication equipment. Austin’s advantages for the high-tech firms in the semiconductor, computer and communications equipment industries are many. These include: an educated work force, a pleasant place to live, quality research support through the University of Texas and other organizations (i.e., Sematech), favorable labor costs and reasonably priced living costs, at least compared to some other competitive areas for these “high-tech” industries. As evidence of the validity of the underlying logic behind TEC’s outlook for the high-tech durable manufacturing in the area, witness the recent decisions by several firms to expand their local facilities here as will as other new firms locating new plants in this central Texas MSA. While the current DRI forecast for the U.S. electronic components' industries are robust both over the near and long-term, it still calls for a moderation in growth rates in the long-term (2001 and beyond). Consequently, the outlook for Austin’s durable manufacturing sector for the beginning of the next Century, after the last planned expansion in the new Samsung plant in 2001, also begins to show more moderate growth rates. Government The present long-term outlook for total government employment in the Austin area is a little lower than last year’s through 2002. This is because of the unexpected decline in the state government employment in the area in 1996. Beyond 2002 though the total government sector forecast for Austin now is actually slightly higher as state government operations should expand to not only meet the population needs of the second largest state but also as further responsibilities and funds are shifted from Washington. Economic Outlook — 1997-98 Thousands GOVERNMENT EMPLOYMENT AUSTIN MSA 200 150 100 50 0 1982 1986 1990 1994 1998 2002 Source: Tucson Economic Consulting 2006 With continuing budget concerns at the federal level, it is likely that Federal government employment will continue to be under pressure to shrink or at least not expand despite Austin’s growing population. Accordingly, TEC has lowered somewhat the current forecast for this governmental function in Austin. On net then, the current forecasts for the government sector levels over the next decade have not changed dramatically from the 1996 TEC forecast except in the path - less growth in the first few years and more later in the decade. Construction The pace of economic activity and population growth in the Austin area seems to be downshifting now to more modest rates than the past four years. Consequently, the accompanying outlook for the area’s construction sector should also reflect this development. With 1996’s employment levels reaching close to their prior peak in 1985 and with the overall economy beginning to cool and with some of the catch-up in multi-family housing behind us- it is likely that this sector will show more modest rates of increase. Multi-family permits have gone from low or non-existent levels just a little over three years ago to levels of over 2,000 new permits per quarter in the second half of 1995, dropping off to lower levels in 1996. However, with still solid population growth and continued immigrates of new workers, the outlook for multi-family permits is to continue expanding to fill the housing needs of both new immigrants and the demand from the natural growth component of the ever larger current population base. With prices of single family homes having moved up considerably over the last several years, this will also impact favorably the demand for the more affordable multi-family dwellings. Single family permits for Austin remained strong through the first three quarters of 1996. However, with prices rising it is not likely that the permits' levels will increase to much higher levels over the next few years. On net then, with strong local population growth, continuing income advances and as long as mortgage rates remain reasonable, the current level of single family permits should be sustainable over the longer run as seen in the chart below. Economic Outlook — 1997-98 Thousands 30 HOUSING PERMITS 25 AUSTIN MSA 20 15 10 5 0 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 Source: Tucson Economic Consulting Multi-Family Single-Family In summary, the construction sector is expected to continue building on the clear gains it has made since 1989 when the bottom of its long decline from the 1985 peak occurred. Over the next decade it should continue rising to meet the needs of the expanding population, commercial and governmental sectors in the local economy. From a plausibility perspective, please bear in mind that the Austin MSA of 2006, with a projected population of nearly 1.4 million, will generate more on-going construction needs to serve the existing population base than it did twenty-one years earlier in 1985 when its population was only about half as much at 760,000. Population Population growth in the Austin MSA has risen at a faster pace through the 1990’s, compared to the late 1980’s, as anticipated in earlier TEC reports. During the 1987 to 1988 time, a booming national economy and troubles locally caused a dramatic reversal in the earlier 1980’s large influx of workers. Now, that the economic fortunes of Austin are again outstripping the Nation’s an increase of new migrants into the area has once again begun to lift the population growth rates locally, with 1995 estimated to have grown by 3.3 percent over 1994. Thousands 1,400 POPULATION 10.0% P AUSTIN MSA O G P R U O L W A 2.9 2.9 2.8 2.8 2.7 T T H I O N 0 0.0% 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 Source: Tucson Economic Consulting Beyond the recent surge in the Austin economy though, the rate of growth in population should begin moderating on a long-term trend basis in synch with the slower pace of overall economic growth for the area. This should occur as levels of net migration peak at or near their recent level of slightly over 22,000 estimated for 1995. Additionally, the natural increase component of local population change is also anticipated to remain stable at its current level of about 10,000 annually for most of the 1990’s. This stability should occur despite the growing population base because of an anticipated continued decline in overall birth rates locally just as is occurring nationally.
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