Houston economy gets back on its feet
Ronald Martinez  /  Getty Images file
Houston is still the capital of U.S. oil production, but its impact on the local econmy has declined.
By John W. Schoen Senior producer
updated 10/4/2004 2:52:08 PM ET 2004-10-04T18:52:08

At the sprawling Galleria shopping mall here, business is brisk. Locals and out-of-towners stroll through this Texas-sized, 2.4 million-square-foot retail center, complete with a ground floor skating rink where shoppers can take a break from the relentless, late summer heat of a September day. Local merchants say business is good.

“My sales are great,” said Charlene Keller, who works at a specialty store at the mall.  “I haven’t noticed at all anything wrong with the economy.”

Like much of the rest of the country, Texas is getting back on its feet after a stubborn pullback that began three years ago. But this region experienced more than its share of pain during the latest recession, say local economists. After the boom of the late 1990s, widespread layoffs in the state's high concentration of telecom and high-tech companies sent the Texas economy reeling. The collapse of Enron and other local “merchant energy” firms helped accelerate the downturn, which local economists say has only recently reversed course.

“We have a higher share of industries that were hit hard during the recession, so it took us a little longer to get out of if,” said Barton Smith, a professor at the University of Houston, who follows the local economy.

Though average incomes here have been gradually rising, not everyone has kept pace. Among those laid off during the tech sector downturn, for example, only a quarter have found full-time jobs, according to a recent survey by the North Texas Technology Council. Of those who did find work, 45 percent said they took pay cuts of more than 40 percent.

Some have fallen off the economic ladder altogether. At a busy traffic intersection just a few blocks from the bustling Galleria, Charlie, who would not provide his last name, said that there were jobs to be had, but they just didn’t pay enough to keep a roof over his head.

“It’s day to day,” he said. "If don’t have money for a motel, I go to a shelter. But that’s why I’m trying to stay in a motel where I can acquire some clothes to get a real good job. A real good job to me is $300 or $400 a week.”

Diverse economy
Now, with oil trading at $50 a barrel, you might expect the recent pickup in the Texas economy to accelerate. Throughout the last century, after all, the economy of this region was joined at the hip to the oil industry. Since 1901, when the first Texas gusher erupted on Spindletop hill near the East Texas town of Beaumont, boom times in the oil patch carried the rest of the state to prosperity, and oil busts brought painful recessions.

But times have changed. While Houston is still the capital of the U.S. oil and gas industry, the region has gradually weaned itself from the grip of oil money. As recently as 1982, the oil and gas industry made up about 20 percent of the Texas economy; today it’s about 6 percent, according to the Dallas Fed.

“Houston’s non-energy economic base is very diverse,” said Smith. The list includes everything from NASA to financial services and engineering consulting, from medical and biotech industries to transportation. Houston is home to one of the nation’s largest ports; Continental Airlines has its headquarters here; American and Southwest are based in Dallas.

Major Market Indices

Texas, along with the rest of the Southwest, has also prospered from an ongoing real estate expansion for the past several decades. But real estate is notorious for its own boom and bust cycles, and Texas is still suffering from something of an late 90s overdevelopment hangover. Dallas recently topped the charts with the highest office vacancy rate in the nation, according to Mine Yücel, a senior economist with the Federal Reserve Bank of Dallas

“We still have a lot of empty buildings here, especially in Dallas and the telecom corridor,” she said. “Anecdotally, people are saying we’ve hit bottom. But we have yet to see than in the numbers.”

In the meantime, growth is coming from other parts of the economy. Federal, state and local governments are the biggest employer in Texas, contributing some 29 percent of all wages in the second quarter of this year. And while many local governments around the country are looking to cut back, Houston’s public payrolls have been growing, said Smith.

“Local government has for several years been playing catch-up,” he said. “We had kind of an explosion in growth going back to about 1997, in which we saw rapid expansion in population in Houston. Employment in the local public sector never caught up.”

As a result, he said, school districts in Houston suburbs, for example, are scrambling to fill teaching jobs.

Little help from Big Oil
Make no mistake, oil is still big business in Texas: close to half the oil produced in the U.S. comes from fields in Texas, Louisiana and the Gulf of Mexico. After oil production began its steady decline here in 1970, Big Oil went global. Houston remains the hub of a worldwide energy business that is trying to find and produce oil faster than the global economy consumes it. The recent surge in prices, say some industry analysts, is a sign of just how difficult a job that’s become.

But despite the recent surge in prices, major oil companies here have been slow to invest new money in promising fields around the world. One reason is that, in this part of the country, memories of the late 1990s -– when oil prices crashed to $10 a barrel -- are still fresh.

“It’s been so volatile over the last 20 years or so,” said Jerry Hawsey, a retired executive with Nalco Chemical Co. “They’ve got burned many times when they thought the industry was going to be booming; just a few weeks later, oil prices would start dropping -- and drop quite severely."

Still, there are signs that investment may be coming back. Record profits have freed up cash for global giants like ChevronTexaco and ExxonMobil to invest in new projects and joint ventures; ConocoPhillips recently in invested $2 investment in Russian oil producer LUKOIL.

But now that this region’s economy has diversified away from its historiacal reliance on oil and gas production, higher energy prices actually hurt the Texas economy, according to Yücel.

“Nowwe have a lot more industries who use the higher-priced fuel than produce it,” she said. “Even though we’re the number one producer of oil and gas, we have transportation and other industries that are not benefiting because it costs them.”

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