Fiona Sigalla

English

Research Papers in Economics

INSIDE:
Is Telecom Disconnected
or Just on Hold?
•
Financial Globalization:
Manna or Menace?
Issue 1 January/February 2002
After a decade of strong employment growth, the
Texas economy weakened significantly in 2001. Texas’
economic growth, which began decelerating in early
2000, continued to slow throughout 2001. A sharp
downturn in high-technology industries led to a de-
cline in manufacturing activity and weak growth in
the service sector. Demand for Texas products dropped
on the national and world markets. Mexico, an im-
portant Texas trading partner, entered recession,
which sharply reduced activity along the border.
By the end of the summer the Texas economy
was vulnerable to an external shock. That shock came
on Sept. 11. The U.S. economic slump and subse-
quent energy price decline worsened the outlook for
Texas’ economic growth. The energy industry quickly
cut back activity, and the airline and travel industries
laid off thousands of workers. The Texas economy
has decelerated rapidly, and it is possible that it has
been dragged into recession along with the nation.
What Has Made Texas’ 
Economy Unsinkable?
Texas has a history of strong employment
growth, which often continued even when the
At the beginning of 2001, federal spending was lower and revenues were
higher, relative to GDP, than in recent experience. The resulting surplus was
paying down the federal debt. Projections indicated that the entire debt
would eventually be retired if tax and spending laws remained unchanged.
Three major events during 2001 altered these budgetary patterns. In June,
a new tax law brought sweeping income tax reductions. A recession, induced
or deepened by the Sept. 11 terrorist attacks, further reduced revenue and
pushed up spending. The budgetary response to the attacks also increased
spending on defense, homeland security and recovery. As the policy emphasis
shifted from preparing for long-term needs to meeting current challenges, the
budget moved back into (or close to) deficit.
The Unsinkable Texas 
Economy Takes on Water
The Federal Budget:
What a Difference a Year Makes
FEDERAL RESERVE BANK OF DALLAS
Southwest Economy
(Continued on page 2)
(Continued on page 6)
. . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . .U.S. economy was in recession. Employ-
ment growth in Texas has increased each
year since the energy bust of 1986.
Many factors have led to the resilience
of Texas’ economic expansion over the
past 15 years. Texas has a strong portfolio
of diversified industries selling to global
markets. While the state is no longer de-
pendent on the energy industry for eco-
nomic growth, the energy industry makes
Texas’ portfolio of industries special.
Some of the state’s industries benefit from
high oil prices, and others benefit from
low oil prices. High technology, petro-
chemicals, plastics and other industries
have diversified the economy, buoying
economic growth when oil prices weaken.
Other factors stimulate the state’s
strong economic growth as well. Favor-
able government policies, such as rela-
tively few regulations, make it easier for
companies to start and grow. As a right-
to-work state, Texas has a smaller share
of unionized workers than much of the
country. Texas also has a relatively low
cost of living, including low land and
construction costs.
Texas’ employment growth typically
outperforms the nation’s by roughly 1
percentage point (Chart 1).
1 The unsink-
able nature of the state’s economy
means that economic growth had a long
way to slow before entering recession.
Deceleration Accelerates in 2001
Texas job growth has been deceler-
ating since early 2000. After increasing
2.6 percent in 2000, employment growth
in 2001 rose just 0.9 percent. Texas pri-
vate employment fell each of the last
four months of the year. The first four-
month consecutive drop since 1986.
Manufacturing employment has been
falling since December 2000, primarily
because of cutbacks at high-technology
firms. Manufacturing employment accel-
erated its decline in fall 2001 and was
joined by broad-based decreases in the
service sector.
While much of the recent downturn
has been related to job cuts at transporta-
tion and tourism-related businesses such
as hotels, declines have been across the
board in nearly all service-related indus-
tries. Employment at firms that supply
temporary workers has been particularly
weak, decreasing 4.8 percent in 2001.
There are several indications that
economic conditions are likely to worsen
before they improve. The U.S. economy,
Mexican economy, construction activity,
and the high-technology and energy
industries have all been pillars of strength
for the region but are now languishing.
One or more of these sectors will need
to recover before Texas economic activ-
ity picks up.
Global Markets Are Weak. Texas pro-
ducers sell to the world, and weakening
world economies have reduced demand
for Texas products. Texas exports have
fallen 25 percent since August 2000; ex-
ports to most major markets have de-
clined (Chart 2).
2 FEDERAL RESERVE BANK OF DALLAS   SOUTHWEST ECONOMY   JANUARY/FEBRUARY 2002
Texas has a strong 
portfolio of diversified
industries selling to 
global markets.
Texas Employment Growth Usually Exceeds Nation’s
Percent change (December-over-December)
Chart 1
SOURCES: Bureau of Labor Statistics; Federal Reserve Bank of Dallas.
United States Texas
–2
–1
0
1
2
3
4
5
’01 ’00 ’99 ’98 ’97 ’96 ’95 ’94 ’93 ’92 ’91 ’90Economic growth in Mexico remains
very important to the Texas economy. The
Mexican economy has weakened along
with the U.S. economy and is expected
to remain that way until the U.S. econ-
omy rebounds. Maquiladora activity—
manufacturing plants along the Texas–
Mexico border—has dipped sharply
(Chart 3). This decline in maquiladora
employment, along with a drop in cross-
border traffic, has dampened activity in
Texas’ border cities. Difficulty crossing the
border is discouraging day crossing and
reducing sales at border-area retailers.
Weak economic conditions in Texas
have reduced the number of Mexican
migrants coming to the state and encour-
aged Mexicans in Texas to return to
Mexico. While this labor pool reduction
has helped the Texas labor market adjust
to weakening economic conditions, on
net the economic woes of Mexico and
other Texas trading partners are a nega-
tive for the state.
Energy Industry Deteriorates. Energy
activity weakened significantly in 2001 in
response to lower energy prices. Natural
gas prices started 2001 at very high 
3 FEDERAL RESERVE BANK OF DALLAS   SOUTHWEST ECONOMY   JANUARY/FEBRUARY 2002
The U.S. economy,
Mexican economy,
construction activity, 
and the high-technology
and energy industries
have all been pillars 
of strength…but are 
now languishing.
Weak International Economic Conditions Are Hurting Texas Exports
Index, first quarter 1997 = 100*
Chart 2
*Seasonally adjusted.
SOURCES: Massachusetts Institute for Social and Economic Research; Federal Reserve Bank of Dallas.
Other
12%
European
Union
11%
Asia
16%
Latin
America
5%
Canada
11%
Mexico
45%
70
200
190
180
170
160
150
140
130
120
110
100
90
80
1997 1998 1999 2000 2001
Other
Asia
European Union
Canada
Mexico
Total
Latin America
Share of Texas Exports
Maquiladora Employment Dives
Employment growth (percent)*
Chart 3
*Quarter-over-quarter, seasonally adjusted, annualized rate.
SOURCES: Instituto Nacional de Estadística, Geografía e Informática; Federal Reserve Bank of Dallas.
–30
–20
–10
0
10
20
30
’01 ’00 ’99 ’98 ’97 ’96 ’95 ’94 ’93 ’92 ’91 ’90levels but fell by nearly two-thirds—to 
a more normal range—as the U.S. econ-
omy cooled. A drop in demand from
weakened world economies also resulted
in oil prices falling by roughly one-third.
While energy activity dropped pre-
cipitously, it has not declined as much as
would be expected with a one-third cut
in the domestic rig count.
2 Recent oil
industry mergers have left companies
flush with cash and ready to invest.
Deep drilling continues in the Gulf of
Mexico, propping up demand for oil 
services. Further, the oil industry may 
be reluctant to lay off workers because
cuts that occurred when prices fell in
1998–99 are now considered to have
been too deep.
Construction Activity Drops. After
growing strongly in the late 1990s, con-
struction activity has been retrenching
since early 2001. Contract values have
weakened, and construction employment
began to slide in late summer. Office
vacancy and industrial availability rates
have been rising, and reports of over-
building in some office and high-priced
home markets suggest construction in-
vestment will continue to slow.
Further, heavy construction along
the Gulf Coast is unusually weak. Petro-
chemical activity would normally accel-
erate with falling energy prices, but weak
demand and serious overcapacity are dis-
couraging investment.
3
What Triggers Texas Recessions?
Recent Texas recessions have been
accompanied by either a drop in oil prices
or a U.S. recession, although neither of
these events alone is sufficient to trigger
a recession in the state. The coincident
index, which measures the Texas busi-
ness cycle, shows that Texas has had
two recessions—at least two quarters of
negative growth—over the past 30 years
(Chart 4 ).
4 During this same time Texas
experienced two growth recessions—
periods of growth very close to zero.
The characteristics of these four periods
are described below.
September 1974 to March 1975.
During the growth recession of the mid-
1970s, a U.S. recession dragged down
Texas employment growth. The 1973
OPEC oil embargo spurred a tripling of
oil prices. Texas typically benefits from
high oil prices, and the Texas rig count
increased moderately during this period.
However, wage and price controls lim-
ited the benefit to the Texas economy of
the higher oil prices.
March 1982 to April 1983. The early
’80s recession was sparked by a decline
in energy prices and a sharp U.S. reces-
sion. This recession started the bursting
4 FEDERAL RESERVE BANK OF DALLAS   SOUTHWEST ECONOMY   JANUARY/FEBRUARY 2002
Coincident Index Shows Texas Economic Activity 
Declining Since July 2001
Percent*
Chart 4
*Month-over-month, seasonally adjusted, annualized rate.
NOTE: Index is composed of employment, the unemployment rate and the gross state product.
SOURCE: Federal Reserve Bank of Dallas.
Coincident index
Texas recession
Texas growth recession
–8
–6
–4
–2
0
2
4
6
8
10
12
’01 ’99 ’97 ’95 ’93 ’91 ’89 ’87 ’85 ’83 ’81 ’79 ’77 ’75 ’73
Recent Texas recessions
have been accompanied
by either a drop in 
oil prices or a 
U.S. recession.of the Texas energy bubble. The early
’80s recession led to a loss of 208,000
jobs in Texas, or roughly 3.3 percent of
employment.
September 1985 to February 1987.
The mid-’80s recession, commonly referred
to as “the bust,” was the result of sharply
lower oil prices. Oil prices plunged by
two-thirds, falling from $37 to about $12
per barrel. This recession was compli-
cated by the elimination of tax incentives
that had stimulated overinvestment in real
estate. The bust resulted in the loss of
another 207,000 jobs, or 3.1 percent of
employment.
December 1990 to February 1992.
Texas economic growth was again dragged
down by a U.S. recession in the early
1990s; however, high energy prices helped
keep Texas economic activity afloat.
Is Texas in Recession Now?
Several economic indicators, includ-
ing Beige Book reports and the Texas
Leading Index, suggest that Texas may
have entered a mild recession. A fore-
casting model based on the leading
index and past employment growth esti-
mates the recession started in the third
quarter of 2001 and will result in a loss
of roughly 90,000 jobs, or just under 1
percent of employment.
The Texas Leading Index, which has
been falling since March 2000, dropped
sharply in September 2001 (Chart 5 ).
While the index showed improvement
toward the end of the year, most com-
ponents remain below the August level
(Chart 6 ). The recent strength in the
index suggests economic growth will
pick up, perhaps as early as the second
quarter of 2002.
Summary and Outlook
Texas’ economic growth began to
decelerate in early 2000 and its decline
accelerated in 2001. The state typically
grows faster than the nation—by roughly
1 percentage point—so economic activ-
ity had a long way to slow before reach-
ing negative territory. A U.S. recession
and low energy prices may have dragged
Texas into recession. But despite a sharp
drop in the Texas Leading Index, at
worst a recession is likely to be less than
half as bad as the recessions of the 1980s.
—Fiona Sigalla
Sigalla is an economist in the Research
Department of the Federal Reserve Bank of
Dallas.
Notes
The author thanks Keith Phillips, Bill Gilmer, Mine Yücel, Steve Brown,
Pia Orrenius, Erwan Quintin, Jason Saving, Lori Taylor and Frank
Berger for contributing to this economic assessment and outlook.
Anna Berman and Charis Bosell provided excellent research assis-
tance.
1 Fiona Sigalla and Mine K. Yücel (2001), “Another Great Texas Boom,”
Federal Reserve Bank of Dallas Southwest Economy, Issue 1, Janu-
ary/February, pp. 1–5.
2 Robert W. Gilmer (2002), “Slow Job Growth in Houston in 2002,” Fed-
eral Reserve Bank of Dallas Houston Business (January).
3 Mark Eramo, Robert W. Gilmer and Arved Teleki (2001), “Petrochemi-
cal Outlook Still Bleak for 2002,” Federal Reserve Bank of Dallas
Houston Business (November).
4 The coincident index is based on movements in employment, the
unemployment rate and real gross state product. The methodology
behind the construction of the index is described in Alan Clayton-
Matthews and James H. Stock (1998–99), “An Application of the
Stock/Watson Index Methodology to the Massachusetts Economy,”
Journal of Economic and Social Measurement, vol. 25, issue 3/4, 
pp. 183–233.
Leading Index Suggests Continued Downturn in Texas Economic Activity
Employment (in thousands) Texas leading index
Chart 5
SOURCES: Bureau of Labor Statistics; Federal Reserve Bank of Dallas.
Texas recession
Texas growth recession
3,500
10,500
9,500
8,500
7,500
6,500
5,500
4,500
’01 ’99 ’97 ’95 ’93 ’91 ’89 ’87 ’85 ’83 ’81 ’79 ’77 ’75 ’73
Employment
85
90
95
100
105
110
115
120
125
130
Leading index
Net Contributions of Components to Change in Leading Index
(September–December 2001)
Chart 6
NOTE: Help-wanted index not available for November and December 2001.
SOURCE: Federal Reserve Bank of Dallas.
Net change in leading index
Texas value of the dollar
U.S. leading index
Real oil price
Well permits
New unemployment claims
Texas Stock Index
Help-wanted index
Average weekly hours
–5 –4.5 –4 –3.5 –3 –2.5 –2 –1.5 –1 –.5 0 .5 1
Percent
–4.05
.25
.60
–.95
–.65
–1.64
.36
–1.06
–.96
5 FEDERAL RESERVE BANK OF DALLAS   SOUTHWEST ECONOMY   JANUARY/FEBRUARY 2002

The unsinkable Texas economy takes on water

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The unsinkable Texas economy takes on water

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