Some analysts have predicted another economic downturn practically since the nation emerged from the pandemic-driven recession of 2020. But as dire predictions surge and wane, Texas’ economic fundamentals help it face the prospect of any recession from a position of relative strength.
For the Texas Comptroller of Public Accounts, job one is closely monitoring economic information and trends. This scrutiny shapes forecasts including the Biennial Revenue Estimate that Comptroller Glenn Hegar issues before each regular legislative session.
“We anticipated slower growth in our revenue estimate, but we also know that Texas’ economy is better positioned than other state economies and the national economy to absorb slower growth rates,” says Hegar.
A September report by the Federal Reserve Bank of Dallas (Dallas Fed) says Texas job growth fell below the U.S. rate in August, the first time that has happened since November 2022. Overall economic activity was stronger, however, and looking at December 2022 through August 2023, Texas job growth outpaced the U.S. (Exhibit 1).
|Sector||U.S. (percent)||Texas (percent)|
|Trade, transportation and utilities||0.4 2.2|
|Professional and business services||1.3 1.6|
|Education and health services||4.2||4.7|
|Leisure and hospitality||3.1||4.8|
|Oil and gas extraction and mining services||5.2||9.2|
Note: Seasonally adjusted annual rate.
Sources: Bureau of Labor Statistics; Texas Workforce Commission; Federal Reserve Bank of Dallas
Along with many others who watched the Federal Reserve (the Fed) raise interest rates, the Comptroller’s office in January predicted a mild recession for Texas. The Comptroller’s office has since pulled back from that forecast, also in line with other economists, as Hegar expressed cautious optimism.
While the uncertainty made a hash of traditional economic expectations, Texas’ strengths remain clear: a resilient workforce; a diverse economy that encompasses oil and gas; a business-friendly environment; and a continued investment in infrastructure. These advantages lure people and businesses from outside Texas, further buttressing the state’s economy.
There is no official source for state recessions, says Tom Currah, associate deputy comptroller for fiscal matters for the Comptroller’s office. The National Bureau of Economic Research (NBER), which tracks U.S. economic cycles, defines recession as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.” The research organization uses federal data on employment, industrial production, personal income and consumer spending. Most recessions identified by NBER include two or more consecutive quarters of declining real gross domestic product.
The pandemic and other world events complicated the picture, notes Currah:
Jase Auby, chief investment officer of the Teacher Retirement System of Texas, said in July that it takes time for interest rate changes to affect the economy, and that he still expected a recession.
Pia Orrenius, vice president and senior economist at the Dallas Fed, notes her agency isn’t predicting a Texas recession in 2023, while acknowledging the unique challenges of forecasting in the pandemic era. “All our models broke in the pandemic,” Orrenius says. “Everything had to be re-done.”
Currah says it’s simply new territory.
“I suspect the current business cycle is one that will be studied by economists for decades,” he says, “with ongoing debate about exactly why we did not enter a recession by now.”
Despite the uncertainty, Texas is buoyed by strengths “from both natural advantages and policy,” Currah says. Several factors are key.
Texas’ positive factors include “its business-friendly economic and regulatory environment that attracts companies to the state,” Currah says. Texas doesn’t impose an income tax, for example, and its regulatory structure is predictable.
Orrenius says taxation and regulation are viewed relative to the states from which people are coming. “If they’re moving from California, obviously we have a much lighter tax and regulation scheme,” she says.
A diverse economy helps in downturns because when one industry slides, others may not be hit as hard. Texas’ economic diversity “has been robust over time,” says Jojo Estrada, an economist with the Comptroller’s office who prepared a diversity index comparing Texas with U.S. employment in 11 “supersector” industries (Exhibit 2).
Note: The diversity index shows employment in Texas in 11 supersector industries compared with the U.S. Supersector industries are natural resources and mining; construction; manufacturing; trade, transportation and utilities; information; financial activities; professional and business services; education and health services; leisure and hospitality; other services; and government.
Source: Revenue Estimating, Texas Comptroller of Public Accounts
The index measures diversity based on a scale of zero to 100 percent. An index value close to zero means that the distribution of industry employment in Texas is dissimilar to that of the U.S. On the other hand, the closer the index is to 100 percent, then the distribution of industry employment in Texas is just as diverse as industry employment distribution in the U.S.
Texas’ lowest level on the diversity index occurred in 2014 due to an oil boom that drove up state employment in the industry more than it did that of the nation overall.
“Based on 33 years of employment data, the average annual index value of 96 percent shows that the level of industry employment distribution in Texas closely approximates that of the U.S.,” says Estrada. “This shows that the Texas economy is a diverse one.”
Texas’ economy also benefits from federal and state policy aimed at pandemic recovery and other state and federal legislation. For example, Congress approved the CHIPS and Science Act to boost the U.S. semiconductor industry, and state lawmakers established the Texas Semiconductor Innovation Fund to encourage economic development.
While these factors are important, migration to the state plays a crucial role in its success, says Orrenius. “Really, the secret sauce in Texas is the economic growth that is sustained by both firms and people moving to the state,” she says.
Texas is the second state to reach more than 30 million residents, based on 2022 population estimates from the U.S. Census Bureau, after years of high growth, often adding more than 1,000 people per day. By 2060, Texas’ population could be between 36.7 million and 44.4 million.
The Census Bureau wrote that from 2000 to 2022, about half of the population gain came from natural increase, about 29 percent from net domestic migration and 22 percent from net international migration — important factors for a strong and diverse workforce, according to Monica Cruz, state data center lead at the Texas Demographic Center.
Further, individuals between 18 and 34 years of age make up the highest percentage of people moving to Texas both domestically and from abroad (Exhibit 3).
|Age||Total, Estimate||Moved from Different State, Estimate||Moved from Abroad, Estimate|
|1 to 4 Years||1,534,066||2.3%||0.7%|
|5 to 17 Years||5,564,920||1.6%||0.7%|
|18 to 24 Years||2,846,706||3.9%||1.0%|
|25 to 34 Years||4,239,952||3.4%||0.9%|
|35 to 44 Years||4,142,711||2.2%||0.6%|
|45 to 54 Years||3,627,516||1.3%||0.4%|
|55 to 64 Years||3,322,098||1.1%||0.4%|
|65 to 74 Years||2,425,031||0.9%||0.3%|
|75 Years and Over||1,467,380||0.9%||0.4%|
Sources: U.S. Census Bureau, 2021 American Community Survey 1-year sample; Texas Demographic Center
“Typically, Texas’ economic growth exceeds U.S. growth by a bit. This is attributable in part to the fact that we have a younger population on average than the country as a whole, and thus a larger share of our population is working age,” says Currah.
Texas has the second lowest median age in the U.S. of 34.8 years and ranks second for percentage of individuals under 18 years.
“A younger population can be an advantage for the growth of the economy if adequate investments in education, health care, housing and job training are made,” says Cruz.
Over the years, government and industry leaders have focused on Texas’ varied needs, important for keeping the economy strong and continuing to attract new residents.
Lawmakers this year approached higher education investment from several directions, including increased funding for community colleges, medical education and appropriations for financial aid programs.
A new funding model for community colleges puts an emphasis on outcomes — transferring to a four-year school, graduating with a degree or certificate, or completing 15 hours of dual credit or dual enrollment. It will provide about $2.2 billion in state funding over the next two years.
Texas community colleges already have received national recognition for outstanding academic and workforce outcomes. In 2021, San Antonio College was the first Texas school to win the Aspen Prize, a national honor awarded every two years. Amarillo College was named a winner in 2023.
Voters in November will consider approving the Texas University Fund, an endowment that could expand research capabilities at Texas State University, Texas Tech University, the University of Houston and the University of North Texas.
Texas State, for example, has set a plan to achieve Research-1 (R1) Carnegie classification, the highest tier of research university, by 2027. At a town hall in May 2023, the university’s president Kelly Damphousse said this achievement would mean “a high level of research activity and innovation.” Damphousse added, “That means there are companies that get spun out by the faculty or companies that spin in to work with our faculty. That means they will hire our students as interns and provide jobs for our students when they graduate. We are building a tax base here with high-paying jobs around us.”
For many years, Texas had affordable housing compared to the national average. But since about 2010, appreciation has been keeping pace with the nation. Still, Orrenius sees a positive environment compared with states experiencing similar increases in housing costs, but without the same level of residential building.
“Most quarters, if you look at the data, we’re at the very top of adding supply to the housing pool,” says Orrenius. “There’s just been so much demand that it’s overwhelmed supply.”
Texas was fourth in the U.S. in a recent analysis by Construction Coverage of residential building permits, while the state’s four major metro areas were in the top 10 (Exhibit 4).
|Metro||New Housing Units Authorized Per 1,000 Existing Homes||Total New Housing Units Authorized|
|Austin-Round Rock-Georgetown, TX||42.5||42,364|
|Houston-The Woodlands- Sugar Land, TX||26.8||75,728|
|Dallas-Fort Worth-Arlington, TX||25.8||77,894|
|San Antonio-New Braunfels, TX||23.5||24,339|
Note: Authorized refers to the act of a local jurisdiction approving construction projects by issuing building or zoning permits.
Sources: U.S. Census Bureau, Building Permit Survey; Construction Coverage
A strong economy and prudent spending allow Texas to continue investing in critical infrastructure. The Comptroller’s office has been tasked with managing high-speed internet expansion.
“We have a responsibility to ensure that residents and businesses can thrive no matter where they live. I’m honored my office is helping with these essential programs,” says Hegar.
The work is ongoing. The 88th Legislature passed measures that, if approved by voters, would create the Broadband Infrastructure Fund, the Texas Water Fund and the Texas Energy Fund. Each seeks to set up long-term funding sources.
Building infrastructure takes considerable time, which can lead to challenges as demographic or business trends change. Orrenius points to one example when mentioning that Mexico recently became the top U.S. trading partner, a change that’s been noticed by those in Laredo. The anticipation of increased truck traffic five to 10 years from now has local leaders already examining road needs.
“I think we have a responsibility to do what we can to make sure that whatever’s coming, let’s prepare for it,” she explains.
The Center on Budget and Policy Priorities describes state rainy day funds as “an essential component of strong revenue systems that can endure economic ups and downs and preserve stability, especially during difficult times when they’re needed most.”
Texas’ Economic Stabilization Fund (ESF) is structured to automatically receive a portion of severance tax revenue, reducing the state’s reliance on this volatile money for day-to-day expenses. Continued good stewardship of the fund is essential to ensuring it remains available when needed.
“Texas’ Rainy Day Fund is a valuable tool, but we must never forget that it comes from taxpayers’ pockets,” says Hegar.
The ESF is only one aspect of how a sound tax structure and financial accounts can better position the state to withstand any future downturns. About 57 percent of tax revenue is from sales and use tax, and the state doesn’t have a personal income tax. Moody’s Investors Service says a state income tax can increase economic volatility.
In October 2019, Hegar said, “When you’re in the second-longest economic recovery in modern history — and about to be in the longest, hopefully — every morning you wake up, you’re one day closer to the next recession. Right now, we don’t know when that day is.”
The 2020 recession differed completely from previous recessions. But the state was better prepared to rebound from its effects thanks to prudent governance — and expects to be in the same place for future recessions. FN
For more on the state’s infrastructure investments and needs, go to “Building Strong Infrastructure for a Growing Texas,” as well as the Comptroller’s Good for Texas tours examining energy and water.