Biennial Revenue Estimate 2006-2007

Economic Outlook

Closely tracking national economic growth, the Texas economy is expected to continue improving throughout 2006-07. During the upcoming biennium, state economic growth--as measured by real gross state product--is predicted to average 3.2 percent per year.

The best economic news will be the creation of nearly 400,000 new jobs between fiscal 2005 and 2007. Typically, employment growth lags an improving economy because employers wait to see if the economic rebound is sufficiently robust before committing to new workers. Thus, even though state economic output--propelled largely by higher profits and business investment--can be expected to slow somewhat from the heated rate of fiscal 2004 and early fiscal 2005, the statewide job count should continue to increase at a 2.0 percent annual rate from fiscal 2005 through fiscal 2007.

Economic History and Outlook for Fiscal Years 2001-2007
Fall 2004 Forecast
  2001 2002 2003 2004* 2005* 2006* 2007*
Texas Economy
Gross State Product (Billions, 1996$) 695.7 714.8 735.9 770.5 797.6 823.2 849.6
Annual % Change 1.9 2.7 3.0 4.7 3.5 3.2 3.2
Personal Income (Billions, Current $) 613.2 627.8 643.5 677.6 716.0 754.6 797.1
Annual % Change 5.5 2.4 2.5 5.3 5.7 5.4 5.6
Nonfarm Employment (Thousands) 9,535.1 9,431.7 9,382.7 9,422.0 9,552.6 9,736.6 9,946.5
Annual % Change 1.8 (1.1) (0.5) 0.4 1.4 1.9 2.2
Resident Population (Thousands) 21,291.4 21,685.9 22,071.3 22,465.3 22,857.5 23,267.6 23,715.3
Annual % Change 1.9 1.9 1.8 1.8 1.7 1.8 1.9
Unemployment Rate (%) 4.4 6.1 6.7 6.1 5.6 5.7 5.5
Oil Price ($per Barrel) $27.72 $21.83 $28.59 $32.49 $41.17 $34.65 $31.76
Natural Gas Price ($per MCF) $4.56 $2.39 $4.08 $4.57 $5.56 $5.02 $4.50
U.S. Economy
Gross Domestic Product (Billions, 1996$) 9,867.7 10,013.8 10,275.7 10,728.6 11,100.1 11,419.5 11,788.4
Annual % Change 1.1 1.5 2.6 4.4 3.5 2.9 3.2
Consumer Price Index (1982-84=100) 176.2 178.9 183.1 187.4 191.7 195.4 199.5
Annual % Change 3.2 1.5 2.4 2.4 2.3 1.9 2.1
Prime Interest Rate (%) 8.0 4.9 4.2 4.1 5.4 6.5 6.5
* Projected
SOURCES: Carole Keeton Strayhorn, Texas Comptroller; and Global Insight, Inc.

Even now, Texas is benefiting from modest employment growth. After declining by a total of 1.6 percent during the 2001-03 national downturn, Texas employment increased by 0.4 percent in fiscal 2004. By the first quarter of fiscal 2005, Texas nonfarm employment growth was 1.3 percent above the rate for the same period in the previous year. In tandem with the new job gains, statewide wage growth also should accelerate during 2006-07. As wages increase, however, the growth in proprietor and property income should plateau, leaving the overall growth in personal income at 5.5 percent per year.

Coincident with the projected increase in new jobs, the number of Texans looking for work is expected to rise. By the end of the upcoming biennium, the state's total population should reach 23.7 million, a 1.9 percent average annual growth rate--virtually the same as the 2.0 percent average annual projected increase in jobs. As such, the statewide unemployment rate is expected to remain relatively unchanged at approximately 5.5 percent through fiscal 2007.

Focus on Jobs
Most of the new jobs in 2006-07 will be in Texas' vast services sector. From fiscal 2005 through 2007, only 33,000 new jobs are likely to be created in goods-producing industries, including mining (oil and gas), construction, and manufacturing. In contrast, the service sector is projected to generate 361,000 new jobs. Even through economic output will continue to increase, strong productivity gains (i.e., increased output with fewer workers) should continue to limit job growth in the state and national goods-producing sectors. Services by their nature are generally "people-intensive" and relatively less susceptible to dramatic productivity gains; thus, as business and consumer demands increase, additional workers become necessary.

Almost 80 percent of the state's new service jobs in 2006-07 will be in five industries. Health service employment will increase by as much as 70,000, driven by an aging population and the increasing availability of advanced medical procedures. Professional and business services jobs will grow by 68,000 as businesses seek outside contractors to fill manpower needs. A rising number of school children will lift local government employment by 51,000. More business travel and tourism will boost jobs at hotels, restaurants, and other leisure and hospitality services by 49,000. Finally, as consumer income and spending increase, wholesale and retail employment will increase by 48,000.

Forecast Concerns
As the structure of the Texas economy has grown more like that of the national economy, changes in national economic growth affect state economic growth almost immediately. Thus, if for some reason the national economy stagnates or expands more slowly than what is expected in the current forecast, Texas economic growth will almost certainly be affected. Currently, the national and state economies face at least three potential dangers through 2006-07.

Figure 2: Texas and U.S. economies follow similar pattern in the coming years

First, the current economic forecast assumes that oil prices will decline from an average of approximately $41 per barrel in fiscal 2005 to $32 per barrel in fiscal 2007, with a commensurate reduction in the price of natural gas. However, if energy prices remain at or rise above current levels, U.S. and Texas economic growth would almost certainly suffer. A sustained increase in energy prices could reduce consumer and business expenditures on discretionary, non-energy related goods and services--ultimately impeding business investment and employment growth.

Second, the current economic forecast assumes that the Federal Reserve will continue to increase short-term interest rates gradually to ward off inflationary pressures as the national economy improves. A sharper-than-expected jump in inflation, however, could force the Federal Reserve to increase short-term interest rates at a faster rate, adversely affecting auto sales, consumer credit purchases, and short-term business inventory and equipment purchases. Moreover, if inflation cannot be kept in check, long-term bond and mortgage rates would be expected to rise, putting a severe crunch on the vibrant residential construction market

Third, at the national level, foreign imports could continue to outpace exports, exerting an ever-increasing drag on U.S. economic growth. The current forecast assumes that the continuing decline in the value of the dollar relative to foreign currencies--which in theory should make U.S. exports relatively cheaper and imports relatively more expensive--will have a salutory effect on our foreign trade deficit. If this fails to happen, however, national and state economic growth could rise more slowly than anticipated. In addition, if China allows the value of its currency to increase significantly relative to the U.S. dollar, Chinese investors could demand higher U.S. interest rates as the price for continuing to hold a major share of our deficit, consequently slowing U.S. economic growth. Finally--and particularly relevant to Texas--the continued growth of the Mexican economy, our most important trading partner, is of major importance.