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Regional Economy
Atypical Texas Recession Not Helping U.S. Recovery
September 2003

Fiona Sigalla looks at the role Texas plays in the nation's economic recovery

As the U.S. economy struggles to bounce back from a prolonged recession, Texas isn’t providing the helping hand it once did. In past recessions, the state propped up U.S. recoveries with above-average employment growth. This time, Texas’ job market remains too weak to do much for the nation.

In previous downturns, the Texas economy marched to its own drummer—the energy industry. Nine of the 10 recessions that have occurred since the end of World War II were preceded by rising oil prices that dragged down economic activity.[1] High oil prices increased production and operating costs for businesses, reducing profitability and, in most instances, output. Expensive oil also increased heating and gasoline costs for individuals, crowding out spending on other goods. But high oil prices actually benefited Texas because oil and gas extraction played such an important role in the state’s economy.

Chart 1 shows the ratio of Texas employment as a percentage of U.S. employment over the past 30 years. When the ratio is rising, job growth in Texas is faster than in the rest of the country. The ratio declined only during the 1980s energy bust, when the Texas economy was contracting following a sharp drop in oil prices and the U.S. economy was beginning to rebound. During periods of U.S. recession, the ratio is mostly rising as Texas benefited from what hurt the rest of the country—high oil prices. The 2001 recession is unusual because the ratio is flat. The state’s job growth has been roughly the same as the nation's.

Chart 1

The same pattern holds for personal income, as shown in Chart 2. Personal income tended to grow faster in Texas during U.S. recessions, but in this recession the Texas figures were more similar to U.S. ones.

Chart 2

Two key reasons help explain why Texas economic growth has slowed and has not helped the U.S. recover from recession this time.

• Oil prices were relatively high during the recession, but not as high in real terms as they have been in the past (Chart 3). Texas did not benefit as much from the price hike because the industry is a smaller part of the state’s economy. And, according to the Dallas Fed’s Beige Book survey, the industry did not think the price increase would last long enough to warrant a dramatic increase in production.
• Texas industries were hit hard by the downturn. The state has been an important hub for high-tech development. A sharp contraction in demand for high-tech equipment and services led to plant closings and heavy job losses. During the recession, Texas manufacturers of computers and communications equipment lost all of the jobs gained in the '90s expansion. Texas has also been hurt by the contraction in the airline industry, losing 18 percent of employment in air transportation since 2000. Wages have declined for remaining hightech and airline workers.

Chart 3

The Texas economy continues to expand at a slower pace than is typical for the state. Economic output appears to be picking up, but so far this year employment has been flat. Employment growth is expected to accelerate in the second half, but job growth is likely to end the year at less than 1 percent—substantially slower than the long-run trend.[2]

Texas employment growth is further from its trend than the nation. Chart 4 illustrates deviations from trend employment growth for both the United States and Texas. This suggests that the Lone Star State is probably not playing its historical role as an asset to the national recovery.

Chart 4

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