Waco Economic Outlook for Spring 2003

Baylor Center for Business and Economic Research

Revised Growth in Local Employment

The Texas Workforce Commission recently revised employment estimates for the Waco MSA over the past year based on their survey of local establishments. As a result of these revisions Waco emerged as one of the stronger areas for employment growth in Texas over the year. Figure 1 shows the annual percent change monthly wage and salary non farm employment from January 2000 through January 2003 in the Waco Metro Area.

Source: Texas Workforce Commission

January 2003 employment data reveals an increase of 2,600 jobs in McLennan County compared with January 2002. This amounts to an annual growth rate of 2.6 percent. Construction employment continues to expand, adding 400 jobs for an annual growth rate of 7.1 percent. The education and health service sector added the most jobs, increasing by 900 or 5.7 percent over the past year. The leisure and hospitality sector experienced the fastest growth rate in employment, increasing 7.3 percent with 600 additional jobs. Manufacturing employment continues to lag, losing 400 jobs over the 12-month period. But, some of the employment loss in manufacturing was offset by gains in professional and business services, up by 200 jobs or 2.4 percent. Some of these jobs are “outsourced” jobs derived from the manufacturing sector. New mortgage loans and mortgage refinancing and consumer loans led to 300 new jobs engaged in financial activities, up 5.0 percent from a year ago.

The revised employment figures enabled Waco to move up considerably in the rankings of Metropolitan Areas in the State of Texas. In January, Waco ranked sixth lowest among the 27 Texas Metro Areas in terms of MSA unemployment rate, averaging 4.6 percent compared with the state average of 6.8 percent and national average of 6.5 percent. Waco’s annual growth rate in employment ranked fifth among the 27 Metro Areas. In contrast, Dallas’ unemployment rate increased to 7.3 percent, ranking nineteenth among Texas Metro Areas, while Dallas’ loss of 22,600 jobs resulted in employment decreasing 1.2 percent, ranking last in the State.

The Role of Uncertainty

The strong performance over the months from August 2002 through January 2003 would normally provide the backdrop for an optimistic Spring 2003 local economic forecast. However, there are several forces that will probably weigh on the economy in the near future. Perhaps the most significant factor is the financial position of some consumers who accumulated debt over the past year and are in the process of restructuring their balance sheets. Personal bankruptcies are at record levels nationwide, and many local households are facing debt loads that are likely to discourage the purchase of consumer durables in the near future. There is also evidence that homebuilders have become more cautious in light of uncertainty affecting the economy. But, while the number of single family housing permits have decreased slightly over the past year compared with the previous year, homebuyers have been able to take advantage of lower interest rates to finance higher priced housing.

At the time of this analysis the U.S. is about to invade Iraq. The demand for home heating oil due to the cold winter, the oil strike in Venezuela, and uncertainty over the war in Iraq on future supplies from the middle east have driven up the price of oil. Higher gasoline prices have “taxed” disposable income from households and added to the local inflation rate. Still inflation has increased only 2.2 percent from a year ago, and the core inflation rate omitting energy prices, remains low. If the war is relatively short, then energy prices could fall rapidly, but they may spike upward during the days of the conflict. During the 1990 Gulf War consumers stayed at home and energy prices spiked upward leading to economic recession. Still not all of the blame on the 1990-91 recession is due to oil shocks. Recall that the Federal Reserve had been following restrictive monetary policy to stem inflationary forces. This time around the Federal Reserve is more likely to add to the money supply and lower interest rates in the face of recession forces that could materialize during the war.

The war with Iraq has several influences that could tip the economy either toward recession or toward stronger growth. President Bush is asking for 90 billion dollars to finance the war. On top of a rising federal budget deficit this could result in some “crowding out” of domestic investment spending if interest rates increase. While the dollar is temporarily declining helping to mitigate the loss of net export demand, a higher U.S. interest rate could strengthen the dollar and add to our trade deficit. Of course, the Federal Reserve is likely to accommodate the deficit and keep interest rates from rising until it becomes concerned with potential inflationary forces. On the positive side, action against Iraq will relieve uncertainty, and financial markets, especially for stocks, generally react favorably to less uncertainty. Higher stock prices could have a positive wealth effect on consumer and investor spending. If the war goes well, the attention of congress is likely to turn toward tax cuts that might provide some boost to the economy. Of course, if the clearer outcome of war with Iraq is offset by more uncertainty of terrorist attacks in this country, then the future could continue to be cloudy.

In general, the fundamentals of the economy are better than the current assessment by investors. Inventories are under control, and there is evidence of a slight turnaround in the high tech sector that was the primary force behind the recent recession. Price inflation is modest and the recent scare over deflationary forces has subsided. While housing demand has been strong due to pent-up demand and low mortgage interest rates, there is little evidence of a housing price “bubble” or evidence of excessive inventories.

The Most Likely Outlook

I may be going out on a limb, but it is hard not to be optimistic about future of the Waco economy. Construction continues in new industries and shopping centers. Investors in larger metro areas are looking for markets in intermediate sized cities that are relatively accessible. Waco leadership is beginning to flex its muscle in the quest for economic development. Since nine-eleven there has been a sequence of bad news that has adversely affected investor and consumer expectations, but the economy still continues to chug along, showing an amazing resilience. It’s about time for a little good news. When that happens, pessimism can rapidly change to optimism and the economy can resume economic growth potential that continues to be demonstrated by rising productivity growth even in the face of slower demand. In my view, the worse of the 2001 recession and “growth recession” will come to an end. Waco is outperforming many other areas of the country and will continue to experience steady, if not spectacular growth that could accelerate even more during the latter half of the year.

Tom Kelly, Economist

Director of CBER