the texas economy and employment: short‐term forecast

TheTexasEconomyandEmployment:Short‐TermForecastAnalysis,2011‐2014

Preparedby:

IHS Global Insight October 5, 2012

IHSGlobalInsightsShortterm2011‐14ForecastNovember2012 Page2

TableofContents

Introduction .................................................................................................................................................. 3

Background: U.S. and Global Economic Outlook ......................................................................................... 3

Texas: General Near Term Outlook .............................................................................................................. 8

Outlook by Sector ......................................................................................................................................... 9

ENERGY ..................................................................................................................................................... 9

Oil .......................................................................................................................................................... 9

Natural Gas ......................................................................................................................................... 12

Chemicals ............................................................................................................................................ 14

Renewable Energy .............................................................................................................................. 15

CONSTRUCTION ...................................................................................................................................... 16

MANUFACTURING ................................................................................................................................... 19

Chemical Manufacturing ..................................................................................................................... 19

Computer and Electronic Products Manufacturing ............................................................................ 20

Fabricated Metal Manufacturing ....................................................................................................... 20

Machinery Manufacturing .................................................................................................................. 21

Transportation Manufacturing ........................................................................................................... 21

SERVICES ................................................................................................................................................. 22

Health Care Services ........................................................................................................................... 22

Education Services .............................................................................................................................. 24

Professional, Business, and Technical Services ................................................................................... 25

Leisure & Hospitality Services ............................................................................................................. 26

Retail Services ..................................................................................................................................... 27

GOVERNMENT ........................................................................................................................................ 28

Uncertainty Associated with Forecasts ....................................................................................................... 28

Appendix A: IHS Model of the U.S. Economy ............................................................................................. 35


Introduction

The Texas Workforce Commission (TWC), Labor Market and Career Information (LMCI) Department, has

solicited IHS Global Insight to produce short‐term industry employment forecasts for Texas statewide

and each of the 28 Local Workforce Development Areas (LWDAs) through 2014. In addition to the

database, a summary of our assumptions, methodology, and findings is provided in this report.

Background:U.S.andGlobalEconomicOutlook

The data, models, and forecasts utilized by IHS analyze and assess economic impact by county and

industry, thereby incorporating the unique trends of specific industries as well as the structural

characteristics of Texas's local economy. More importantly, they are linked, which provides a

comprehensive, consistent, and detailed view of the global, U.S., state, and local economy (See

Appendix A for complete model documentation.) Therefore, it is important to understand our

assumptions at the U.S. and global macroeconomic levels in order to put the outlook for Texas and each

of its LWDA’s into perspective.

Our view is that the recovery from the “Great Recession” of 2008 continues on a modest track. We

expect second‐half 2012 GDP growth in the U.S., averaging 1.4%, to be little different from the second

quarter's 1.5% pace. However, some of the drivers that were previously supporting growth—exports

and business fixed investment—are showing signs of flagging in the face of global economic headwinds

and domestic policy uncertainty. As a result, manufacturing has at least temporarily run out of steam,

and overall growth in output and employment is likely to remain at only a modest pace.

IHS expects the Eurozone to remain in mild recession for much of the next year, before recovering. The

baseline forecast assumes that a Greek Eurozone exit evokes a strong policy response from the

European Central Bank (ECB). The Greek exit, expected in 2013, could well be the "wake‐up call" that

prompts further economic and financial integration in Europe. Strict conditionality on fiscal

consolidation and structural reforms from the ECB will help to mitigate the economic damage caused by


a Greek exit. After policy actions help to stabilize financial markets and growth resumes, the euro is

likely to bounce back in 2014.

Although the global macroeconomic impact of a Greek exit and worsening Eurozone crisis may not be

large, the ramifications for multinational corporations and specific industries will be greater (e.g. high

tech). The profits earned by European operations of large global companies are already being

hammered. Moreover, some industries such as high tech, pharmaceuticals, and high‐value

manufacturing generate more of their top‐line growth in Europe. Many of these companies are taking

defensive actions such as moving cash back to North America, keeping inventories lean, trimming costs

further, and preparing for slower sales. Meanwhile, United States financial institutions have been

reducing their exposure to Europe and matching assets to liabilities—for example, they are trying to

cover loans to Spanish borrowers with funds from Spain. As European banks "de‐globalize", the upside

for U.S. banks is that they can increase their market share, especially in emerging markets. This,

combined with the greatly improved capital positions of U.S. banks, puts these institutions in a good

position to weather all but the worst storms emanating from Europe.

Weakness in the Eurozone and, to a lesser extent, the United States has significantly slowed down

China’s exports. Chinese exports will continue to cool owing to worsening demand in Europe. With the

more challenging external demand conditions, the Chinese government will probably remain cautious in

its exchange‐policy moves. China's currency policy is likely to remain conservative during the export

downturn, in order to limit the negative impact on the low margin, labor‐intensive export sectors.

Continued steady depreciation of the renminbi during this time of economic slowdown is unlikely, given

it could induce capital flight.

China's domestic economy has still not resolved the problems created by the excessive liquidity

injections in 2009–2010 intended to combat the global recession. Besides inflation, the massively

bloated local government debt, officially reported at 10 trillion renminbi (25% of GDP) that contributed

to China's real‐estate bubble could be even more dangerous to China's economic well‐being. With an

increasingly fragile global economy that further dampens China's business conditions, debt payment

abilities of the local entities will be even more constrained. A local debt crisis could lead to a banking


crisis and trigger a hard landing in China. In such a scenario, investment spending will be severely

hampered, as much investment is financed by bank lending. The combination of investment downturn

(drag on growth) and real‐estate market collapse (drag on wealth) will hurt China's normally resilient

consumer demand.

Export orders in the United States are declining in the face of an unofficial but deepening Eurozone

recession and a marked slowdown in growth in the emerging world, largely driven by China.

Manufacturing output growth in the U.S. slowed in the second quarter, and it was only thanks to the

continuing revival in motor vehicle production that it remained in the black. Durable goods reports

suggest that the momentum behind business capital spending has weakened, too. Global weakness and

uncertainty over the policy outlook in Washington are the obvious candidates for blame.

In the United States, we do not expect the economy to go off the "fiscal cliff." But uncertainties about

the cliff—and more broadly, about the direction of federal tax and spending policy—are unlikely to be

resolved quickly unless November's elections deliver an extremely decisive result. Our assumption is

that the lame‐duck Congress will punt the problem down the road with a "stay of execution" that will

postpone the tax hikes and spending cuts for a few months. That will remove the immediate risk, but

delay a final resolution. As a result, extreme uncertainty over fiscal policy is likely to remain a fact of

life—and a deterrent to risk‐taking—well into 2013. The fact that the debt ceiling will need to be raised

some time in the first few months of 2013 adds an unwelcome extra complication.

Households face too many negatives to allow a robust consumer spending recovery—high debt burdens,

low house prices, modest employment growth, and a lack of confidence in the government's ability to

make things better. Overall, we expect consumer spending growth of 1.9% in 2012, down from 2.5% in

2011, followed by 2.1% growth in 2013. Light‐vehicle sales remain a bright spot, as pent‐up demand is

coming through, but our forecast for 2012 has been lowered fractionally to 14.1‐million units, from

14.2‐million units. Our 2013 projection remains 14.8 million.

On the employment front, July showed marked improvement after three consecutive months of sub‐

100,000 job creation. We believe that a "warm‐winter" payback and other seasonal‐adjustment issues


exaggerated the slowdown. Over the rest of 2012, we anticipate job growth averaging around 140,000

per month, which helps the unemployment rate edge down to 8.1% by year‐end, from 8.3% in July.

Pent‐up demand for housing is building as young adults stay at home. It is already supporting a modest

improvement in housing activity, and at some point (helped by job growth) will spark a major revival.

We expect a 24% increase in housing starts in 2012, albeit from a low base (761,000 units, compared

with 610,000 in 2011), concentrated in the multifamily segment, where pent‐up demand is helping the

rental market. We expect starts to improve to 935,000 in 2013 and 1.23 million in 2014. Recent

evidence suggests that home prices are stabilizing. We expect a 2.7% house‐price increase in 2012, as

measured by the FHFA purchase‐only index, fourth quarter to fourth quarter.

Capital equipment remains an important driver of GDP growth. Business equipment and software

spending growth improved to 7.2% in the second quarter, from 5.4% in the first. However, the latest

evidence shows a weakening in orders for capital equipment, indicating that firms became more

cautious on capital investment plans, along with employment, in the second quarter. As a result, we

expect equipment spending growth to slow again (to 5.5%) in the third quarter.


A summary of the key assumptions behind our U.S. and global economic outlook are below:

KeyForecastAssumptions

Fiscal Policy: Discretionary Spending. We assume that real nondefense federal government spending on goods and services falls 1.1% in calendar 2012 and 2.5% in 2013 as budget cuts bite. We assume that real defense spending falls 3.6% in 2012 and 3.4% in 2013, reflecting a combination of budget cuts and overseas contingency operations winding down.

Fiscal Policy: Expiring Stimulus. We assume that the 2% payroll tax cut and emergency unemployment insurance benefits are extended for 2013, and then phased out over several years, rather than disappearing overnight. We assume that the present 50% bonus depreciation incentive is not extended for 2013.

Fiscal Policy: Automatic Spending Cuts and the Bush Tax Cuts. We do not expect the automatic spending cuts now scheduled to begin in January 2013 to take effect. We assume that the lame‐duck Congress will delay the cuts, giving time for the new Congress and president to produce a package of spending cuts and tax increases, mostly sparing discretionary spending since the cuts there are already aggressive. We have assumed a combination of cuts in Medicare, Medicaid, and Social Security, and increases in income taxes. The measures mostly begin in January 2014; we assume that the Bush tax cuts are extended for 2013.

The Drought and Food Prices. The US drought has undermined this year's corn and soybean crops, and the resulting higher farm commodity prices will gradually pass through to the consumer. We have raised our projection of consumer food price inflation in 2013 to 3.0%, from 1.2%.

Weak Global Growth Assumed to Keep a Lid on Oil Prices. Increased tensions in the Middle East have pushed oil prices up from their June lows, but we still expect weak global growth to dominate the immediate outlook. We expect the refiners’ acquisition cost for crude oil to average $91/barrel in the second half of 2012, up from our July projection of $88/barrel. But we still assume an average refiners' acquisition cost price of $88/barrel in 2013, little changed from last month's $89/barrel. That corresponds to an average Brent oil price of $93/barrel in 2013.

Federal Reserve to Hold Rates Near Zero Until Late 2014; More Quantitative Easing Assumed in September. The Fed has said that it expects to keep its federal funds target in the 0.00–0.25% range until at least late 2014. We anticipate that it will wait until November 2014. We assume another round of quantitative easing ($600 billion), to be announced in September 2012, concentrated on mortgage‐backed securities.

Dollar to Gain on the Euro. The Eurozone economic downturn is worsening, the sovereign‐debt crisis has further to run, and we expect the ECB to cut interest rates further. As a result, we expect the euro to weaken to $1.10 by August 2013. Given the weakening in Chinese growth, we expect only a 0.9% appreciation of the Chinese renminbi in 2012 (year‐end to year‐end).

Weaker Global Growth. We expect GDP growth in the United States’ major‐currency trading partners to weaken to 1.1% in 2012 and 1.2% in 2013, from 1.7% in 2011. GDP growth for other important trading partners is projected to slow to 4.3% in 2012 and 4.6% in 2013, from 5.2% in 2011.


Texas:GeneralNearTermOutlook

The Texas economy will continue to expand in the medium term. The gross state product (GSP) for

Texas, which measures output and illustrates the economic health of the state, is expected to grow at a

compound annual growth rate (CAGR) of 3.2% from 2011‐14 in real terms. This growth rate makes Texas

the third fastest growing state in the nation (after North Dakota and Alaska). As the state’s economy has

expanded over the past decades, Texas’ contribution to the national GDP has increased from 6.7% in

1990 to 8.7% in 2011 (comparatively, North Dakota and Alaska each make up less than 0.5% of national

GDP). As one of the leading drivers behind the nation’s recovery, the state of Texas is expected to play

an increasing role in the U.S. economy even beyond 2014.

While one of the best‐performing states in the nation, the Texas economy cannot completely escape the

shadows of the Eurozone crisis, the impending fiscal cliff, and the ongoing drought. Weak consumer

and business confidence nationally, contributing to slower global growth in manufacturing and energy,

will also keep the outlook for Texan manufacturing and mining output moderate. Other industries

however, such as professional services, which have not been as susceptible the global and national

crises, to are expected to see a turnaround in Texas as we continue to see more diversification in the

local economies. Houston, for example, which has traditionally been dependent on energy‐related

industries, has seen rapid expansions recently in both education and health‐care and business services.

In the outlook, in fact, these are the fastest growing employment sectors in Houston, growing 4.1% and

3.9%, respectively over the 2011‐ 2014 period.

Meanwhile, employment in Texas is expected to grow at a CAGR of 1.7% from 2011‐14 in real terms.

While expansion is slow, Texas continues to be a top performer nationwide and is one of only seven

states to have employment return to its prerecession level (other states include North Dakota, Alaska,

Washington DC, Louisiana, New York and West Virginia). Despite the slow growing payrolls, the

unemployment rate will remain close to 7.0% for much of 2012 and will decline to 6.9% and 6.6% in

2013 and 2014, respectively. Bringing the unemployment rate down will prove a slow process because

there are many previously discouraged workers ready to jump back into the labor force, renewing their

job searches as conditions begin to improve. Continued payroll gains will drive wages and personal

income higher, but growth rates will remain below those achieved in the prerecession years.


The employment outlook for Texas ranks third in the country in terms of medium‐term growth. Unlike

Texas, some of the states in the top five, such Arizona, were among the hardest hit by the recession so

they will be posting high growth rates from a very low base. The fastest‐growing industry for

employment in Texas over the medium term is expected to be professional and business services, while

the state is expected to see declines in agriculture, forestry, fishing and hunting as well as government

employment.

OutlookbySector

ENERGYOil and natural gas production have been strong drivers of the Texas economy. While the relative role

of energy in the Texas economy has declined as the state has become more diversified, Texas still

remains the country’s leading natural gas and oil producer. Texas currently accounts for 20 percent of

oil and 33 percent of natural gas extraction in the United States. Out of 254 counties in Texas, 223 are

actively producing oil and natural gas.1

As a very capital‐intensive industry, the direct employment contribution of oil and natural gas extraction

to state employment figures is relatively minor in Texas. In fact, the proportion of jobs in Texas making

up oil and gas extraction alone is less than 1%. However, it is the indirect contributions and induced

economic benefits to the state in terms of employment which are much more significant. That is, the

benefits of oil and gas extraction to state employment figures extend far beyond the mining sector;

professional and technical services, retail and wholesale trade, manufacturing, transportation,

construction, agriculture, and government employment are all positively affected.

OilMany headlines driving the price of oil in 2012 have the words “euro” or “Iran” in them. Prices have

gyrated as the market alternates between pessimism over the health of the world economy and oil

demand and anxiety over the availability and adequacy of future supply. In the meantime, however,

the “Great Revival” in U.S. crude oil production that began in 2008 has accelerated. Driven primarily by

1 Yucel, Mine K. and Jackson Thies, Oil and Gas Rises Again in a Diversified Texas, The Federal Reserve Bank of Dallas, 2011Q1, p. 1


output from tight crude oil plays such as the Eagle Ford Shale play (as well as the Bakken in North

Dakota), U.S. production of crude oil/condensate and natural gas liquids (NGLs) has increased about 1.9

million barrels per day (mbd) from 2008 through the first quarter of 2012. Between 2011 and 2014, IHS

CERA expects tight oil production to continue on that path.

The growth of the Eagle Ford Shale play, rich in both oil and natural gas, has been explosive. In 2008, 33

drilling permits were issued for the exploration of the Eagle Ford Shale play; by 2011, that number

exceeded 2,800. As referenced earlier, the economic impacts of the Eagle Ford Shale play are not

limited to the drilling sites. Given San Antonio’s proximity to the majority of shale play sites, Bexar

County in the Alamo LWDA is likely to have a significant role in staging exploration, and as a result, the

energy boom is expected to bring in new investment and generate thousands of jobs in San Antonio. Oil

and gas extraction employment in the Alamo LWDA is expected to increase 21.4% in 2012; after that,

employment growth will begin to decline to a 4.9% CAGR 2011‐14.

Energy companies such as EOG Resources and Chesapeake Energy have already opened satellite offices

in the San Antonio metro area, but the biggest announcement so far has come from oil‐field services

giant Halliburton. At the end of 2011, Halliburton began work on a $50‐million base of operations in San

Antonio, for which it will need 1,500 workers to support its operations in the Eagle Ford shale play. The

company said it hopes to fill 75%, or more than 1,100, of these high‐paying positions by hiring locally.

Halliburton is not the only oil‐field‐services company interested in operating in San Antonio. Houston‐

based Baker Hughes, Inc. has said it plans to build a $30‐million operations center and administrative

headquarters in southeastern Bexar County, which will employ 400. Meanwhile, Schlumberger Ltd., the

world's largest oil‐field services company, has told local economic development officials it wishes to

establish a site in southern Bexar County as well. 2

Of course, there remains great uncertainty about the ultimate pace and sustainability of the current

boom in U.S. production, particularly for Texas. For one, it is still early days for the development of tight

oil resources in North America, much less beyond. There are still many untested plays, and decline rates

may ultimately prove steeper than anticipated. Backlash over environmental concerns related to

2 Gonzalez, John W., “Baker Hughes plans major South Side facility.” My San Antonio, http://www.mysanantonio.com/news/local_news/article/Baker‐Hughes‐plans‐major‐South‐Side‐facility‐1463249.php


hydraulic fracturing—especially in regions unaccustomed to hydrocarbon production—could also slow

growth. Threatening to Texas in particular are U.S. tight oil producers, especially those in North Dakota,

who are offering steep price discounts not only to Brent but also to West Texas Intermediate (WTI)

because of insufficient pipeline capacity to bring new production to market. A WTI price in the $70s—

with Bakken producers receiving well below this—could discourage some upstream capital investment

in Texas.

The move by the U.S. government to defer a decision to approve the Keystone XL pipeline (a proposed

1,700 mile line from Alberta to the Texas Gulf) underscores this point. Major pipeline projects will be

needed to serve both Canadian oil sands producers and North American tight oil light crude producers in

the coming years. Without enough overall pipeline capacity, both types of producers could potentially

end up underserved. If Keystone XL is not ultimately approved and other alternatives (pipeline or rail) do

not develop, oil sands producers will face deeper and deeper discounts for their crudes over the coming

years, increasing the likelihood that Canadian oil sands will seek Asian markets instead.

On the other hand, the experience of the shale gas revolution in North America shows that productivity

rates can increase dramatically as industry gains knowledge and experience using new production

technologies. Moreover, until now, the Great Revival has been driven principally by independent oil

companies. As major oil companies begin to move into the tight oil space, they are likely to bring

greater economies of scale and efficiency, which may ultimately lower costs. The bottom line is that our

current production outlook could prove to be conservative, and oil prices could stay lower for an even

longer period than we currently anticipate.

While unconventional oil continues to be a top story in the headlines, oil reserves in Texas’ Permian

Basin also remain a source of growth for the state. The basin is home to 20 of the nation’s top 100 oil

fields, and the state's crude oil reserves represent almost one‐fourth of the U.S. total. Economic activity

in this region has pushed unemployment rates well below the full employment level. Texas’ 26

petroleum refineries can process nearly 4.8 million barrels of crude oil per day, and they account for

more than one‐fourth of total U.S. refining capacity. Most of the refineries are clustered near major

ports along the Gulf Coast, including Houston of the Gulf Coast LWDA, Port Arthur of South East Texas

LWDA, and Corpus Christi of Rural Coastal LWDA. The employment in each of those LWDA’s will increase


in the medium term with the Gulf Coast LWDA’s employment growing the fastest at CAGR 1.9% from

2011‐14. Refineries in the Houston area, including the Baytown refinery make up the largest refining

center in the United States. From Houston, refined product pipelines spread across the country,

allowing Texas petroleum products to reach virtually every major consumption market east of the Rocky

Mountains.

Also located in the Permian Basin is the Wolfcamp shale formation, a natural gas and oil field that that is

located below the Spraberry Field. Pioneer Natural Resources (PNR) is the largest acreage holder, driller

and producer in the Spraberry Field. According to the company’s website, production in the first two

horizontal wells drilled in Upton County has been split 75% oil, 20% natural gas liquids and 5% dry gas.

The company has also recently revealed its intention to sell its properties in the Barnett shale region and

use the sale proceeds in the Wolfcamp and Spraberry shale fields, which it considers to be more

productive areas.. With new investments and growing production, the Wolfcamp shale fields will

continue to create direct jobs for engineers, geoscientists, well and pump service professions as well as

a multiplication of indirect and induced jobs for the region.

NaturalGasNew sources of natural gas from shale formations have changed the U.S. energy outlook and the

economy. In 2010, shale gas represented 27% of U.S. natural gas production. Within the next five years,

this share will grow to 43% and is expected to increase to 60% by 2035. Texas' natural gas reserves

account for almost 30% of total U.S. reserves and the state is the country's leading natural gas producer

accounting for nearly one‐third of total domestic production.

While the Eagle Ford Shale play contains natural gas along with oil fields, the largest gas fields are

concentrated in the Bend Arch‐Fort Worth Basin located in north central Texas. The Barnett shale play,

located in the Bend Arch‐Fort Worth Basin, is the largest U.S. shale gas play in the region. This shale

formation contains over 40 trillion cubic feet of recoverable gas reserves3. According to the Railroad

Commission of Texas, as of July 19, 2012, there were 16,213 total gas wells drilled to date in the Barnett

3 U.S. Energy Information Administration, “Review of Emerging Resources: U.S. Shale Gas and Shale Oil Plays”, http://www.eia.gov/analysis/studies/usshalegas/


Shale field4. Since 2006, the number of vertical wells in the Barnett field has been declining; however, as

the horizontal well technology became more prevalent, the number of horizontal wells is growing

rapidly5. The number of drilling permits issued for Barnett Shale drilling had been rapidly trending

upwards reaching a maximum of 4,145 in 20086. However, the economic downturn and sharp natural

gas price declines that followed price peaks in 2008 led to a decline in Barnett Shale drilling permits in

2009.

The shale gas industry varies from other infrastructure‐intensive commercial undertakings in that

employment effects do not dissipate as construction and infrastructure build outs come to an end. In a

study from IHS Global Insight for America’s Natural Gas Alliance (ANGA), IHS found that shale gas

investment contributes a relatively consistent share of employment by industry, showing that the high

levels of capital indicative of the infrastructure phase will continue throughout the next 25 years, as

natural gas production grows in step with natural gas demand. This will help to sustain direct mining,

construction and manufacturing jobs. In turn, those direct investments and jobs help sustain indirect

and induced manufacturing and services jobs, as well as jobs in retail and wholesale trade. The fact that

only 10‐12% of the jobs produced by shale gas investment will be in the mining sector (where gas

extraction jobs are categorized) illustrates that the economic contribution of shale gas industry extends

far beyond the mining sector.

A key reason for these profound economic contributions is the shale gas industry's "employment

multiplier." The employment multiplier measures the contribution that jobs make to the economy

through the indirect and induced jobs created to support an industry. Some industries generate a larger

contribution than other industries. The larger the multiplier, the greater the ripple effect of every dollar

spent within an industry in terms of creating additional jobs across the broader economy. It is striking

that, when compared with other industrial sectors, the shale gas industry, on average, demonstrates

one of the larger employment multipliers: for every direct job created in the shale gas sector, more than

three jobs are added across indirect and induced contributions. This employment multiplier places the

4 Railroad Commission of Texas, http://www.rrc.state.tx.us/data/fielddata/barnettshale.pdf 5 Institute for Energy Research, “Barnett Shale Fact Sheet”, http://www.instituteforenergyresearch.org/wp‐content/uploads/2012/08/Barnett‐Shale‐Fact‐Sheet.pdf 6 Railroad Commission of Texas, http://www.rrc.state.tx.us/barnettshale/drillingpermitsissued.pdf


shale gas sector ahead of such notable industries as the finance, construction, and many of the

manufacturing sectors. This remarkable employment multiplier is the result of two primary factors that

drive the industry's indirect and induced job creation.

First, the shale gas sector is capital intensive and spends nearly 50% of revenues on materials and

services, with suppliers in construction, fabricated metals, computer design, and chemicals, and in a

broad range of service sectors such as legal and financial services. However, it's not just the large capital

expenditures or the wide‐ranging supplier base that lead to the impressive employment multiplier.

Another critical reason is the strength of domestic suppliers, especially in Texas. While the United States

is the world leader in shale gas industry, Texas is the state leader; unlike other industries in this country,

there is a broad domestic supply chain, which means that a larger portion of the dollars spent here stay

here and support American jobs.

Second, the economic contribution does not end with the creation of jobs within the industry and

among its suppliers; the quality of the jobs created is also high. Given the technologically innovative

nature of the shale gas sector, the jobs attributed to this sector stand out from other employment

opportunities. Workers in the oil and natural gas sector are currently paid an average of $28.30 per

hour—more than the wages paid in manufacturing, wholesale trade, education and many other

industries. IHS Global Insight estimated broader average hourly earnings for the shale gas sector, which

incorporates not only shale gas production but also immediate equipment producers, site builders, and

service providers. The estimated average earnings for these employees register at $23.16 per hour.

Americans working directly in these industries are paid more than workers in the manufacturing,

transportation and warehousing, education, and hospitality sectors, where pay ranges from $13.10 to

$22.00 per hour for production, professional, and business‐services workers. Given the relatively high

wages paid directly to employees in the shale gas sector and in the various supplier industries that

support shale gas, employees have higher‐than‐average spending, resulting in relatively larger induced

income contributions.

ChemicalsThe surge in shale gas production has led to significantly lower prices for gas and electricity than

otherwise would have existed. Between 2009 and 2010, as shale production started to ramp up in


significant volumes, the price average has dropped from $6.73 per MMBtu (average 2000 ‐ 2008 Henry

Hub Price) to $4.17 MMBtu in constant 2010 dollars. Natural gas prices are and will continue to be over

two times lower than they otherwise would have been prior to the ‘shale gale’. Moreover, from 2011

through 2035, IHS projects that the price will average $4.79 MMBtu in constant 2010 dollars.

Unlike plants in Europe and Asia that use oil, chemical plants in the U.S. that use natural gas as a raw

material input. Therefore, even if the oil prices continue to rebound amidst greater uncertainty in the

Middle East, Texas’ chemical plants will maintain their competitive advantage over their global

competitors by benefiting from the differential between oil and gas prices.

Several major corporations have made announcements in recent months to expand the downstream

chemical opportunities in Texas. Exxon Mobil Corp, for example, has announced it is considering plans

to build a multibillion‐dollar chemical plant at its existing Baytown complex in the Gulf Coast LWDA. The

plant, which could be complete in 2016, is expected to create 350 permanent jobs once operational and

produce 1.5 million tons/year of ethylene, a key chemical in plastics production. In May 2012, Irving‐

based chemical company, Celanese Corp., announced it is considering building a $1 billion plant in Clear

Lake; and in April 2012, Michigan‐based Dow Chemical Co. said it is spending $4 billion on new chemical

facilities in the Houston area.

RenewableEnergy Texas is also rich in renewable energy potential, and leads the nation in wind‐powered generation

capacity. Today, there are over 2,000 wind turbines in West Texas alone, and the numbers continue to

increase as development costs fall and wind turbine technology improves. At 736 MW, the Horse Hollow

Wind Energy Center in West Central Texas LWDA is the largest wind power facility in the world.

Wind energy generation is already transforming the economies of relatively poor West Texas counties:

creating new job opportunities that span beyond wind power generation alone and include education,

transportation, construction and other local business jobs. For example, Texas State Technical College

has introduced new curriculum programs focusing on wind and solar energy technologies7.

7 Texas State Technical College, http://www.tstc.edu/westtexasprograms/programs


The state government also continues to actively support renewable energy investments and through the

Texas Enterprise Fund, the state has invested over $4.7 million in renewable energy‐related projects

since 2011. These investments are expected to create over 900 jobs, according to the governor’s office8.

PEW Charitable Trusts, a nonprofit organization conducting clean energy markets research, has

estimated that between 1998 and 2007, clean energy jobs in Texas were growing at an average annual

rate of 1.7% and in 2007 Texas had 55,646 clean energy jobs9. While those jobs account for less than

0.5% of the total number of jobs, they also underline the growth potential of the state’s renewable

energy employment.

Despite the rapid increase in renewable energy production, renewable technologies remain relatively

more expensive and the state’s clean energy employment as a share of total employment is very small.

The extraordinary growth in shale gas production has driven natural gas prices down from their peak of

over $11 in 2008 to under $3 today. Since electricity prices are driven primarily by natural gas prices, it

is even more difficult for renewable technologies to remain price competitive10. As a result, further

increases in consumption of the renewable energy will depend on improvements in production

efficiency of the renewable technologies.

CONSTRUCTION

Texas’ construction sector has proved to be relatively more resilient during the economic downturn as

compared to the construction sectors in other states. Due to an ample supply of land, less restrictive

building policies and more restrictive lending standards, the housing market in Texas did not experience

the big boom in housing prices before the recession. As a consequence, the recessionary decline in

Texas was relatively mild as compared to the rest of the country. Nonetheless, the market did take a

dive. 8 Office of the Governor, Economic Development & Tourism, Texas Renewable Energy Industry Report, July 2012, http://governor.state.tx.us/files/ecodev/Renewable_Energy.pdf 9 The PEW Charitable Trusts, The Clean Energy Economy: Repowering Jobs, Businesses and Investments Across America, https://greenjobshawaii.hirenethawaii.com/admin/gsipub/htmlarea/uploads/Pew_Clean_Energy_Report.pdf 10 Office of the Governor, Economic Development & Tourism, Texas Renewable Energy Industry Report, July 2012, http://governor.state.tx.us/files/ecodev/Renewable_Energy.pdf


While total real construction investment in the U.S. declined 27% between 2008 and 2011, construction

investment in Texas declined by 17% over the same period. Residential construction in Texas declined a

mere 12.1% as compared to the national decline of 28.8%. Nonresidential construction investment was

more significantly impacted in Texas, falling 19.5% between 2008 and 2011. By comparison, Arizona and

Nevada’s nonresidential construction markets were most severely impacted, falling 34.4% and 45.9%,

respectively, during the same period.

While faring better than the rest of the nation, employment in the construction sector in Texas was not

impervious to the decline. Texas lost nearly 16% of all construction jobs between 2008 and 2011. This

decline, however, was significantly less severe than the nationwide construction employment drop of

24% during the same period. Nevada, Arizona and Florida were the biggest losers shedding 54%, 40%

and 36% of the construction jobs, respectively.

In the outlook, employment in construction will be one of the strongest sources of growth in Texas. The

sector is expected to grow from 4.6% of the total employment market in 2011 to 4.9% in 2014, a pace of

3.7% CAGR. Only the professional and technical services sector is expected to grow at a faster pace in

the short‐term outlook. While nonresidential construction in the state is expected remain sluggish/flat

over the next three years, residential construction is expected to grow at CAGR 11.7% between 2011and

2014.

By 2015, housing starts in Texas are expected to reach their prerecession levels. Aiding in this recovery

is the pent‐up housing demand that exists in Texas. Currently at 4.4%, the foreclosure rate remains well

below the national average of 7.4%, and this figure is expected to continue to improve in the upcoming

quarters. Also unlike most rest of the country, home prices in Texas have increased nearly 3.8% from

their trough; one of only six states to see appreciation over that period.

Residential housing growth and household formation will be further supported by favorable

demographic changes. As the 2010 U.S. Census has revealed, the U.S. population has been shifting to

the South and West in the past decade. While natural growth is responsible for over 50% of the

population increase in Texas, the international and domestic migration makes Texas one of the five

fastest growing states in the nation (in terms of population). The U.S. Census Bureau also expects that


over the next two decades Texas will remain the second fastest growing state in the nation after

California. By 2030, the state’s population is expected to increase to 33.3 million.

The U.S. Census Bureau has also shown that, in general, the U.S. population is shifting toward the

suburbs of major metropolitan areas – a trend which can be highlighted in Texas as well. Fort Bend and

Montgomery counties near Houston area (Gulf Coast LWDA) saw population increases of 63.2% and

53.3% respectively over the past decade. Collin and Rockwall counties near Dallas (North Central Texas

LWDA) have respectively added 56.4% and 78.5% to their populations over the same period. In

Williamson and Hays counties near Austin (Rural Capital Area LWDA) the populations have grown by

65.8% and 58.6% respectively since 2000. Collectively, these major metro areas make up the “Texas

Triangle,” drawing population from both inside and outside the state.

As nonresidential construction tends to lag the residential market, the outlook for nonresidential

construction is expected to pick up in the longer term. Housing affordability, relatively low costs of

doing business, and a favorable tax environment are what will support the state's ability to attract new

businesses. In fact, some real estate developers are starting now with large investment projects in

Texas. Westcott LLC and JaRyCo Development LLC, for example, are planning to invest nearly $150

million toward the construction of a 28‐acre office park in northern Dallas called Preston Bend Office

Park11. While construction documents are yet to be filed, Westcott is determined to unroll the project

stating that “the time to proceed with Preston Bend One is now.” The project will be located in Collin

county of North Central Texas LWDA.

Also on the nonresidential side, developments of several major corporations investing in energy plants

in the region will certainly provide a boost to construction employment (See Energy section). Dow

Chemical Company’s plans to build a world‐scale ethylene production plant in Freeport, TX, for example,

is estimated to employ up to 2,000 workers at the construction peak. As shale gas expansion makes

downstream production more profitable, other petrochemical companies are also expected to make

11 Jones Land LaSalle, Westcott LLC and JaRyCo Development LLC Select Jones Lang LaSalle to Lease New Office Development in North Tollway Corridor, http://www.us.am.joneslanglasalle.com/unitedstates/en‐us/pages/NewsItem.aspx?ItemID=25710


large capital investments in Texas, which will certainly continue to drive growth in construction

employment.

MANUFACTURING

Output in Texas’ manufacturing sector had grown steadily, 3.7% (CAGR) per year since 1990, reaching

$1.1 billion (real dollars) in 2008. Following the economic downturn, the state’s manufacturing output

shrank by 1.8% in 2009; however, growth was quickly resumed in the following year. In 2011, the

manufacturing sector in Texas comprised 14.5% of the state’s gross output and employed almost 7% of

the state’s workforce (over 830,000 people).

While Texas’ manufacturing output has more than doubled since 1990, employment in the sector has

declined in Texas. From its peak in 1998, to its trough in 2010, more than 276,000 manufacturing jobs

(over 25%) have been lost in the state. Especially with increasing advances in technology and incentives

to move overseas, this trend in Texas exactly follows the rest of the country; where peak‐to‐trough

declines in employment in manufacturing fell 35% over the same period, 1998‐2010. While employment

in manufacturing began to grow in 2011, and is expected to continue modestly in the outlook, it is still

expected to remain significantly below its pre‐recessionary (2007) levels through 2014.

ChemicalManufacturingAs the country’s top producer of petrochemicals, accounting for 60% of U.S. total petrochemical

production 12 , chemical manufacturing in Texas is a significant portion of total manufacturing

employment. According to the Texas Chemical Council, the state is home to at least 70 chemical

companies with over 200 separate facilities13 providing more than 70,000 jobs. As the expansion of

shale gas production continues to help provide lower input prices to petrochemical plants, at least a

dozen companies are expected to move forward with capital investment projects in the medium term.

Additionally, as one of the country’s leading biotech states, Texas hosts over 3,400 biotechnology

manufacturing and R&D firms (such as Novartis, Abbott and Medtronic).

12 Yucel, Mine. What Drives Texas?, Federal Reserve Bank of Dallas, June 13, 2012


However, the petrochemical industry’s growth is taking place amidst higher concerns over water

shortages and pollution. The unusually warm summer and the water‐intensive process of hydraulic

fracturing have heightened concerns over water supply. Formosa Plastics facility near Point Comfort, for

example, already had to adjust to a temporary 20% water reduction as a result of the recent draught14.

A growing number of air permit applications at the Texas Commission on Environment Quality bring

attention to the air pollution caused by the petrochemical plants. The environmental impacts of

petrochemical production may result in tighter regulation that could limit industry’s growth in the

longer term.

In 2011, 48% of all chemical manufacturing jobs were in the Gulf Coast LWDA (see Energy: Chemicals

section). Dallas LWDA is the second largest center for chemical manufacturing employment providing

9% of chemical manufacturing jobs. However, both LWDAs have been losing these jobs slowly over the

past decade, mostly through productivity enhancements.

ComputerandElectronicProductsManufacturingSince the 1990s, the Texas high tech industry sector has been expanding rapidly. Today, Texas is home

to more than 14,000 telecommunication, semiconductor production, video game developers and other

IT‐related companies. According to the Federal Reserve Bank of Dallas, over the past two decades, the

high‐tech industry’s output grew 20 times as fast as Texas gross state product reaching nearly $43 billion

in 201015. Despite this rapid growth in output, employment in this sector has been declining at an

average annual rate of 0.2% over the past decade. In 2012, employment in computer and electronic

manufacturing in Texas is expected to average 11.1% of the state’s total employment in manufacturing.

Dallas, Gulf Coast and Austin/Travis LWDAs together account for three quarters of the state’s

employment in computer and electronic manufacturing.

FabricatedMetalManufacturingFabricated metal product manufacturing is the single largest contributor to the state’s manufacturing in

employment; accounting for 15% of total manufacturing employment in 2011. The success of this

14 Galbraith, Kate. Boom Promises 20,000 New Jobs but Shortages Too, New York Times, July 14, 2012 15 Yucel, Mine. What Drives Texas?, Federal Reserve Bank of Dallas, June 13, 2012


manufacturing sector is largely dependent upon demand in other industries, such as the housing market

or the transportation industry. As the economic crisis destroyed the U.S. housing market and suffocated

the demand for the transportation industry output, the fabricated metal product sector shed nearly

23,000 jobs between 2008 and 2010. However, the sector started adding jobs back in 2011 and that

total employment in fabricated metal product manufacturing is expected to exceed its pre‐recessionary

peak in 2013 reaching 130,514 jobs. As the economic recovery brings back the demand for housing,

automobiles and other durable goods, fabricated metal product manufacturing employment will

continue to grow.

Gulf Coast LWDA accounts for 43% of employment in fabricated metal products manufacturing. North

Central, Fort Worth, Dallas and East Texas LWDAs account for another 26% of employment. Fort Worth

and Middle Rio Grande LWDAs will show the strongest increase in fabricated metal product employment

between 2011 and 2014 growing at the average annual rates of 6.3% and 6.7% respectively.

MachineryManufacturingMachinery manufacturing is the second largest subsector, employing nearly 12% of the manufacturing

workforce in 2011. Gulf Coast LWDA employs 53% of those workers. Between 2011 and 2014, Gulf Coast

machinery manufacturing employment is expected to grow at an annual average rate of 8.3% adding

another 13,000 jobs by 2014. Some of the major industry’s employers include Halliburton Co. and

Schlumberger Ltd. Both companies produce oilfield equipment and are located in Houston (Gulf Coast

LWDA). Trane Inc, a manufacturer of air conditioning units and compressors, is located in Tyler County,

which is part of Deep East Texas LWDA. Caterpillar Inc., the world’s largest manufacturer of construction

equipment, has recently announced opening of its new hydraulic excavator facility in Victoria, Texas

(Golden Crescent LWDA). The new facility is 1.1 million‐square‐foot big representing an investment of

$200 million16.

TransportationManufacturingTransportation equipment manufacturing employs nearly 11% of the manufacturing labor force in

Texas. Both General Motors (Arlington) and Toyota (San Antonio) operate assembly plants in the state, 16 “Caterpillar Celebrates Grand Opening of New Hydraulic Excavator Facility in Victoria, Texas.” http://www.4‐traders.com/CATERPILLAR‐INC‐4817/news/Caterpillar‐Inc‐Caterpillar‐Celebrates‐Grand‐Opening‐of‐New‐Hydraulic‐Excavator‐Facility‐in‐Victo‐14471612/


as well as a number of other automotive manufacturers (and suppliers). In the outlook, employment in

transportation manufacturing is expected to grow at a CAGR 5.6% from 2011‐14, making it one of the

healthiest sectors in the state in terms of employment. Both government initiatives and Texas’

proximity to Mexico (aiding it to become a major NAFTA trading partner) have supported, and will

continue to support, the growth in the state’s automotive manufacturing industry.

SERVICES

The services industries will be an impetus for the economy in Texas in the medium term, particularly in

education and health services. A study of the demographic profile of the state (specifically, its growth)

helps to explain why this is the case.

According to the most recent census results, Texas is the second most populous state in the country,

after California. The population of Texas reached 25.7 million in 2011. However, Texas surpasses

California as the fastest growing state. Over 2000‐10, the population in Texas had grown by nearly 25%.

By 2020, the state’s population is expected to reach 30 million.

While most of the population growth remains natural, migration (both domestic and international) as a

proportion of the total population growth has increased to over 45%. Domestically, it is the state’s

robust economy, favorable business climate, and relatively low cost of living which attract the second

highest number of migrants (after Florida). Across the border, Texas’ proximity with Mexico helps to

explain why international migration accounts for slightly more than half of the migration to Texas. As

projected by Texas State Data Center, the Hispanic population will account for more than half of the

state’s population by 2030.

HealthCareServicesThe health services industry is the second largest source of employment for the state of Texas (behind

government), and it is also the third fastest for employment growth (behind professional, scientific, and

technical services and construction). In 2011, health services made up 10.8% of the employment market

(government employment was 20.9%); by 2014, health service employment is expected to grow 2.9%

CAGR, 2011‐14.


A growing population in Texas certainly contributes to increased demand for health services. Currently,

Texas is the second youngest state in the nation (behind Utah); the median age is 33.6 years. Nearly 6

million or 23% of the population are below the age of 15. The working age population between the ages

of 15 and 65 comprises two‐thirds of the state’s population. There are 2.8 million seniors aged 65 and

over in Texas making up 11% of the population. However, the population in Texas is growing quickly.

Nearly 1.3 million people in Texas are between the ages of 60 and 65. By 2014, 276,000 of them will

reach the age of 65 or above bringing the total number of seniors to 3.1 million. The population group

aged 65 and over will be the fastest growing age group in the upcoming years averaging 4.6% growth

annually between 2011 and 2014. By 2020, the population aged 65 or more will account for 13% of

Texas’ population.

Also driving the need for medical services in Texas is the state’s physical health. Texas has one of the

highest obesity levels in the nation. Data published by the U.S. Center for Disease Control and

Prevention demonstrates that Texas has been getting progressively “heavier” over the past two

decades. In 1991, obesity prevalence in Texas was between 10%‐14%. By 2000, this proportion

increased to over 20%17. According to the most recent data, obesity prevalence in Texas reached 30.4%

in 201118. Obesity‐related conditions, such as heart disease, stroke and Type 2 Diabetes have also been

on the rise. Based on the data by Behavioral Risk Factor Surveillance System (BRFSS), 9.7% of adults aged

18 years or older responded that they were diagnosed with diabetes in 2010. This is an increase of 2%

since 200419.

Most of the health service jobs are located in the Gulf Coast LWDA, predominately in the Texas Medical

Center. In 2011, Gulf Coast LWDA employed 292,441 people in the health service industry and by 2014

this level will increase to 332,963 people. Hospital employment is expected to grow the fastest

averaging 6.1% growth between 2011 and 2014. The Dallas LWDA is the second largest area by health

17“Obesity Trends Among U.S. Adults Between 1985 and 2010”, Centers for Disease Control and Prevention, http://www.cdc.gov/obesity/downloads/obesity_trends_2010.pdf 18 “Adult Obesity Facts”, Centers for Disease Control and Prevention, http://www.cdc.gov/obesity/data/adult.html#Prevalence 19 “Prevalence and Trends Data,” Centers for Disease Control and Prevention, http://apps.nccd.cdc.gov/BRFSS/display.asp?yr=2004&state=TX&qkey=1363&grp=0&SUBMIT3=Go


service jobs. In 2001, the Dallas LWDA provided 156,612 health service jobs and this number is expected

to grow on average 3.1% annually reaching 171,812 jobs in 2014.

EducationServicesAs one of the largest employment‐intensive industries in Texas, education comprises 9.2% of the

workforce. The demand for education comes from its growing school‐age population; in 2011, almost

7.8 million people in Texas were below the age of 20. By 2014, this number will increase to 8 million.

Most of the education workforce comes from publicly funded revenues in the state budget. In fact,

more than half of Texas’ general revenues expenditures in the state budget go toward education.

The allocation of funding within the Texas education system offers a bit more insight. According to the

Texas Comptroller of Public Accounts and Texas Education Agency, the number of administrators has

been growing significantly faster than the number of teachers over the past 10 years. While the number

of teachers rose 27.1%, the number of administrators increased by 35.6% during the same time20.

Furthermore, administrators earn 1.5 times more on average than the teachers. While there may be

strong evidence in support of reducing teacher‐to‐administrator ratio, it may be also creating efficiency

problems for Texas schools. The Texas Comptroller’s Office estimates that in order to return to 1998‐

1999 teacher‐to‐administrator ratio again, the state would have to eliminate 1,571 administrative jobs.

In the outlook, the need for employment in the Texas education system is expected to grow. According

to the U.S. Census, the average level of education in Texas is below the national average; 80.7% of state

residents have a high school diploma and just 32.3% have at least an associate’s degree or higher. In

2009, Texas was ranked last in the nation based on the proportion of the population with a high school

diploma or more.

As college graduation levels remain low, the overall quality of the state’s workforce will become an

obstacle for the state’s economic growth in the long term. The education gap is creating a sizeable

mismatch between the skills the employers need and the skills that the workers have. While Texas may

be a domestic heaven for the companies that would otherwise have offshore low value added jobs,

20 Combs, Susan. “Financial Allocation Study for Texas 2010” pg. 27 Texas Comptroller of Public Accounts. http://www.txcharterschools.org/sites/default/files/resources/FASTp1execSummary.pdf


strong economic growth in the longer term will be driven by more demanding jobs requiring higher

levels of educations. For as long as Texas fails to provide appropriate training to the local workforce,

high tech, biotech and petrochemical companies expanding their operations in Texas will likely attract

higher skill personnel from the rest of the country and provide only low‐skill and entry level jobs to the

local Texas population.

Professional,Business,andTechnicalServicesThe professional, business, and technical services industry in Texas employed 4.7% of the population in

2011, and this proportion is expected to grow to 5.0% by 2014, making it Texas’ fastest growing sector

for employment in the outlook. This sector includes legal, accounting, architectural, computer systems

design, management consulting, as well as scientific research and development services. In Texas, 80%

of the employment market for this industry falls within six LWDAs: Gulf Coast (31%), Dallas (20%), Austin

(9%), Alamo (7%), North Central (7%), and Fort Worth (6%).

Despite the recent trend of large scale offshoring of lower‐value added technical services, some

companies are beginning to find value in keeping part of the previously offshored services at home. As a

result, lower production cost domestic destinations, such as rural Texas, are likely to benefit from

domestic outsourcing. In order to attract IT sector investment, Texas state government established the

Texas Emerging Technology Fund in 2005 and has been actively supporting high‐tech sector

development ever since.

With state government’s support, leading technology companies are planning to make sizeable

investments in Texas expanding customer support and sales services. Apple Inc. is proposing to more

than double its operations in Austin over the next 10 years, with a $304‐million campus that will

ultimately create 3,600 new jobs, according to an announcement by Governor Rick Perry. In exchange

for Apple’s commitment to create these new jobs in Texas, the state has offered the company an

investment of $21 million over 10 years through the Texas Enterprise Fund. Apple's final decision on the

deal is waiting on a contract from the state and approval of incentives by the City of Austin and Travis

County. The city has proposed giving Apple an economic development grant of $8.6 million based on a

10‐year waiver of real and personal property taxes on the new development. The new staff, in what the

company is calling its Americas Operations Center, will expand customer support, sales, and accounting


functions for the region. Apple operations in Austin have grown dramatically over the past decade, from

fewer than 1,000 employees in 2004 to more than 3,500 today.

Governor Rick Perry’s office has also recently used $1.8 million from the Texas Enterprise Fund to help a

private firm fund a $7 million investment in a 40,000 square‐foot technology service center. The new

center in Belton will create at least 350 jobs in a rural area where high tech opportunities are scarce.

With the help of the state government, the job market in Texas is going to benefit as the new

opportunities are created in the neediest locales by the high tech industry.

San Antonio has established itself as a cyber security center hosting nearly 80 defense contractors as

well as the National Security Agency’s Texas Cryptology Center. Texas A&M University‐San Antonio has

recently joined the University of Texas at San Antonio, Our Lady of the Lake University and Northwest

Vista College in accepting the designation as a National Center of Academic Excellence in cyber security

and information assurance. With a more qualified local workforce and a growing need in San Antonio’s

energy security field, university graduates in the technology field will be better positioned to find

employment in the upcoming years.

Leisure&HospitalityServicesThe leisure and hospitality industry employs about 8.6% of the state’s workforce, although only

contributes 3.2% to the state’s total output. This industry has grown steadily over the past 20 years.

While performing arts, spectator sports, museums, historical sites, amusement, gambling,

accommodations and food services and drinking places all contribute to this sector, the food services

and drinking places is by far the greatest source of employment. In 2011, food services employed 79.5%

of the total leisure and hospitality workforce.

In 2010, Texas was one of the top three visited states21. Large metropolitan areas such as Houston,

Dallas, Austin and San Antonio attract most of the state’s tourism creating new job opportunities in

retail and leisure and hospitality sectors. During the recession, Texas lost less than 0.1% of all leisure and

21 “Texas Tourism, Publications, and Marketing FY 2012” http://c.ymcdn.com/sites/www.ttia.org/resource/resmgr/2011_summit/oogsummitpres.pdf


hospitality jobs. As consumer spending rebounds, Texas is going to see increase in employment across

all leisure and hospitality sectors.

The Gulf Coast LWDA with its center in Houston remains Texas’ largest source of leisure and hospitality

employment. In 2011, the Gulf Coast provided jobs for 24% of the state’s total leisure and hospitality

workforce. More than 80% of those 249,526 people worked in food services and drinking places.

Between 2011 and 2014, leisure and hospitality employment in the Gulf Coast LWDA will grow at an

average annual rate of 3%.

Dallas and Alamo LWDAs provided 12.7% and 10.9% of all leisure and hospitality jobs in 2011,

respectively. Central Area LWDA with Austin as its center provided another 6.5% of jobs. Total Texan

employment in leisure and hospitality sector will grow at an average annual rate of 2.1% between 2011

and 2014.

RetailServicesIn 2011, nearly 9.6% of the Texan workforce held jobs in the retail industry. During the same year, retail

output contributed 6.4% to the state’s total output.

As consumer spending plummeted and credit disappeared off the markets during recent economic

downturn, the demand for retail products collapsed. Consequently, employment in the retail sector also

declined, falling more than 3% in 2009. However, retail markets have been quicker than other industries

to rebound after the recession. Despite slow overall recovery, retail output growth in Texas recorded

10.4% growth in 2010 and remained positive after that. Retail employment followed, recording positive

2.1% growth in 2011.

As the economy continues to recover, and consumers gain greater access to credit, the retail sector will

continue to add jobs. However, offsetting this growth to some degree are the advances in technology

and growth of internet shopping, which eliminated some of the need for employees in store fronts. In

fact, the relative importance of the retail sector to employment in Texas has been on a steady decline

for nearly two decades. In 1992, the share of the workforce employed in retail was 10.9%. In 2011, this

share decreased to 9.6%. Between 2011 and 2014, the employment in retail sector will grow, at an


average annual rate of 0.96%, but the retail sector’s contribution to the state’s output will decline (from

6.4% in 2011 to 6.2% in 2014).

The Gulf Coast LWDA provides most of the jobs in the retail sector. In 2011, Gulf Coast LWDA supplied

24.1% of all retail jobs in the state and by 2014 this share will increase to 24.7%. Dallas LWDA provides

jobs for 11.4% of the retail workforce. Between 2011 and 2014, retail employment in the Dallas LWDA is

expected to grow at an average annual rate of 0.3%.

GOVERNMENT

As the most employment‐intensive industry in Texas, the government sector comprised 20.9% of the

workforce in 2011. Aside from agriculture, forestry, fishing & hunting (which is less than 1% of the

workforce), it is also the sector of employment expected to take the biggest hit over the 2011‐14 time

period. After falling 2.1% in 2011, another drop of 2.1% is expected in 2012 followed by flat and only

slightly growing growth thereafter.

Unveiled earlier this year, Governor Rick Perry’s “Texas Budget Compact” proposes significant cuts to

state spending and is certainly influencing the outlook on employment in government‐funded programs

and agencies. The plan, however, is not unlike what other states and local governments are planning

over the outlook. While IHS does not expect the national economy to go off the “fiscal cliff”, extreme

uncertainty over national fiscal policy is likely to remain a fact of life—and a deterrent to risk‐taking—

well into 2013. The fact that the national debt ceiling will need to be raised some time in the first few

months of 2013 adds an extra unwelcome extra complication.

Despite increases in sales tax receipts, Governor Perry’s conservative budget plan continues to cut

spending and aims to close the state’s budget gap. In this way, IHS does not expect employment in

government spending to improve over the 2011‐14.

UncertaintyAssociatedwithForecastsRecognized as the most consistently accurate forecasting company in the world, IHS Global Insight has

over 4,000 customers in industry, finance, and government. Using a unique combination of expertise,


models, data, and software within a common analytical framework, we cover over 200 countries and

more than 170 industries. As IHS Global Insight’s models are consistent across regional, national and

international macroeconomic and industry forecasts, so too are the uncertainties in our models.

The uncertainties in the employment forecasts provided for the state of Texas and its LWDAs are in fact

linked to the uncertainties that IHS Global Insight has quantified at the U.S. national level. Our chief U.S.

economists have given our baseline forecasts a 65% probability; however there are looming events or

potential shocks in the economy that have led us to assess a more pessimistic scenario with 20%

probability as well as a more optimistic scenario with a 15% probability.

Europe and Gridlock in Washington Derail the Recovery (20% Probability):

In the pessimistic scenario, despite encouraging European moves in the summer, policy paralysis takes

over in the latter part of 2012. The Eurozone crisis intensifies and financing for Greece dries out, forcing

its exit in early 2013. At the same time, the gridlock in Washington, DC, briefly pushes the U.S. economy

off the fiscal cliff at the start of 2013. Private sector confidence collapses and stock prices plunge.

Policymakers, realizing the potential threat to the economy, quickly reverse course and extend all

expiring measures for 2013. But with the Eurozone financial crisis intensifying, this proves to be too

little, too late to save the economy from recession. Credit tightens, businesses and consumers retrench,

the housing sector turns down again, and the unemployment rate rises back toward 10%.

The global growth slowdown, exacerbated by a harder landing in China, drags down U.S. exports and

restrains overall U.S. economic activity. With sales constrained both at home and abroad, businesses cut

down on costs. Hiring freezes and layoffs once again become common practice, pushing the

unemployment rate back up above 9%. With no income support, consumer spending declines sharply.

A deteriorating labor market, high debt, and weak income gains undercut housing activity. The “green

shoots” observed in mid‐2012 quickly turn brown as low demand and persistent oversupply once again

lead to declining home prices. Housing starts fall close to their 2011 trough level, reaching only 650,000

in 2013 (versus 945,000 units in the baseline). The median price of a single‐family existing home falls

more than 7% below the baseline in 2014.


The oil refiners’ acquisition price of crude falls back to $78 per barrel in 2013 (versus $88 per barrel in

the baseline), as global growth remains depressed. Lower inflation ensues, with headline consumer

price inflation at 0.8% in 2013, and core CPI inflation at 1.5%. But when the U.S. economy finally starts

recovering and pent‐up demand is released, tight production capacity and weak productivity lead to

production bottlenecks and put upward pressure on prices. This causes higher inflation, along with a

weakening U.S. dollar owing to worries about fiscal debt and weak growth. CPI inflation exceeds the

baseline by 2015, and the gap continues to widen. The Fed raises interest rates in response, but is too

late. Monetary tightening eventually stabilizes core inflation around 2.6%.

Recovery Reignites (15% Probability):

In the optimistic scenario, rapid and sustained improvements in the housing and labor markets ignite

stronger domestic growth, while credible policy decisions in Europe and China boost the foreign

economic outlook. The fiscal cliff is avoided, as in the baseline, but unlike in the baseline, a credible plan

for long‐term deficit reduction is quickly enacted.

A stronger economy allows Congress to begin scaling back emergency unemployment benefits and the

payroll tax cut during 2013, a year sooner than in the baseline. Disposable income takes a slight hit in

the first quarter of 2013, but the economy is healthy enough that it can do without the extra stimulus.

Across the Atlantic, the European Central Bank develops a credible plan to tackle sovereign‐debt issues

and prevent a financial meltdown. There are no exits from the Eurozone, as the bloc takes decisive steps

towards a banking and fiscal union that stabilize markets. U.S. equity markets respond favorably to

European stability and a better domestic growth profile, with the S&P 500 nearly 15% higher than the

baseline by mid‐2013.

The effects of each of these scenarios on employment in Texas are displayed in the tables below.

Because of the level of detail for some of these categories, optimistic and pessimistic outlooks are

provided at the 2‐digit level.


Agriculture, Foresty, & Fishing (3,455) (2,195) (1,256)

111 Crop Production

112 Animal Production

113 Forestry and Logging

114 Fishing, Hunting and Trapping

115 Support Activities for Agriculture and Forestry

Natural Resources & Mining 5,055 10,718 16,465

211 Oil and Gas Extraction

212 Mining (except Oil and Gas)

213 Support Activities for Mining

Utilities 838 554 (127)

221 Utilities

Construction 27,292 66,851 100,687

236 Construction of Buildings

237 Heavy and Civil Engineering Construction

238 Specialty Trade Contractors

Manufacturing, Food Manufacturing 3,498 4,858 5,754

311 Food Manufacturing

Manufacturing, Beverages and Tobacco Products (12) 7 44

312 Beverage and Tobacco Product Manufacturing

Manufacturing, Apparel (458) (428) (371)

315 Apparel Manufacturing

Manufacturing, Wood Products 5,847 8,398 10,888

321 Wood Product Manufacturing

Manufacturing, Paper and Paper Products (183) 136 495

322 Paper Manufacturing

Manufacturing, Printing and Related Support Activities (2,893) (2,262) (2,154)

323 Printing and Related Support Activities

Manufacturing, Petroleum and Coal Products (379) (369) (306)

324 Petroleum and Coal Products Manufacturing

TheUncertaintyinIHSGlobalInsightForecastBaselines:

NetJobCreating2011‐2014

Pessimisitc Baseline Optimistic


Manufacturing, Chemicals (2,729) (1,695) (844)

325 Chemical Manufacturing

Manufacturing, Plastics and Rubber Products (1,350) (569) 397

326 Plastics and Rubber Products Manufacturing

Manufacturing, Nonmetallic Mineral Products 1,282 2,326 3,477

327 Nonmetallic Mineral Product Manufacturing

Manufacturing, Primary Metals 417 1,264 1,689

331 Primary Metal Manufacturing

Manufacturing, Fabricated Metal Products 10,474 15,219 20,618

332 Fabricated Metal Product Manufacturing

Manufacturing, Machinery 13,463 16,907 24,964

333 Machinery Manufacturing

Manufacturing, Computer and Electronic Products (2,103) 825 4,136

334 Computer and Electronic Product Manufacturing

Manufacturing, Electrical Equipment and Appliances (600) (70) 655

335 Electrical Equipment, Appliance, and Component Manufacturing

Manufacturing, Transportation Equipment 14,500 16,913 20,464

336 Transportation Equipment Manufacturing

Manufacturing, Furniture and Related Products (161) 1,110 2,341

337 Furniture and Related Product Manufacturing

Wholesale Trade 27,340 45,379 55,669

423 Merchant Wholesalers, Durable Goods

424 Merchant Wholesalers, Nondurable Goods

425 Wholesale Electronic Markets and Agents and Brokers





Retail Trade 11,732 35,414 52,091

441 Motor Vehicle and Parts Dealers

442 Furniture and Home Furnishings Stores

443 Electronics and Appliance Stores

444 Building Material and Garden Equipment and Supplies Dealers

445 Food and Beverage Stores

446 Health and Personal Care Stores

447 Gasoline Stations

448 Clothing and Clothing Accessories Stores

451 Sporting Goods, Hobby, Book, and Music Stores

452 General Merchandise Stores

453 Miscellaneous Store Retailers

454 Nonstore Retailers

Transportation and Warehousing 25,698 37,742 45,517

481 Air Transportation

482 Rail Transportation

483 Water Transportation

484 Truck Transportation

485 Transit and Ground Passenger Transportation

486 Pipeline Transportation

487 Scenic and Sightseeing Transportation

488 Support Activities for Transportation

491 Postal Service

492 Couriers and Messengers

493 Warehousing and Storage

Information 7,600 9,281 6,606

511 Publishing Industries (except Internet)

512 Motion Picture and Sound Recording Industries

515 Broadcasting (except Internet)

517 Telecommunications

518 Data Processing, Hosting and Related Services

519 Other Information Services

Finance and Insurance (5,476) 5,962 9,230

521 Monetary Authorities‐Central Bank

522 Credit Intermediation and Related Activities

523 Securities, Commodity Contracts, and Other Financial Investments and Related Activities

524 Insurance Carriers and Related Activities

525 Funds, Trusts, and Other Financial Vehicles

TheUncertaintyinIHSGlobalInsightForecastBaselines:NetJobCreating2011‐2014



Real Estate and Rental and Leasing 12,296 14,789 16,803

531 Real Estate

532 Rental and Leasing Services

533 Lessors of Nonfinancial Intangible Assets (except Copyrighted Works)

Professional, Scientific, and Technical Services 37,960 72,254 96,644

541 Professional, Scientific, and Technical Services

Management of Companies and Enterprises 658 1,579 1,784

551 Management of Companies and Enterprises

Administrative and Support and Waste Management and Remediation Service 34,132 97,018 159,035

561 Administrative and Support Services

562 Waste Management and Remediation Services

Educational Services 17,893 35,888 35,784

611 Educational Services

Health Care and Social Assistance 122,037 116,031 95,534

621 Ambulatory Health Care Services

622 Hospitals

623 Nursing and Residential Care Facilities

624 Social Assistance

Arts, Entertainment, and Recreation 6,541 8,719 9,522

711 Performing Arts, Spectator Sports, and Related Industries

712 Museums, Historical Sites, and Similar Institutions

713 Amusement, Gambling, and Recreation Industries

Accommodation and Food Services 54,519 56,877 58,625

721 Accommodation

722 Food Services and Drinking Places

Other Services 10,008 11,822 10,693

811 Repair and Maintenance

812 Personal and Laundry Services

813 Religious, Grantmaking, Civic, Professional, and Similar Organizations

814 Private Households

Federal Government (27,501) (23,367) (23,367)

919 Federal Government, except Postal Services

State & Local Government (55,385) (11,856) 20,936

929 State Government, except Education and Hospitals

939 Local Government, except Education and Hospitals





AppendixA:IHSModeloftheU.S.EconomyThe Model’s Theoretical Position

The IHS Model is an econometric dynamic equilibrium growth model. It incorporates the best insights of

many theoretical approaches to the business cycle (Keynesian, neoclassical, monetarist, supply‐side, and

rational expectations). In addition, the IHS Global Insight Model embodies the major properties of the

long‐term growth models presented by James Tobin, Robert Solow, Edmund Phelps, and others. This

structure guarantees that short‐run cyclical developments will converge to robust long‐run equilibria.

In growth models, the expansion rate of technical progress, the labor force, and the capital stock

determine the productive potential of an economy. Both technical progress and the capital stock are

governed by investment, which in turn must be in balance with post‐tax capital costs, available savings,

and the capacity requirements of current spending. As a result, monetary and fiscal policies will

influence both the short‐and the long‐term characteristics of such an economy through their impacts on

national saving and investment.

A modern model of output, prices, and financial conditions is melded with the growth model to present

the detailed, short‐run dynamics of the economy. In specific goods markets, the interactions of a set of

supply and demand relations jointly determine spending, production, and price levels. Typically, the

level of inflation‐adjusted demand is driven by prices, income, wealth, expectations, and financial

conditions. The capacity to supply goods and services is keyed to a production function combining the

basic inputs of labor hours, energy usage, and the capital stocks of business equipment and structures,

and government infrastructure. The “total factor productivity" of this composite of tangible inputs is

driven by expenditures on research and development that produce technological progress.

Prices adjust in response to gaps between current production and supply potential and to changes in the

cost of inputs. Wages adjust to labor supply‐demand gaps (indicated by a demographically‐adjusted

unemployment rate), current and expected inflation (with a unit long‐run elasticity), productivity, tax

rates, and minimum wage legislation. The supply of labor positively responds to the perceived

availability of jobs, to the after‐tax wage level, and to the growth and age‐sex mix of the population.

Demand for labor is keyed to the level of output in the economy and the productivity of labor, capital,

and energy. Because the capital stock is largely fixed in the short run, a higher level of output requires

more employment and energy inputs.

Such increases are not necessarily equal to the percentage increase in output because of the improved

efficiencies typically achieved during an upturn. Tempering the whole process of wage and price

determination is the exchange rate; a rise signals prospective losses of jobs and markets unless costs

and prices are reduced.


For financial markets, the model predicts exchange rates, interest rates, stock prices, loans, and

investments interactively with the preceding GDP and inflation variables. The Federal Reserve sets the

supply of reserves in the banking system and the fractional reserve requirements for deposits. Private

sector demands to hold deposits are driven by national income, expected inflation, and by the deposit

interest yield relative to the yields offered on alternative investments. Banks and other thrift

institutions, in turn, set deposit yields based on the market yields of their investment opportunities with

comparable maturities and on the intensity of their need to expand reserves to meet legal

requirements. In other words, the contrast between the supply and demand for reserves sets the critical

short‐term interest rate for interbank transactions, the federal funds rate. Other interest rates are keyed

to this rate, plus expected inflation, Treasury borrowing requirements, and sectoral credit demand

intensities.

In the IHS Model, “monetary policy” is defined by a set of targets, instruments, and regular behavioral

linkages between targets and instruments. The model user can choose to define unchanged monetary

policy as unchanged reserves, or as an unchanged reaction function in which interest rates or reserves

are changed in response to changes in such policy concerns as the price level and the unemployment

rate.

The model pays due attention to valid lessons of monetarism by carefully representing the diverse

portfolio aspects of money demand and by capturing the central bank's role in long‐term inflation

phenomena.

The private sector may demand money balances as one portfolio choice among transactions media

(currency, checkable deposits), investment media (bonds, stocks, short‐term securities), and durable

assets (homes, cars, equipment, structures). Given this range of choice, each medium's implicit and

explicit yield must therefore match expected inflation, offset perceived risk, and respond to the scarcity

of real savings. Money balances provide benefits by facilitating spending transactions and can be

expected to rise nearly proportionately with transactions requirements unless the yield of an alternative

asset changes.

Now that even demand deposit yields can float to a limited extent in response to changes in Treasury

bill rates, money demand no longer shifts quite as sharply when market rates change. Nevertheless, the

velocity of circulation (the ratio of nominal spending to money demand) is still far from stable during a

cycle of monetary expansion or contraction. Thus the simple monetarist link from money growth to

price inflation or nominal spending is therefore considered invalid as a rigid short‐run proposition.

Equally important, as long run growth models demonstrate, induced changes in capital formation can

also invalidate a naive long‐run identity between monetary growth and price increases. Greater demand

for physical capital investment can enhance the economy's supply potential in the event of more rapid


money creation or new fiscal policies. If simultaneous, countervailing influences deny an expansion of

the economy's real potential, the model will translate all money growth into a proportionate increase in

prices rather than in physical output.

Since 1980, “supply‐side" political economists have pointed out that the economy's growth potential is

sensitive to the policy environment. They focused on potential labor supply, capital spending, and

savings impacts of tax rate changes. The IHS Model embodies supply‐side hypotheses to the extent

supportable by available data, and this is considerable in the many areas that supply‐side hypotheses

share with long‐run growth models. These features, however, have been fundamental ingredients of our

model since 1976.

As the rational expectations school has pointed out, much of economic decision‐making is forward

looking. For example, the decision to buy a car or a home is not only a question of current affordability

but also one of timing. The delay of a purchase until interest rates or prices decline has become

particularly common since the mid‐1970s when both inflation and interest rates were very high and

volatile. Consumer sentiment surveys, such as those conducted by the University of Michigan Survey

Research Center, clearly confirm this speculative element in spending behavior.

However, households can be shown to base their expectations, to a large extent, on their past

experiences: they believe that the best guide to the future is an extrapolation of recent economic

conditions and the changes in those conditions. Consumer sentiment about whether this is a “good time

to buy" can therefore be successfully modeled as a function of recent levels and changes in

employment, interest rates, inflation, and inflation expectations. Similarly, inflation expectations

(influencing financial conditions) and market strength expectations (influencing inventory and capital

spending decisions) can be modeled as functions of recent rates of increase in prices and spending.

This largely retrospective approach is not, of course, wholly satisfactory to pure adherents to the

rational expectations doctrine. In particular, this group argues that the announcement of

macroeconomic policy changes would significantly influence expectations of inflation or growth prior to

any realized change in prices or spending. If an increase in government expenditures is announced, the

argument goes, expectations of higher taxes to finance the spending might lead to lower consumer or

business spending in spite of temporarily higher incomes from the initial government spending stimulus.

A rational expectations theorist would thus argue that multiplier effects will tend to be smaller and

more short‐lived than a mainstream economist would expect.

These propositions are subject to empirical evaluation. Our conclusions are that expectations do play a

significant role in private sector spending and investment decisions; but, until change has occurred in

the economy, there is very little room for significant changes in expectations in advance of an actual

change in the variable about which the expectation is formed. The rational expectations school thus


correctly emphasizes a previously understated element of decision‐making, but exaggerates its

significance for economic policy‐making and model building.

The IHS Model allows a choice in this matter. On the one hand, the user can simply accept Global

Insight's judgments and let the model translate policy initiatives into initial changes in the economy,

simultaneous or delayed changes in expectations, and subsequent changes in the economy. On the

other hand, the user can manipulate the clearly identified expectations variables in the model, i.e.,

consumer sentiment, and inflation expectations. For example, if the user believes that fear of higher

taxes would subdue spending, he could reduce the consumer sentiment index. Such experiments can be

made “rational" through model iterations that bring the current change in expectations in line with

future endogenous changes in employment, prices, or financial conditions.

The conceptual basis of each equation in the IHS Global Insight Model was thoroughly worked out

before the regression analysis was initiated. The list of explanatory variables includes a carefully

selected set of demographic and financial inputs. Each estimated coefficient was then thoroughly tested

to be certain that it meets the tests of modern theory and business practice. This attention to equation

specification and coefficient results has eliminated the “short circuits" that can occur in evaluating a

derivative risk or an alternative policy scenario. Because each equation will stand up to a thorough

inspection, the IHS Global Insight Model is a reliable analytical tool and can be used without excessive

iterations. The model is not a black box: it functions like a personal computer spreadsheet in which each

interactive cell has a carefully computed, theoretically consistent entry and thus performs logical

computations simultaneously.

Major Sectors

The IHS Model captures the full simultaneity of the U.S. economy, forecasting over 1200 concepts

spanning final demands, aggregate supply, prices, incomes, international trade, industrial detail, interest

rates, and financial flows.

Diagram 1 summarizes the structure of the eight interactive sectors. The following discussion presents

the logic of each sector and the significant interactions with other sectors.

The domestic spending (I), income (II), and tax policy (III) sectors model the central circular flow of

behavior as measured by the national income and product accounts. If the rest of the model were

“frozen," these blocks would produce a Keynesian system similar to the models pioneered by Tinbergen

and Klein, except that neoclassical price factors have been imbedded in the investment and other

primary demand equations.


Diagram 1.

Consumer spending on durable goods is divided into eleven categories: two light vehicles categories; net

purchases of used cars, motor‐vehicle parts; recreational vehicles; computers; software; other

household equipment and furnishings; ophthalmic and orthopedic products, and “other." Spending on

nondurable goods is divided into nine categories: three food categories; clothing and shoes; gasoline

and oil; fuel oil and coal; tobacco; drugs; and “other." Spending on services is divided into seventeen

categories: housing; transportation; six household operation subcategories; five transportation

categories; medical; recreation; two personal business service categories; and “other." In nearly all

cases, real consumption expenditures are motivated by real income and the user price of a particular

category relative to the prices of other consumer goods.

Durable and semi durable goods are also especially sensitive to current financing costs, and consumer

speculation on whether it is a “good time to buy." The University of Michigan Survey of Consumer

Sentiment monitors this last influence, with the index itself modeled as a function of current and lagged

values of inflation, unemployment, and the prime rate.


Business spending includes six fixed investment categories; four information processing equipment

categories; industrial equipment; two transportation equipment categories; other producers’ durable

equipment; four building categories; mining and petroleum structures; public utility structures; and

miscellaneous. Equipment and (non‐utility, non‐mining) structures spending components are

determined by their specific effective post‐tax capital costs, capacity utilization, and replacement needs.

The cost terms are sophisticated blends of post‐tax debt and equity financing costs (offset by expected

capital gains) and the purchase price of the investment good (offset by possible tax credits and

depreciation‐related tax benefits). This updates the well‐known work of Dale Jorgenson, Robert Hall,

and Charles Bischoff.

Given any cost/financing environment, the need to expand capacity is monitored by recent growth in

national goods output weighted by the capital intensity of such production. Public utility structure

expenditures are motivated by similar concepts except that the output terms are restricted to utility

output rather than total national goods output. Net investment in mining and petroleum structures

responds to movements in real domestic oil prices and to oil and natural gas production.

IHS U.S. Regional Economic Models

IHS U.S. Regional Model provides analyses of each state and metropolitan area in the U.S. Each area is

modeled individually and then linked into a national system of macroeconomic and industry forecasts.

The models forecast internal growth dynamics and differential business cycle responses for each state

and metropolitan area. Our objective is to forecast how regional activity varies, given an economic

environment as laid out by IHS U.S. economic forecast and economic and demographic characteristic of

a region.

U.S. Regional state forecasting models use U.S. macroeconomic forecast as main driver. State models

are econometrically estimated and comprise of a large number of stochastic equations specified to

capture economic behavior of the state relative to the national economy. Similarly, metro forecasting

models use state forecast as driver and contain stochastic equation that summarizes the behavior of the

metro economy relative to the state economy. The list of concepts modeled include demographic details

at state level, employment sector detail, GSP sector detail, annual wages by sector, personal income

details and other concepts such as retail sales, housing starts, etc. Metro models have similar coverage

with fewer details for sectors.

The IHS approach to state models represents a significant departure from most previous multi‐regional

modeling and forecasting efforts. Most other regional models are constructed as proportions of the U.S.

In the IHS system, each area is modeled individually and then linked into a national system. Thus, our

models do not forecast regional growth as simple proportions of U.S. totals, but focus on internal

growth dynamics and state specific business cycle response. This approach is referred to as "top‐down


bottom‐up." It contrasts sharply with pure share (top‐down) models, and models which are not linked to

a national macroeconomic model (bottom‐up), and contains the best of both approaches. Our basic

objective is to project how regional activity varies, given an economic environment as laid out by our

Macroeconomic and Industry forecasts. Important regional issues are addressed using information

about detailed industrial mix, inter‐industry and interregional relationships, productivity and relative

costs, and migration trends. IGI maintains separate models for 50 states and for Washington DC, as well

as for 318 metropolitan areas. The state models have two fundamental characteristics: (1) Each state is

modeled individually, with different model structures specified according to the characteristics of the

state; and (2) national policy is explicitly captured.

These models are econometrically estimated and contain about 250 or more equations each.

Employment by sector and wage rates and income by type of activity, and GSP by sector are modeled in

detail. Other coverage includes housing starts, retail sales, consumer price indexes, population by 10

year age groups, the labor force and household employment. The models have the ability to forecast

income, wages and GSP in nominal as well as real dollars. The State models have a monthly periodicity,

so they are able to capture the full business cycle behavior of the economy, including the timing and

amplitude of turning points. Another model characteristic is that they are policy sensitive — they

respond to changes in tax rates, military spending, utility costs, etc. The policy simulation capability can

be classified into: (1) how a state/metro economy responds to changes in the national economy

resulting from national or international events; and (2) how a state/metro responds to a change in

state/city government policy. Aside from the model, the CO state service provides state level five year

forecasts that are updated monthly and 30‐year forecasts that are updated on a semi‐annual basis. The


U.S. Metropolitan Area Service provides five‐year forecasts that are updated quarterly and 30‐year

forecasts that are updated semi‐annually.

IHS U.S. Business Market Insights (BMI)

IHS Business Market Insights consists of detailed data and forecasts of employment, the number of

business establishments, and the value of output by industry (production), business size, and geographic

area. The employment, establishments, and output are developed for 1,000 industries based on detailed

NAICS codes as defined by the federal government. Employment by industry is also further delineated

into 60 occupational classifications. The data are available for all detailed industries in all states,

metropolitan areas, and counties and 75 aggregate industries in all Congressional Districts and ZIP codes

in the U.S. The model is linked to IHS Global Insight's other models to assure consistency for all levels of

industry, occupation, and geographic area detail.

The Business Market Insights model represents a bottom‐up approach that is then validated against the

U.S. Macroeconomic and U.S. Regional top‐down analysis. The BMI approach starts from the county

and ZIP Code level. The other geographic levels are created by aggregating or splitting these two

modeled levels. All Business demographics modeled databases are designed to meet two key criteria:

They must reflect economic activity that is consistent with actual information available at these two levels of geography.

They must also agree with published values for national and state employment, establishment and sales data.

U.S. Macroeconomic

Model

U.S.Industry ServiceModel

Input / OutputTables

Output

Prices

Employment

Wage Rates

Revenue

Cost

Profits

Regional ModelsBusiness Market Insights


The county and above forecasts are developed using current and historical data as well as economic

modeling techniques. This approach enhances economic analysis in two important ways. First, it utilizes

all current data and information to accurately estimate the current location of employment,

establishments and sales. Second, it defines the relationships between each variable and the

appropriate economic, cyclical, and migratory factors that cause their movements over time.

The model estimation process incorporates the effects of the business cycle on employment trends and

yields more accurate forecasts at the county level and higher level geographies. The estimated

relationships are used to develop estimates for the current year and forecasts for each of the next five

years that reflect Global Insight’s widely used Regional, State and County Economic Forecasts.

The IHS approach accurately depicts changes in worldwide, domestic, state, and local economic activity.

In this context, the estimates and forecasts account for changes in global and local economic conditions

and not merely trends embodied in past economic censuses and annually recorded economic data. Each

area is modeled both individually and linked to its parent geography modeling system. This approach is

referred to as a top‐down/bottom‐up model, and contrasts sharply with pure regional share (top‐down)

models and those not linked to national and regional models (bottom‐up). The IHS Model contains the

best of both approaches.

The state, MSA and county models are econometric in nature incorporating underlying behavioral

relationships between such concepts as the business cycle, the timing and amplitude of the turning

points, and the disparities that exist across state, counties and local areas. These models are policy

sensitive in that they respond to changes in tax rates, military spending, utility costs, and other external

factors.

the texas economy and employment: short‐term forecast

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