The “Texas Miracle” could become more like a mirage.
For years, politicians in the second-largest U.S. state bragged that low taxes and loose regulations kept employment high while the rest of the country was mired in economic doldrums following the 2008 crash. Turns out it was just its deep pockets of oil and gas.
Unemployment may surpass the national rate in the next year for the first time since 2006, according to Prestige Economics, JPMorgan Chase and ING Bank. Texas is already experiencing a “rapid deceleration” in job growth to just a third of what it was last year following a slump in oil prices, said Wood Mackenzie.
“The Texas miracle was predicated on high oil prices, which are probably gone for a while,” said Jason Schenker, president of Prestige Economics in Austin.
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The state’s unemployment rate, which dropped as low as 4.1 percent earlier this year, will rise to 4.9 percent in June, exceeding the projected national level for the first time since October 2006, according to forecasts from Prestige Economics. James Glassman, a New York-based senior economist at JPMorgan, sees the unemployment rates crossing over each other toward the end of next year.
There is “definitely a chance” that Texas could surpass the U.S. unemployment rate, though this will depend on how long oil prices stay low and the national rate could be affected by the future path of U.S. interest rates, said Rob Carnell, chief international economist for ING in London.
It’s a far cry from four years ago, when joblessness in Texas was more than a full percentage point below the national average. Then-Gov. Rick Perry extolled the state’s economic success in his failed run for the Republican nomination for president. He mentioned taxes 10 times in his announcement speech in August 2011. Oil wasn’t mentioned once.
Gov. Greg Abbott, a Republican who replaced Perry in January, has echoed his predecessor’s sentiment, denouncing overly burdensome regulations at the local level as threatening to “California-ize” the Texas miracle.
In turn, Democrats have long targeted Republicans who attribute the state’s economics to a unique brand of Texas governing.
“It’s very clear that the production of oil and gas has carried the state through this boomlet,“ said state Rep. Garnet Coleman, a Democrat and chair of a legislative caucus that produces a biennial report titled ”Texas on the Brink.”
“Once the golden goose leaves, there’s nothing left but them regular gooses,” he said.
Oil and gas extraction contributed to about 8.3 percent of total private-sector job growth in Texas from 2009 through 2014, excluding the effect of a relatively minor decline in the information category, said Cheryl Abbot, regional economist with the Bureau of Labor Statistics’s office in Dallas.
Weathering the decline
What has been notable in Texas is that the slowdown in jobs hasn’t mirrored the plunge in oil prices, said Joseph LaVorgna, chief U.S. economist for Deutsche Bank. “The state has so far been able to weather the decline in energy prices. Now whether that remains depends on what happens with oil prices.”
West Texas Intermediate crude has plunged 25 percent this year, while natural gas is down 24 percent. Even if energy prices rebound, job growth won’t surge as in recent years because producers have become more efficient, pumping out more fuel with fewer rigs and staff, said Ed Rawle, chief economist at Wood Mackenzie in Houston.
In October, the office of the Texas Comptroller of Public Accounts cut its forecast for expected revenue available for general spending by $2.6 billion, citing a ”prolonged weakness in oil and gas markets.” Still the state’s rainy day fund, which is funded by oil and natural gas production tax revenues, reached a record $9.6 billion last month.
“We have a very bearish outlook,” said Schenker. “It’s tough for a miracle to continue when you’ve got WTI knocking on $40 a barrel.”