Texas Miracle, meet the Oil Curse.
After booming when rising energy prices rippled through the nation’s largest oil-producing state, Texas’s once stellar economic growth is slowing as crude trades for less than half what it did two years ago. As a result, lawmakers are anticipating that billions of dollars of tax revenue won’t materialize, threatening the government’s surpluses and leading investors to demand higher yields on some of its bonds.
“The oil bust is cutting to the core,” said Pia Orrenius, senior economist at the Federal Reserve Bank of Dallas. “The weakness is spreading.”
The collapse in the price of oil, to about $46 a barrel from more than $100 in mid-2014, is squeezing energy-producing states. Alaska and North Dakota have already slipped into a recession, according to Moody’s Analytics, while Oklahoma and Louisiana are at risk of one.
Texas’s economic expansion effectively ground to a halt in the three months ended Sept. 30, according to the federal government’s most recent figures, growing 0.1 percent compared with as much as 10.3 percent in early 2012. Job losses in Houston will cut the state’s employment growth to less than 1 percent in 2016 from 1.3 percent last year, according to the Dallas Fed.
“Last year, energy companies were telling us they were laying off people in the oilfields, but now they’re telling us they’re laying off people in their home offices in Houston,” said Orrenius. “Those jobs are not coming back anytime soon. Oil prices are going to be lower for longer.”
The slowdown is taking the shine off a state that was responsible for more than a quarter of the nation’s new jobs from late 2000 through 2014, a run that then-Gov. Rick Perry dubbed the “Texas Miracle.”
The population grew by more than 400,000 annually in the five years that ended in 2014, driven in part by demand for workers because of the increase in hydraulic fracturing, a technology that unleashed previously untapped reserves. With tax money rolling in, the AAA-rated state amassed $10 billion in its “rainy day” fund.
Texas legislative leaders on May 3 told state agencies to expect leaner times ahead. Joe Straus, the Republican House speaker, said in a letter to colleagues last month that they’ll have to contend with the impact of lower oil prices when they gather in January to begin work on the next two-year budget. Since the fiscal year started on Sept. 1, the state’s sales tax collections have dropped 2 percent from a year earlier to about $18.7 billion, according to Comptroller Glenn Hegar’s office.
“There are challenges on the horizon that will require significant fiscal resources,” Straus wrote in the April 19 letter. Lawmakers “need to heed the warning signs we are seeing from the economy and the impact it will have on the next state budget.”
Texas was harder hit by the downturn in the early 1980s, when it had a less diversified economy. Since then, the state has benefited from an expansion in its healthcare and technology industries, and companies including Raytheon, General Motors and Toyota Motor Corp. have set up or expanded major facilities.
But the pressure on the state is mounting. In October, the comptroller revised his estimate for revenue in fiscal 2016 and 2017 down by $2.6 billion, or 2.3 percent, to $110.4 billion. That reduced the surplus projected at end of 2017 to about $4 billion, one third less than originally predicted. In January, when oil dropped below $30, Moody’s said the surplus was at risk of disappearing entirely.
At the same time, the state may need to put more money into its foster-care system for abused children, Straus warned. They may also have to come up with additional funding for the Medicaid healthcare program and retired teachers’ benefits, according to the Legislative Budget Board.
A national or global economic slowdown could drag other parts of the economy, too, and further reduce sales tax revenue that funds about half the budget. Unlike most other states, Texas doesn’t levy an income tax.
“If the price of oil stabilizes around $40 for a while and there is not a national recession, Texas will be able to withstand the lower revenue that the collapse in oil prices is costing,” said James Gaines, chief economist at the Real Estate Center at Texas A&M University. “If the U.S. economy sinks into a recession, Texas needs to be ready.”