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State Economy Set for Comeback as Oil Prices Stabilize

Oil derrick silhouette

As the energy outlook continues to improve, business leaders from across the state are cautiously optimistic about Texas' economy. That was the consensus at the 2017 University of Texas McCombs Business Forecast events, where experts shared insights with audiences in Austin, Dallas, Houston, and San Antonio in January and February. They predict that 2 percent job growth will help the Texas economy stabilize in 2017 following two lackluster years caused by weak oil prices.

From Oil Bust to Oil Balance

Energy accounted for roughly 13 percent of the state's GDP in 2014 — then it reached a low of 6 percent a year later, and that cost Texas 100,000 jobs.

Yet economists Mine Yücel, Keith Phillips, and Robert Kaplan of the Federal Reserve Bank of Dallas noted that while energy and related manufacturing weakened sharply in 2015-2016, the service sectors in the state continued to grow during that time, and that regionally, the I-35 corridor of Dallas, Austin, and San Antonio saw few negative effects from the energy bust.

Yücel noted that while Houston only added 6,000 new jobs last year, Dallas added 73,000, thanks to new offices by State Farm, Toyota, and Liberty Mutual. "The primary underpinning of this state is the migration of people and firms," said Phillips.

Unprecedented Reserves in Permian Basin

In November 2016, the U.S. Geological Survey announced a new estimate of continuous oil in the Wolfcamp Shale area of the Permian Basin in the Texas Midlands, by far the largest such estimate recorded for any formation in the United States. The area is assessed to have 20 billion barrels of oil.

During the energy downturn, innovations in extraction technology continued in the Permian."We did a lot of great learning during an anemic time in the industry while there were not a lot of rigs running. You had plenty of time to focus, get your science right, optimize things," said Bill Montgomery of Quantum Energy Partners.

Financial Systems 'Loaded for Bear'

Banks are in a stronger position than they have been in years, according to Elaine Agather, South Region head and managing director for JPMorgan Private Bank.

"By any reasonable measure, the financial system is unquestionably stronger because of the regulations enacted after the mortgage crisis of 2008," said Agather. "Our bank, we are loaded for bear. Our capital and deposits are stronger than they’ve been in 70 years. However, now that things are stabilized, we need to begin making some modifications to the regulations so that we can get money flowing back into the economy."

David Booth, chairman and co-CEO of Dimensional Fund Advisors agreed. "I'm not against all regulation, but there's got to be an optimal amount of regulation, and whatever that point is, wherever the pendulum is, in the financial services industry it’s gone way too far."

John Goff, a private investor in Fort Worth and co-founder of Crescent Real Estate Equities, says financial regulation has led to a huge pent-up demand in the economy.

"There's significant cash on the sidelines," he said. "Corporate cash in the country is at an all-time high, $2 trillion. If you look at the firepower on bank balance sheets, there is $14 trillion of excess lending capacity that’s not being tapped into."

Universities Incubate Innovation

Bob Metcalfe, an early Ethernet pioneer and professor of innovation at UT's Cockrell School of Engineering, says the innovation system that drives prosperity is functioning well and getting better. More universities are adopting the MIT innovation model, he says, in which professors and students incubate new projects on campus, identify investors, and take the innovations to market with students serving as CSOs and CTOs.

"The single most important new fact about the human condition is that thanks to telegraph, telephone, radio, TV, internet, and now the coming mobile video gigabit internet of things, we human beings are more connected," said Metcalfe.

Data-Driven Distribution

Even in traditional industries, innovation is crucial to success says Alan Dreeban, partner and director at Republic National Distributing Company, a wholesale distributor of wine and spirits, based in San Antonio.

"We use a complex blend of data to help us determine the propensity of people to pay above or below a certain price by category. Then we bring back to the chain a suggested product mix and set for every socioeconomic slice that can glean the most profit per square inch of shelf space, and that's reviewed on a consistent basis."

Health Care: The Outlier

And yet with all the positive developments in the Texas economy, one area where innovation and utilization are out of sync is health care. While nearly 10,000 new health care jobs were created in 2016, Texas still has the highest number and highest percentage of uninsured residents, said Don Kramer, M.D., founder and chairman of Nobilis Health.

"Since the introduction of the Affordable Care Act, the percentage of uninsured in Texas has dropped from 27 percent to 16 percent — still the highest in the nation," said Kramer. The state doesn’t pay for the $5.5 billion in uncompensated care costs that Texas health care providers incur annually, he said.

"Ultimately, health care services for the uninsured get rendered through emergency rooms or hospitals, which is not at all cost-efficient, and local taxpayers pay the bill."

Cloud Computing Spurs Disruptive New Business Models

The most recent — and disruptive — connection technology is cloud computing, said Taylor Rhodes, CEO of San Antonio's Rackspace Managed Cloud Business Solutions.

"The old way of business was to buy expensive computer hardware and proprietary software and hire people to integrate it, maintain it, and manage it," said Rhodes. "By the time you got through all of that, it was already obsolete, but you were stuck with it… The new way is simply to consume out of shared pools of computing, storage, and networking in the cloud."

Today's Uber, Lyft, Yeti, Airbnb, Amazon, and even the newly responsive Domino's, would never have been possible in their current forms without their born-in-the-cloud technology-based platforms, he explained.

"Technology is both creative and destructive," he added. "Jobs are lost and jobs are created. We have an opportunity here to be on the winning side of that."

Click below to access full-length videos from all four 2017 Business Forecasts hosted by the McCombs School of Business.

Text: 2017 Business Forecast

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