Dallas-Fort Worth’s Economic Outlook for 2008

DFW’s economy should be well-positioned for the future—if we meet the challenge of minority education.

Kimberly Olson, the new director of human resources at the Dallas Independent School District, gave an enlightening presentation recently to members of the SMU Cox Women in Business Club. Olson emphasized that unless Dallas does a better job of educating our growing minority population, the city will face dire social and economic consequences in the not-too-distant future. Her presentation came on the heels of the Federal Reserve’s September decision to lower interest rates by 50 basis points for the first time in five years. Both Olson’s talk and the Fed move occurred against the backdrop of the continuing war in Iraq and growing tensions among the United States, Russia, and Iran, illustrating well the complex, tenuous nature of economic forecasting.

Predicting economic conditions is, in many ways, like performing a Texas Two-Step. First, you make sense of the current state of affairs in the United States in light of recent economic trends. Second, you guess what’s going to happen to the global geopolitical climate over the next 12 months, an undertaking that can prove as difficult as making a long-term weather forecast.

So I’ll tackle the second step first by making what economists call a “peace in the world” assumption:

›› The Middle East will continue to be a politically unstable region this year, but no more so than in 2007.

›› North Korea will persist in rattling its nuclear arsenal for attention, but nothing will happen.

›› The U.S. economic integration with China will continue, making us increasingly dependent on one another—a good thing for peace in the world.

Of course, if we experience another terrorist attack like 9/11, or if the war in Iraq spreads to Iran, all bets are off.

>> Though the U.S. economic forecast doesn’t call for rain yet, dark clouds are looming on the horizon.

>> DFW’s economy still maintains an edge, as more companies relocate to the area.

>> Minority education is the key to keeping that edge.

As we consider the prospects for 2008, it’s useful to first put the current economic expansion in historical perspective. Throughout the 1990s, we enjoyed the longest peacetime economic expansion in our nation’s history, during which the real rate of growth averaged 3.6 percent for more than nine years. While the current expansion hasn’t achieved that kind of longevity yet, it’s one of the strongest we’ve ever experienced, averaging real GDP of 3.6 percent from November 2001 through 2006. This past fall, the expansion entered its seventh year. This is good news. But we’re clearly slowing—for several reasons.

The subprime mortgage crisis and the decline in new housing starts and home values were much worse in 2007 than anyone expected. As a result, GDP lagged well behind most economists’ predictions. Nationally, the housing market is depressed and will continue to be throughout 2008.

Recent reports from the likes of Wal-Mart and Home Depot suggest that consumer spending is softening, while other large retailers such as Best Buy reported strong sales this past fall. There are at least a couple of factors that will push and pull consumer spending in the coming year. I don’t believe the Fed is done cutting rates, and that will put more money in the hands of consumers. However, the 2 million adjustable-rate subprime mortgages that reset to higher rates at the end of 2007 will undoubtedly lead to more foreclosures, which will adversely impact consumer spending. Overall, I expect consumer spending to be sluggish in 2008.

In addition, high energy costs will continue to hurt the travel, transportation, and shipping industries, as well as any companies whose livelihood relies heavily on providers in those industries. Finally, the strong global economy combined with a weak U.S. dollar presents good news and bad news. The weak dollar has made us a low-cost nation in terms of the goods we’re producing. As a result, U.S. exports are growing—and clearly that’s a good thing for our economy. But in response to the Fed’s September rate cut, the dollar hit a record low in October relative to the Euro. With interest rates higher in Europe, investment dollars are fleeing U.S. financial markets to find better deals overseas. I expect this migration of funds to persist throughout 2008.

I believe the U.S. economy will continue to be sluggish in 2008. For the second consecutive year, real growth will come in at or below 3 percent.

In many respects, though, forecasting 2008 is a matter of degrees. Most experts agree things will slow down. The debate is over how much. And the word recession invariably creeps into most of these conversations.

A Wall Street Journal survey of economists in September 2007 revealed that 36 percent expected a recession in 2008. But I don’t believe the housing slowdown and subprime mortgage crisis will spur a recession this year. I put the probability of a recession in 2008 at 10 percent.

Another reason I think we’ll come out all right in 2008 is because it’s an election year. And historically, America has not had recessions in election years.

A recession in 2009 becomes more likely if we see tax increases from the newly elected president, as tax hikes are antithetical to economic growth.

So, what factors could edge the economy closer to recession?

Historically, U.S. economic expansions have ended when spending declines. Business spending typically falls when interest rates rise, but I don’t see this happening in the foreseeable future. Consumer spending falls when consumer debt climbs too high, and this is clearly a widespread problem in our country with consumer debt levels at all-time highs.

In 2006, the savings rate for individuals and families dipped into negative territory at -1 percent, the first time this has happened since the Great Depression of the 1930s. We’ve gotten ourselves into this mess because of too much “loose” credit and dramatic rises in the number and amount of home-equity loans. From 2001 to 2006, home-equity loans in the United States rose from $550 billion to more than $900 billion.

Meanwhile, high-wage, high-skilled jobs once performed by U.S. workers are “migrating” to other parts of the world. Of the more than 120,000 people employed around the world by Plano-based EDS, some 70,000 are outside the United States, including more than 20,000 in India, perhaps the fastest-growing white-collar labor location in the world. Education is a key to keeping these jobs at home.

Minority education is perhaps the single greatest challenge facing our economy. High school dropout rates are near 50 percent for young Hispanics and young African-Americans. Thirty years from now, more than 50 percent of America’s high school students will be Hispanic or African-American. By that time, more than 50 percent of Texas high schoolers will be Hispanic; 10 percent will be African-American.

The large number of high school dropouts and non-college graduates means that a growing number of young people—our most precious natural resource—are embarking upon their adult lives without the confidence or skills necessary to realize personally satisfying and socially productive careers. Our country’s future success depends critically upon our ability to educate these minority groups.

In the midst of these dark clouds gathering on the national horizon, there is a silver lining for Sun Belt cities. Global competition and high energy costs are forcing American companies to pay more attention to their cost structures than ever before. These and other factors will fuel the continued migration of the U.S. population to the southern half of the country.

Nine states are growing significantly faster than the others, and Texas is one of them, growing 12.7 percent over the past seven years. The vast majority of states with net positive growth during that time frame are in the southern half of the country. The states in this region will continue to attract professionals, families, and businesses because of the quality of life and cost of living advantages they offer, including pro-business attitudes and favorable regulatory climates for business, no personal income tax, and warm, sunny weather.

(Estimates by author as of October 2007) 
2007: 4.7%
2008: 4.8%

2007: 2.0%
2008: 2.5%

2007: 2.7%
2008: 2.5%

2007: 1.4 Million
2008: 1.3 Million

(3-Month Treasury)
2007: 4.7%
2008: 4.4%

(10-Year Treasury)
2007: 4.8%
2008: 4.9%

With an estimated 2007 population of 6.6 million people, the Dallas-Fort Worth area is expected to grow to more than 9 million people by 2020. This would push us past Chicago into third place among the country’s largest metro areas. This growth will be fueled, in part, by the continued migration of businesses and educated professionals to our area. In 2006 alone, 16 major companies left California to relocate in Dallas. Corporate relocations are one of the greatest sources of growth in Dallas and Texas today. In 2007, 24 Fortune 500 companies called DFW home, and Texas jumped past New York as the state with the most Fortune 500 companies.

Among major U.S. cities, Dallas offers a relatively low cost of doing business with a favorable tax environment and competitive land, labor, and energy costs. Our pro-business attitude will continue to attract large and small businesses in every industry from around the nation. In addition, local and state tax incentives, relatively low levels of bureaucracy, strong community support, and our new business-minded mayor should make Dallas an even friendlier place for business in the coming years.

When individuals and families consider relocating, they evaluate the housing market, quality of schools, access to shopping and restaurants, and diversity of cultural and recreational opportunities offered by the destination city. Dallas provides perhaps the best overall combination of these factors among all major cities in the country. Finally, our transportation infrastructure—anchored by DFW International Airport and enhanced by Dallas Love Field, Alliance Airport, the inland port being developed south of town, and advances made by Dallas Area Rapid Transit—is second to none.

Of the factors threatening the health of the U.S. economy, consumer debt and minority education pose the most significant hurdles to our city. Our growing Hispanic population intensifies the need to provide good high school and college education for minorities. In the coming years, Dallas-based businesses and residents will have ample opportunities to make choices about the future of our metropolitan area. How we nurture and educate our young people will ultimately determine Big D’s success or failure.

Dr. Albert W. Niemi Jr. is the dean of the Edwin L. Cox School of Business at Southern Methodist University.


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