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How Dallas-Fort Worth Can Maintain Modest Growth

Its diversity should insulate DFW’s economy from all but a severe national downturn this year, economists say. Just don’t mess with Mexico.
By Jeff Bounds |
The North Texas economy will probably remain in an expansion mode this year, with major industries here growing and hiring at moderate rates. That’s the prediction of four local economists, who collectively see no single danger likely to send the U.S.— and, by extension, Dallas-Fort Worth—into recession.

But while indicators from stock markets to unemployment appeared robust at the January dawn of the Trump Administration, the experts warn that the national recovery that began in June 2009 is old and fragile.

DFW’s varied mix of companies has helped protect it from problems that hit other Texas areas hard in recent years.

Quarterly growth of the gross domestic product has remained below 2 percent for much of this decade, according to John Mauldin, chairman of Dallas-based Mauldin Economics. “This is barely above stall speed,” he says. “It would not take much.”

The biggest risk to the local economy is a severe national recession, whether it starts inside U.S. borders or beyond, according to Robert Dye, chief economist at Dallas-based Comerica Bank. “I believe the odds of that happening are low,” he says.

DFW’s varied mix of companies has helped protect it from problems that hit other Texas areas hard in recent years, such as 2015’s collapse of energy prices, he adds. “However, this means we are exposed to a broad-based recession, even if energy markets firm up.”

The flip side is that the region will likely avoid a major disruption from a national recession caused by one specific event, according to Michael Carroll, university economist at the University of North Texas. “The exception to this would be an economic shock that impacts trade flows from Mexico,” he says.

Los Estados Unidos Mexicanos in 2015 was by far the top destination for North Texas’ combined $27.4 billion in exports, according to the International Trade Administration. Among U.S. metro regions, North Texas was the eighth most active exporter that year, the latest for which data was available.

Mexico purchased roughly 17 percent, or $4.7 billion, of the goods that D-FW shipped in 2015. Canada, with 14 percent, ranked second, agency data shows.

A strong dollar or political confrontation over trade agreements could reduce DFW’s exports to its southern neighbor, Dye says. “A U.S. recession with lower oil prices and worsening trade with Mexico would be bad for this area,” he adds.

Oil prices were firming early this year because of production cuts from the Organization of Petroleum Exporting Countries. And Dye doesn’t expect major trade issues with Mexico. “But given the aggressive stance that President Trump took in his election campaign [on Mexico], we must take this risk seriously,” Dye says.

For 2017 at least, the four largest industries in North Texas should remain in decent shape and continue adding jobs, both locally and nationally, our experts say. Those markets are logistics and transportation; banking and financial services; healthcare and life sciences; and technology and telecommunications.

Still, an influential theory holds that the longer an expansion continues, the more likely a downturn becomes, experts say. If the U.S. expansion continues into March, it will become America’s third longest, according to data from the National Bureau of Economic Research, a Massachusetts nonprofit that acts as official scorekeeper on this front. At 93 months, its duration would lag only upturns in the 1990s (120 months) and ‘60s (106), published accounts say.

“The current bull market run in stocks is getting long in the tooth,” Mauldin says. “There is always another recession. It is just a matter of time.”

Debt Diseases Simmer Overseas

One of the biggest risks to the U.S., and by extension North Texas, lies in Italy. Roughly 18 percent of loans on Italian banks’ books have gone bad, Mauldin noted in a December Forbes article. In the depths of the Great Recession, the nonperforming share of U.S. bank loans peaked at 5.63 percent in early 2010, according to the St. Louis Fed. The pile of non-performing loans at Italian banks is the equivalent of U.S. banks holding $3.8 trillion in uncollectable debt, Mauldin says.

That’s roughly 10 times more than the combined $374.7 billion in bad loans that U.S. banks actually had at their worst point of the Great Recession in early 2010, St. Louis Fed data show. Italy’s building crisis could result in a vote there this year on leaving the European Union, something that could lead to multiple currencies on that continent.

“Not the end of the world, but it will create a volatile environment that could quickly devolve into a European recession,” Mauldin says.

“The perception of an advantage is all that matters. corporate relocations often begin … based on … perception.”

Michael Carroll, University of North Texas

That could damage the U.S. economy, as could an economic implosion of China. That country has used debt for decades to sustain its economy as it moves from a strictly state-run system to one using some capitalism.

Losses for China’s banks from corporate loans gone wrong could be equal to 7 percent of China’s economy, according to a June estimate from the International Monetary Fund. Both China and Europe are masters at “kicking the can down the road,” so any day of reckoning could be a ways off, Mauldin says. More immediately, deep downturns in consumer spending or export demand would inflict the worst pain fastest in DFW.

“The DFW logistics sector depends on trade with Mexico,” Carroll says. “The national stagnation of goods manufacturing did not have a significant detrimental effect locally in the recent expansion.”

On the plus side, our region could benefit if Washington changes tax policies to encourage U.S. companies to move their foreign holdings back to the states. “DFW has a large number of headquartered firms with significant holdings abroad,” Carroll says.

Will Change Come?

A major determinant of how North Texas fares economically is reforms Washington may make in government oversight and taxation of business. “Increased regulatory demands and compliance costs have been challenging for the financial services industry, particularly small-sized institutions,” says Laila Assanie, senior business economist at the Dallas Federal Reserve.

Rising interest rates would impact financial services by improving profits for banks. Hiring in healthcare services was strong in 2014 and 2015, partly because of a surge in people getting health insurance and using medical care through Obamacare. “Though Texas did not expand Medicaid coverage under the Affordable Care Act, many people who were eligible [but not enrolled] began signing up for coverage at that point,” Assanie says. As the Obamacare surge moderated, growth in healthcare jobs tempered. “Going forward, hiring will likely slow to its average growth rate,” she says.

As with healthcare, DFW’s technology and telecommunications industry has seen moderation in hiring. “But the increasing role of technology in society, along with increasing cyber threats, will impact demand for tech services,” Assanie says.

Employment in Dallas’ telecommunications industry is currently 46 percent below its peak before the dot-com bust, Assanie says. “However, we have seen net job gains in 2016, which bodes well for the future.”

Much rides on whether DFW can retain its national reputation for lower taxes and lighter regulation, local economists contend. “The perception of an advantage is all that matters,” Carroll says. “Corporate relocations often begin with sweeping winnowing of regions and states based on generalized opinions or perception.” He notes that one Ohio city still suffers a stigma from a 1969 tragedy: “People still remember Cleveland as the place so polluted that the Cuyahoga River caught fire.”

If President Trump repackages former Gov. Rick Perry’s “Texas Miracle” on a national scale, then DFW could lose its luster to other states’ companies, Carroll says. Another variable is how much Austin will spend on infrastructure, such as roads and schools. “If there is significant under-investment in infrastructure, it could have long-run ramifications here,” Carroll says.

Dye, for one, believes North Texas would rue the day it loses its allure as a corporate relocation destination. “We benefit greatly from having open arms to the rest of the United States and internationally,” he says. “I hope we continue to do everything we can to remain a business-friendly environment.”

Jeff Bounds is a freelance business writer in Garland.

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