You’d need to be in pretty good shape to hike up a hillside as steep as the incline depicted on the Dallas Regional Chamber’s chart forecasting the North Texas economy’s growth over the next several years. It takes the roughly 4 percent growth rate we have enjoyed since recovery from the Great Recession began in 2010 and predicts more of the same robust growth into 2022. Both gross product and real personal income are projected to expand at a rate of more than 4 percent per year, with retail sales coming in just below that, at 3.8 percent.
Given national economic conditions as of late 2018, there’s no reason to doubt that good times will continue to roll as forecasted for the chamber by the Perryman Group, a Waco-based economic and financial analysis firm. This year, key economic indicators reached their best levels in decades: in August, the National Federation of Independent Business’ small business optimism index reached the highest level in its 45-year history; in September, the national unemployment rate hit its lowest level since 1969; and in October, the Institute for Supply Management’s index of conditions in the non-manufacturing sector hit an all-time high.
Although conditions are very, very good at present, economists are spending a lot of time wondering how and when all this might change. “It’s the question everyone is asking right now,” says Robert Dye, chief economist for Dallas-based Comerica Bank.
“If you take a probability view of when the next recession will come, you have to say … in July 2019 we will be 120 months into this expansion, and 121 months would be the longest expansion ever,” he says. “So statistically, we’re getting into unknown territory. There is no roadblock that we’re going to hit and knock us back into recession, but the odds of this thing extending another two or three or four years start to go down, just from historical experience.”
Potential Economic Drags
Economists say every downturn is different, and complex economies evolve in ways that often defy prediction. They ask, for instance, whether the relatively weak recovery that followed the Great Recession has made for a longer albeit shallower expansion this time that might not be so tenuous. Still, economists have identified a number of things that could possibly derail the national upturn—and take the North Texas economy down as well.
Market watchers cite a combination of rising interest rates, the withdrawal of some of the fiscal stimulus from this year’s tax cuts, and perhaps some new fiscal drag as Washington attempts to deal with soaring federal deficits as a possible formula for trouble. Former Federal Reserve chairman Ben Bernanke told a conference of the American Enterprise Institute a few months back that tax cuts and spending stimulus are hitting “at the very wrong moment. … It’s going to hit the economy in a big way this year and next and then in 2020, Wile E. Coyote is going to go off the cliff.” A related fear is that the Fed will overdo its rate hikes in an overzealous attempt to stem rising inflation.
“The odds of this thing extending another two or three or four years start to go down, just from historical perspective.”Robert Dye, Comerica Bank
Other possible recessionary triggers mentioned over the past several months include a global slowdown that spreads to the U.S., over-extended corporate debt, an escalation of the trade war, or general over-valuation of assets in the financial markets.
Although the Trump administration’s brinkmanship on trade with China and other nations is an issue commanding a lot of attention, and some companies can be seriously hurt in a trade war, exports only account for a small percentage of national GDP. As Eric Winograd, senior economist at AllianceBernstein, told The New York Times recently, “Trade just isn’t that big. I have a very hard time coming up with numbers that would be big enough to cause a recession based on the trade math alone.”
In May, the Brookings Institution released a report concluding that the number of jobs that might be affected by an all-out trade war with China “remains modest.” Across Texas, 156,000 jobs would be affected out of a total workforce of 12.6 million, the Washington-based think tank calculated.
Leading up to the past two recessions, the seeds of trouble—the dot.com stock bubble in the late 1990s, or reckless lending in the housing sector in the early 2000s—were evident to at least some observers. This time, no one can finger any glaring distortions or obvious culprits signaling an imminent crash.
If and when the next recession arrives, regardless of the cause, it likely will roll over Dallas-Fort Worth as a smaller wave of the national downturn, local economists say, citing a host of factors related to the structure of the local economy.
“Dallas-Fort Worth would certainly feel an impact, but I think it will be fairly shallow, and that reflects the diversity of the DFW economy. It’s not overly focused on whichever sector gets hit the hardest,” says Greg Willett, chief economist for RealPage, Inc., a Richardson-based company that provides software and data analytics to the multifamily housing industry.
Dye, meanwhile, points out that North Texas has extensive employment in areas that “are not recession-proof but are recession-resistant,” such as healthcare, business and professional services, and transportation and warehousing “which is gobbling up real estate left and right in areas surrounding the region.”
Additionally, Willett observes that North Texas is very much a corporate economy as opposed to a region with “a lot of entrepreneurs and mom-and-pops.” These larger employers are more likely to be structured with cash reserves to get through downturns while “with small businesses, a lot of times, they go under,” he says.
The momentum of the DFW economy is another factor that is apt to serve the area well should the national picture darken. DFW led the nation in job growth over the 12 months preceding August 2018, adding an impressive 115,300 jobs, according to federal statistics.
The steady performance of the DFW labor market during the Great Recession gives some historical backing to predictions of a shallower dip in North Texas. Unemployment in Dallas peaked at 8.7 percent in summer 2009, according to the Federal Bureau of Labor Statistics. Nationally, the rate reached 10 percent that fall. By the end of 2012, DFW’s jobless rate reached 6 percent—2 percent lower than the national average—and was steadily recovering.
“Of course there will be job losses but you are set to come back with a large, well-educated employment base that will be there and ready to go,” Willett says.
The perception that North Texas is recession-resistant has been somewhat self-reinforcing, according to Bobby Renkes, managing director of Dallas’ Pinecrest Capital Partners, a middle-market investment bank. He says in an interview earlier this year that buyers were interested in Texas-based firms because its economy suffered less in the last recession than the rest of the country. The more sustainable revenue and earnings, he said, were attractive to buyers looking for companies that could perform in a slowdown.
Top Relocation Destination
Dallas has long been a favored destination for corporate relocations and that is not likely to change anytime soon, says Dye. “In my experience corporate relocations follow a herd mentality. There are only so many large cities corporations can go and Dallas is one of them,” he says. “The factors that shape that—the mid-continent location, the relatively cheap cost of land and low business costs, low regulatory hurdles, the airports—those qualities will still be there in a downturn.”
The energy and real estate industries have played major roles in Dallas’ economic health, and local economists say their performance in the next recession will have even wider effects.
“I don’t think we will get over our skis too far. Everyone expects some sort of slowing, but it’s not going to be a big-time downturn.”Greg Willett, Realpage Inc.
Bernard Weinstein, economist and associate director of SMU’s Maguire Energy Institute, says the boom-bust cycles in Texas’ oil patch have had a major impact on Dallas-Fort Worth, although to a declining degree, as the economy has diversified. “When I moved here in 1975, oil was blowing and going and you’d see bumper stickers saying ‘Drive fast and freeze a Yankee.’ By the mid-1980s they were reading, ‘Please God, just give me one oil boom. I promise not to blow it next time,’” he recalls.
With crude oil prices set on the world market, the health of the industry is not directly tied to U.S. economic cycles, Weinstein points out. He notes that the Great Recession was moderated somewhat in DFW as a result of oil prices that peaked in 2008 at over $120 a barrel. After plunging along with the stock market in late 2008, they recovered to more than $80 a barrel by early 2010.
Predictions that weakening oil prices in 2014, 2015 and 2016 – a consequence of the shale revolution and massive new supplies – would tank the Dallas area economy proved unfounded. But statewide, GDP flat-lined and even declined slightly between 2014 and 2016, according to data collected by the Federal Reserve Bank of St. Louis.
Weinstein and others say the confluence of stronger oil prices and the strength of the rest of the economy have been super-charging the area’s growth lately. Dallas may not have skyscrapers full of petroleum engineers, but there are enough energy company headquarters and oil-related finance activity to make a difference. Dye, the Comerica economist, said oil and gas royalties have a sizable local impact as well, whether they come as minor “mailbox money” or stout inflows into the family offices of Dallas’ oil dynasties.
Employment in the field has mostly been located in DFW’s western reaches, but that has dissipated in recent years. “Nobody is drilling in the Barnett because nobody can make money on dry gas,” Weinstein says. “Those rigs have moved west to the Permian Basin.”
Balanced Supply And Demand
In the late 1980s, when a banking and real estate bust hit Texas so hard there were dollar stores in the Galleria, residential and commercial real estate helped lead the decline. Home prices dropped by a painful 20 percent.
By contast, DFW home prices, which didn’t run up in the 2000s as much as in cities like Las Vegas and Phoenix, served comparatively as a cushion during the Great Recession. Not that there wasn’t extreme pain in the new home construction business. “Half the builders and subcontractors went out of business, and the market was swamped in debt. It was not much fun,” says Ted Wilson, whose company, Residential Strategies Inc., researches Texas homebuilding activity.
But the overhang in housing inventory didn’t last long as job and population growth and corporate relocations “put coal on the fire” and private equity moved in to buy single family houses for rentals, he says.
Economists say the nature of the real estate business—the necessity of lead times for development and construction—means oversupply in a fast-moving downturn is always a risk. “Inherent in the way the Dallas-Fort Worth market grows, you always have too much,” says Willett. There are currently 35,000 apartments under construction in the area, by far the most of any city in the country, he says.
Still, Willett and Wilson say tighter lending practices and better market information have tended to match supply with demand more efficiently than in previous cycles.
“In the past, lot development was being done with maybe 90 percent leverage. Post Dodd-Frank, that has tightened up. Equity today is more like 30 or 40 percent in real dollars, so you don’t see the excesses,” Wilson says.
“I don’t think we are going to get out over our skis too far,” says Willett, given current rates of job and population growth. “Everyone expects some sort of slowing but it’s not going to be a big-time downturn.”
As Weinstein says, “I’ve lived here 43 years, and in good times and bad we seem to do better than the rest of the country. I wouldn’t say DFW is going to grow at the breakneck pace of the last year, but with the diversity of the economy we are going to do better, whether the backdrop is 3 percent growth or a 2 percent contraction.”