BUSINESS OUTLOOK FOR ’86

I suspect things are going to get a little bit worse before they get a whole lot better. “

-R. L. “Bob” Thornton III

“I fear things may get a lot worse before they get a little bit better. “

-J. L- Jackson



THESE PESSIMISTIC views sum up Dallas’ economic outlook in 1986: still okay but sliding downhill, and likely to slide farther, but not too far, before a turnaround at some unforeseen point in the future.

Such was the consensus when D asked Dr. Roy Herberger, dean of the Cox School of Business at Southern Methodist University, to invite a small group of Dallas area financial executives and business professors to take part in a roundtable discussion of the area’s economic outlook for 1986. Participants in the roundtable were: Dean Herberger; Dr. Bud Weinstein, director for the Center of Enterprising at the Cox School; J. L. Jackson, president of Diamond Shamrock Corp.; Dr. Ed McClelland, economist and vice-president of RepublicBank; Dr. George Hempel. professor of finance at the Cox School; R. L. “Bob” Thornton III, Southwest regional manager for Chemical Bank; Dr. Harold Gross, assistant director of the Center for Enterprising; and David Wallenstein, chairman of Miller, Dale & Wallenstein. Moderator of the panel was Scott Bennett, contributing editor of D.

Even the more optimistic voices in our roundtable seemed to be searching for silver linings in a darkening cloud. Herberger sees Dallas in a period of “sell-down” as opposed to “sell-out. ” Explained Herberger, “One of the original attractions of this area, and other Sunbelt boom towns, was the relatively low values on property and assets and the relatively lower cost of living. As the boom gained strength those prices rose dramatically until our inflation rate was above the national average and our costs were fast catching up with the rest of the U. S. ” Concurrently, he pointed out. costs were falling in the depressed Great Lakes and the Northeast. Soon, the relative advantage began to shift north. But Herberger sees a deflation of local costs as good and the selling down of local assets as a long-term benefit.

Interestingly, most participants agreed with Dr, Bud Weinstein of SMU’s Center for Enterprising that there are really two economies in Dallas-Fort Worth. “There is a traditional Texas economy based on oil and gas, agriculture and defense that reacts almost opposite to the national economy, ” he explained. “Then there is a diversified economy of high-tech, retailing, finance and other elements that is tied almost totally to the national economy. ” With two of the legs of the traditional “Texas” economy broken, Weinstein foresees only continuing problems from that half of the local economy. And with the overall U. S. economy sluggish, he is not optimistic that the “national” half will be able to overcome the “Texas” drag.

Harold Gross sees a further division of the local economy, a view with which some participants disagreed. “If you look at the statistics, the real spectacular growth in the Metroplex has come in the Tarrant County portion, especially in the Mid-Cities” According to Gross, this airport- and defense-related growth may indicate that Dallas is in even deeper difficulty than most realize.

The participants’ predictions hinged on national and international events-events that had little effect on the state or local economy a few years ago. Nearly all saw interest rates hovering at or just below 10 percent for the coming year, with inflation remaining in the three percent to four percent range during the first half of next year. Some foretold a slight increase in inflation during the second half, especially the fourth quarter. All agreed that the strong U. S. dollar and the size of the deficit would be key fee-tors in the performance of the local economy.



TAXES

Each panelist stressed the importance of the pending rewrite of the U. S. Tax Code. “The idea of calling this ’reform’ is absurd, ” sneered Diamond Shamrock’s Jackson. “If one goal of reform were ’simplification’ then none of the plans we have seen amounts to reform, ” said SMU’s George Hempel. “Much of our local and the national economy is in limbo and, therefore, stagnating, ” added Dr. Ed McClelland of Dallas’ RepublicBank.

Among the more dire consequences of tax reform addressed by the panelists was the reluctance of investors to act while major changes in the tax code are pending. “The market for second homes, oil and gas deals, research and development partnerships and other investment vehicles has all but died from the uncertainty, ” explained Thornton. Jackson was especially doleful about the meaning of tax reform for the energy industry and the “Texas” half of the Dallas economy. “If a new tax code is to provide tax relief for the poor, the middle-class or anyone else, someone else is going to pay more in the form of taxes. And right now my bet is energy is going to take the number one hit. ” Gross quickly added “real estate” to industries of local importance likely to be at the top of the congressional hit list.

Weinstein did point to some consolation in the president’s so-called Treasury II plan, at least in terms of local interests. “The best thing that could happen is for Congress to adopt the president’s plan to do away with the deductibility of state and local taxes. ” Abolishing the deduction would mean low-tax states like Texas would become even more attractive; the change might offset the effects of other provisions aimed at energy, high-tech and real estate. The idea, he said, is that most middle- to upper-income taxpayers, those most likely to itemize, don’t feel the full pain of super-high local taxes found in most Frostbelt cities because they can deduct them from their national income tax. “If you are in a 50 percent tax bracket and you pay $10, 000 in state and local taxes, you have received what amounts to a $5, 000 subsidy from the Feds, ” explains Weinstein.

Weinstein agreed with other panelists, though, that the state and local tax deductibility proposal was not likely to be adopted. “That was where the president hoped to get the money to fund cuts elsewhere, but it now appears Mario Cuomo [New York governor] and Dan Rostenkowski [chairman of the House Ways and Means Committee] have decided against that approach, ” said Hempel.

On a tax matter closer to home, Jackson expressed concern over rising state and local taxes. “One of the key factors in Diamond Shamrock’s decision to move to Dallas and Texas was the area’s low tax rates. Now we are beginning to see considerable pressure for an upward movement in those rates, and that will definitely hurt our ability to attract additional industry. ” Thornton suggested that top research and development facilities pick the Dallas-Fort Worth area in part because well-paid technical and management personnel want to avoid the high local taxes of many states. He believes that a state income tax or increased property taxes could begin to take the luster off the area.



REAL ESTATE

Tax law considerations aside, most members of the roundtable foresaw problems for developers in 1986 but no real problems in the construction industry itself. “There are plenty of projects in the pipeline to keep the construction industry going strong through most, maybe all of 1986, ” offered Republic’s McClelland. “However, with Dallas now boasting the largest inventory of commercial space in the nation, we may well face a substantial downturn in that industry in 1987. “

Herberger admitted that a construction downturn worried him the most, “Vacant space hurts developers and the financial institutions that financed their projects, but when you start to see large numbers of unemployed construction workers you start talking about significant drop-offs in retail sales and in consumer lending and in other areas that keep a local economy booming. “

Participants also suggested that a) home-building and home sales are likely to remain strong in the area throughout the year unless interest rates take an unexpected dramatic rise, b) retail development and leasing will likely remain at high levels in 1986 but tail off substantially in 1987 and c) industrial space development will continue strong but leasing activity might begin to tail off.



RETAILING

Most panelists foresee a continued strong retail market in Dallas. “Dallas is one of the strongest retail areas in the nation ” advised Weinstein. “This is a very fashion-conscious city and a very consumer-oriented city. Retail space leasing is probably the strongest segment of the local development industry at the moment and that is not by accident. “

“One of the things you do see right now, ” added McClelland, “is plenty of credit card money available, and people are using that credit at the consumer level. ” Other panelists mentioned the growing number of retail sales opportunities in Dallas. “There is a terrific supply of goods and services available in Dallas in terrific shopping environments, and that helps foster demand, ” suggested Weinstein. “You also have the Dallas ’sales’ tradition at work. There is no stigma to being a successful salesperson in this town- in fact, it’s just the opposite. “



SELF-EMPLOYED ENTREPRENEURS

Panelists disagreed over whether or not any substantial degree of new business is being created in Dallas-Fort Worth. Weinstein expressed serious doubts. McClelland and Thornton suggested that after large layoffs (such as those that recently occurred in the semi-conductor field), many unemployed workers tend to use their savings to go into business for themselves rather than move elsewhere. That may account for some figures that indicate a growing number of “self-employed” persons in the Metroplex.



BANKING AND FINANCE

A banking cataclysm is not on the horizon, agreed panelists, but Dallas’ traditionally strong financial sector is in for some rough times. No one expected a major bank failure-but all admitted that even if they did, they would be reluctant to speak about it on the record for fear of creating a selffulfilling prophecy. All, however, expect a number of smaller institutions to go under and see thrift institutions as especially vulnerable. Still, none predicted a credit crunch in Dallas.

One area of some concern, however, was insurance companies. “There are some real problems in that industry today and I would be very much surprised if some of the shaky companies weren’t in Dallas, ” explained Hempel. “For far too long these companies looked to their investments and not to their premiums. Now they find themselves paying claims in excess of their income, primarily because inflationary period investments haven’t remotely lived up to expectations. “

As for venture capital, an area where Texas is frequently criticized as lagging, Herberger suggested that there was plenty of patient investment money available in Texas. “There are great fortunes centered here dial have the time and the interest in waiting out venture capital investments, ” he said. “However, ” he continued, “they may tend to invest in the things they know, like oil and gas, and not high-tech type investments. That’s not necessarily a bad thing. There are great opportunities for investing in energy today, and those investments certainly benefit the Texas and Dallas economies. “



THE WORLD MARKET

Possible action on the tax front aside, panelists see developments in such industries as manufacturing, oil and gas, and electronics as entirely dependent on ?vents in the world marketplace. “If OPEC has truly decided to stop trying to fix the world price of oil then you could see some very steep drops in energy prices, ” predicted Jackson. “If we continue to allow the Japanese and others to beat us over the head in the electronics industry we soon will not have one; Mostek will be only the first cookie to crumble, ” predicted Thornton. “A falling dollar may make our goods more affordable on the world market ” McClelland added, “but it will also mean rising interest rates and that could have a terribly negative effect on die ability of Third World debtor nations to make their payments. “

Hempel was especially concerned with Mexico. “Mexico has a direct and dramatic effect on the Texas economy. Mexico is the major market for most Texas exports and that includes Dallas. The current situation in that country calls very much into question whether or not there will be any market at all in Mexico. Texas, including Dallas, is where most Mexican pesos are spent in me U. S. There aren’t too many pesos around to be spent these days and they aren’t worth very much at that. “

Unfortunately, our participants had no quick and easy answers to major economic problems and no real “Texas” alternatives. The Third World debt bomb, the problems of damned-if-you-do-damned-if-you-don’t maneuvers in foreign exchange markets and with interest rates all cast a pall over talk of 1986. Nearly all participants agreed that “protectionism” was not the answer to meeting and beating the competition, but support for “free trade” was equally lacking. “’We say we are for free trade but we are the only nation I know of that even remotely attempts to practice what it preaches. And it’s costing us dearly, ” said Thornton. “I have had some experience trying to enter Japanese markets and 1 am here to tell you it is ail but impossible to pull off, ” added Jackson.

Still, the “international marketplace” sparked genuine enthusiasm on the part of several participants. Especially excited was Herberger. “We haven’t gotten our act quite together yet with regard to international marketing or junketing, but we are trying and we are one of the tew cities in the U. S. to gel into that effort as a city; in most cases it is a state effort and Texas has done a pretty poor job on that front. ” The greatest need, in Herberger’s eyes, is the need for businessmen planning to travel abroad to understand they are on “trade” missions-and that means “two-way” trade opportunities.

Herberger sees Dallas emerging as a true international city, with foreign investors and corporations increasingly interested in Dallas as a location for their offices and plants. “We offer a foreign company a great deal with regard to location and a positive business climate. I agree that the migration of U. S. companies has halted for the time being; the greatest recruitment opportunities lie with international companies. “



LONG-TERM TRENDS

Despite their keen awareness of looming problems, all participants were more optimistic than not. “Frankly. ” Bob Thornton crowed, “Chemical Bank is committed to Dallas. It’s still one of the most rapidly expanding markets in the nation, and it still possesses the assets that have made it great. There is probably no other market in the nation we believe has a brighter future. “

“Not to be too much the contrarian, ” smiled George Hempel, “but I am cautiously optimistic about both the country as a whole and Dallas for the coming year. Sure, there are a lot of time bombs licking away out there, but there is an awareness of how serious those situations are and they will, I am confident, be dealt with. So when you talk about interest rates being low and inflation being low, then the U. S. portion of the Dallas economy should fare quite well. “

As for the price of oil-long the linchpin of the Texas economy-the consensus can be reflected in two comments: “It’s going to go lower before it goes higher, ” and “Thank goodness we don’t live in Houston. “