Dallas Fed Chief: Texas Economy Poised for Sustained Growth

Texas' rapidly increasing population will give the state an economic edge in coming years as the United States wrestles with sluggish growth in both the labor force and productivity, two trends that could weigh on the nation's economic future, said Robert Kaplan, president of the Federal Reserve Bank of Dallas.

Kaplan, in a recent interview with Houston Chronicle editors and reporters , said the number of people living in Texas has grown from 22.5 million about a decade ago to more than 28 million and could rise above 40 million over the next quarter century, enabling it to outperform the nation as a whole in coming years, said Kaplan. Population is one of two key drivers of economic growth, not only providing workers needed by businesses, but also customers who buy houses, cars and other goods and services.

"At a time where rest of the country is challenged by aging populations, slowing workforce growth and a loss of working age population, with this population growth, Texas is bucking a lot of those trends," Kaplan said. "Texas is extremely well positioned."

The U.S. economy is strong, at or near full employment nine years after the Great Recession ended in 2009. The unemployment rate is 3.9 percent, the lowest in nearly two decades while the economy this year is expected to grow at a pace near 3 percent. But the national economy faces several challenges that federal, state and local policy makers will need to address to maintain healthy economic growth in coming years, Kaplan said.

The biggest of those challenges is demographic. The nation's population is aging and leaving the workforce, creating potential shortages that will slow the production of goods and services. The labor participation rate -- the proportion of people aged 16 to 64 working or looking for work -- has fallen down from 66 percent in 2007 to 62.8 percent today. The Dallas Fed projects that figure could slip below 61 percent over the next several years.

In an effort to bolster the nation's workforce, Dallas Fed researchers have said the United States would be well served to develop a skills- and employer-based immigration system, in which government agencies figure out the kind of jobs that are open and adapt immigration policies to fit the needs of the job market.

"If you think you're going to cut immigration growth by half, you have to recognize that's inconsistent with growing GDP," Kaplan said. "That may be a trade-off decision policymakers want to make. But that's going to make it harder because you have to grow the workforce to grow GDP."

Texas is flush with newcomers, but it faces its own workforce challenges. As technology plays a larger role in the economy, skills will play an ever more important role and workers will need to adjust to changing industries and jobs. State policymakers, he said, should take steps to improve early childhood literacy, secondary education and college readiness -- more than half of the state's college students don't finish with degrees within six years.

In addition, Kaplan said, the state should dramatically beef up training in high schools and junior colleges for skilled middle-class job openings that don't require four-year college degrees.

The Dallas Fed projects Texas employment will grow between 3 percent and 3.5 percent in 2018, and the state's economy could grow by at least 4 percent, well above the 2.5 percent to 2.7 percent in economic growth projected for the United States this year. The state unemployment rate was 4.1 percent in April.

Rising oil prices -- U.S. crude settled at $72.13 on Tuesday, almost three times higher than it was two years ago in the worst of the oil bust -- are also providing a tailwind for Houston's economy, which is driven by the energy industry, Kaplan said.

Global oil consumption is increasing at a healthy pace of 1.5 million barrels a day. Since major oil companies haven't invested in long-term projects in recent years, the world will become far more reliant on U.S. shale drillers headquartered in Houston to meet the growing demand, Kaplan said.

"With the port here and the growth in the energy business, there are increasing opportunities for Houston," he said.

Kaplan said he expects the U.S. economic growth to slip below 2 percent by 2020 as the aging population slows workforce and productivity growth, and stimulus effects the recent federal tax cuts and spending increases wane. That's why he favors the Fed raising interest rates gradually to avoid adding more drag on economic growth.

He said he favors boosting the Fed's key short-term interest rate twice more this year, which would bring the benchmark to just over 2 percent.

"The reason I'm on the gradual side is I'm worried about these structural headwinds -- aging, sluggish productivity, and ... high to unsustainable levels of government debt," he said.

The debt has reached such high levels -- above $20 trillion -- that government is unlikely to take the traditional steps of increasing federal spending to help lift the economy when the next recession hits, said Kaplan. And as the Fed raises interest rates to keep the economy from overheating, the nation's debt burden will only grow as the federal government pays more to borrow, Kaplan added.

The path of debt growth could likely not be sustainable," he said. "And the reason we don't notice it as much is because interest rates are historically low."

Copyright AP - Associated Press
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