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The Texas economy is expected to continue its expansion, even in the face of market volatility, according to retired Assistant Vice President & Senior Economist of the Federal Reserve Keith Phillips.
“The most reliable signal of recession has been a yield curve inversion — by this measure probability of recession remains very high, Phillips told a packed house at the 2024 Economic Outlook, hosted by the Greater San Marcos Partnership.
Phillips said an argument can be made that this time is different due to the pandemic, but the same dispute has been made in the past.
“The Fed believes that a soft landing will occur which means that rates will remain higher for longer — slowing lending and causing faster deterioration in household credit conditions,” Phillips said. “COVID savings by households have shrunk and credit card delinquencies are rising. While holiday spending was strong, diminished household savings, slowing labor demand and resumption of student loan payments will likely soften consumer spending in the months ahead.”
Phillips added that economic data near business cycle turning points are subject to larger than average revisions, meaning the country may not know it’s in a recession until many months after it has begun.
He also added that inflation has subsided significantly, but recent strong economic growth has caused markets to worry that inflation progress may stall.
“Headline CPI Inflation was 3.4% last year versus 6.4% in 2022. Despite an uptick in December, over the last three months of 2023, CPI inflation averaged only 1.8%, while core PCE has averaged 2% over past two quarters,” Phillips added. “Job growth slowed from 3.2% in 2022 to 1.7% last year, with less than a one percent growth rate in final quarter of last year. Second quarter 2023 RGDP growth was a healthy 2.1% - which caused many analysts to switch their expectations from recession to soft landing. GDP for Q3 and Q4 came in strong 4.9 percent and 3.3 percent, respectively.”
Nevertheless, Phillips said the Federal Reserve still expects a soft landing, but their year-end forecasts showed they expect better progress on inflation, and slightly weaker economic growth — and thus a slightly lower level of the Fed funds rate at the end of this year (4.6% vs. 5.1% expected at September meetings).
Phillips said he expects to see job gains continue to narrow and that core measures of inflation also slowing — core PCE at 2% for the past two quarters. He said indicators of household financial conditions suggest a weakening of consumer spending in the coming months while excess savings from pandemic support payments almost all spent. Meanwhile, credit card debt delinquency rate is rising — the Q3 value was the highest since Q1 in 2012.
As for the state, Texas jobs have grown almost three times faster than the national average relative to prepandemic levels (8.5% versus 3%). Last year, Texas jobs grew 3.1% compared to national growth of 1.7%. Texas was first among populous states and fifth among all states — behind only Nevada, South Dakota, Idaho and Wyoming.
“Persistently high oil prices, net in-migration from other states, and a more flexible labor market, have helped Texas outperform the nation,” Phillips said. “While Texas job growth was strong last year it slowed from 2022 and will likely slow further this year, although job growth and overall economic activity likely to remain positive this year.”
Texas jobs grew 1.7% in December — the same pace as in the nation — but during the fourth quarter, they grew 2.4% versus the 1.3% growth rate nationwide. The Dallas Fed Business survey outlooks and the Texas leading index suggest slower, but positive growth this year.
Phillips said mortgage rates have declined but are still high. Meanwhile, single-family building permits have slowed, and Texas home sales continue to decline.
“With rising home prices, mortgage rates have reduced home affordability,” Phillips said. “Office vacancy rates are stabilizing at high levels. A third of Texas workers are still working remotely post-pandemic; oil prices remain high while rig count flattens out; and despite recent drop in rig count, Texas oil and gas production continues to increase.”
Locally, over the next decade, San Marcos and the rest of Hays County are likely to continue to expand at rapid pace.
“The Hays County population is growing rapidly. For U.S. counties with 100k+ residents, Hays County experienced the fastest population growth from 20102020: 53%,” Phillips said. “Neighboring Comal County was second with growth of 49%. The population of Hays County in 2022 was 269,225, up 10.4% from 243,967 in 2020. For comparison, the US population grew 0.5% and Texas's population grew 2.7% during that period.”
Philips said Hays andCaldwell Counties are likely to continue to grow strongly due to a number of factors.
• Texas net domestic migration even stronger since COVID – 231,000 people (net increase) came from other states to Texas in 2022
• Austin continues to grow as a high-tech center.
• San Antonio grows more slowly than Austin – but very stable with large military, health care and driveto tourism sector.
• If Austin/San Antonio was considered as one MSA, it would be the 10th most populous in nation (D/ FW is fourth).
• As home prices continue to rise in Austin and San Antonio – growth is pushed outward to surrounding counties – just like has happened in D/ FW
• Fastest growing surrounding counties will be those with more affordable housing costs, good schools, public infrastructure (roads and bandwidth) and low crime.
• Rising home prices in Austin and San Antonio and work from home spurring growth in outlying counties
• Texas State University (38,873 students) important catalyst for growth – “Innovation Corridor” Mike Kamerlander, GSMP President/CEO, wrapped up the event introducing a threeperson panel consisting of developers in the region: John Colglazier, Jr. with Partners Real Estate; Steve Welton, JE Dunn; and Brooks Willig, La Tierra.
Kamerlander asked each panelist why they think this area is the best place for investment.
“At the end of the day, it's obvious that there's a lot of growth, not only in this community, but in major cities surrounding it,” Welton said. “With all the people coming to Central Texas, obviously the facilities that support that need to grow. With the major projects happening in both San Antonio and Austin, this is a perfect hub to help support that. So, there's a lot of growth opportunities, a lot of development that's planned and that's going to come into Central Texas.”
Colglazier said San Marcos has become a focal point more so now than ever.
“We're now dealing with actual projects that are bringing real employment and significant investment and, companies that are exciting that are international companies, that are seeing it and I think the biggest driving forces is quite simply a very supportive community and the surrounding counties,” said Colglazier.
“Geographically, it's State Highway 130 which has become such a major artery for the industrial world, taking the pressure off I35. “With quick access to the border, and one of the legs part of what we call it the Texas triangle (the area encompassing San Antonio, Austin, Dallas and Houston), I don't know a better place to be.”
Willig said the area’s combination of access, develop-ability, political climate and educated population which made it a very compelling place to do business and to invest.
Asked how things have changed over the last two years, Willig said as money's become tighter, the number of truer, active or real buyers in the market has certainly shifted.
“There are a lot of real companies, industries, and just general needs that must be in this area relative to others in the country. I think that change in kind of who the buyers are in the market, is a national macro one, and I think it makes it a more broadly tighter market that plays into Central Texas as a buyer of land and other real estate investment opportunities,” Willig said.
“Over the last few years has changed in that we're not competing with a bunch of other buyers for deals. The days of getting out bid at the last minute to try to acquire a project have certainly changed. So, it's kind of a two-sided coin. I think where we're at now is that. Again, it's a tighter market with a little bit less activity, but the folks who are left are the ones who really want/ need to deploy capital and I think this is a great area to be positioned in and for those buyers.”
In the last two years, Welton said, the shift has gone more to the municipal markets.
“There's a lot of municipalities that need improvements that have the approved capital and are spending it that so that's been a big shift for us,” said Welton. “Looking forward to supporting other future work, there's a large industrial sector that is going to be coming, life sciences of other markets are coming to Austin; that shift in market sector focus is really what's transitioned over the last couple of years.”
Colglazier said the financial lending conditions have changed drastically.
“That doesn't mean the projects aren't getting done, they're much more challenging, but a lot of what we do has shifted,” he said. “It’s the kind of cycle that we're in right now. We’re working more directly with users coming into the region, bringing jobs, bringing significant capital investments. good investment and honestly, numbers that are staggering, you just wouldn't believe that the amount of investment. I think we're close enough and in a unique position of still being in close enough proximity to the border. and all that's going on there while being able to touch Austin and the tech market, San Antonio and the labor market.”
Willig added one key and critical factor in his experience during the developmental process dealt with time.
“Time for a customer means availability of utilities, and speed to get things moving for the buyers in the market now,” Willig said. “I think it’s different from two years ago. I think it's a big competitive advantage for this region relative to other options available to those end users who are looking on statewide or national search.”
Colglazier agreed speed to market was key.
“One month production for a lot of these companies equates to dollars that are just unfathomable,” he said. “Power is a major concern but from a manufacturing standpoint, we're seeing a lot of data center activity in the community. That doesn't necessarily drive a lot of jobs, but the capital investment that comes along with that is pretty staggering.”
Colglazier said the surrounding counties are very good about expediting processes because companies are quick to move on and they feel like things are slowing down.
“Time is money and it's a lot more money than a lot of people realize because of the contracts these companies have with the different major manufacturers,” Colglazier said. “Just getting operational one month two months, three months sooner — it’s meaningful. “The help that we see from the different agencies and government is helpful here in Central Texas.”
Colglazier said unequivocally in the recent months a difference in the cooperation between organizations such as GSMP, Opportunity Austin and Greater SATX, and it I’s bearing fruit directly.
“The regional approach is working,” Colglazier said. “Let's just get them in the region and a rising tide raises all ships. I have not seen this level of cooperation and collaboration in my career.”
Welton agreed about the benefits of cooperation.
“That cooperation is coming in the form of providing a quicker avenue to be able to turn the dirt, but it's also accessibility to infrastructure,” Welton said. “We all know there's a water problem, but being able to have easy access to power, water and infrastructure, without really having a significant spend on improving that is really where this isolation is coming into real importance. I think continued dedication and improving that infrastructure is really going to help bring in even more.”
