The Texas Triangle As Megalopolis

HoustonBusiness A Perspective on the Houston Economy

FEDERAL RESERVE BANK OF DALLAS • HOUSTON BRANCH • APRIL 2004

them to seek out roles that The Texas Triangle complemented economic strengths developing elsewhere as Megalopolis in the Triangle.1 Where one city was strong, the others would be weak, so the cities’ mature industrial structures could fit together neatly, like pieces of The January issue of Hous- a puzzle, with little overlap. If the Triangle cities ton Business proposed that the A comparison of the cities’ are really a megalopolis, Texas Triangle metro areas of strengths indicated such indus- Austin, Dallas/Fort Worth, trial complementarity exists, divided into four parts Houston and San Antonio exist and statistical tests strongly by geography and as distinct cities largely because confirmed the apparent com- of Texas geography. With a plementarity is no illusion. history, their long, navigable river reaching This article looks at the the heart of the state or a deep same puzzle, but from a differ- complementarity saltwater bay or other inlet ent angle. If the Triangle cities implies we can add making Waco or Temple a sea- are really a megalopolis, divided port, many of the roles played into four parts by geography the four together and by the Triangle cities could and history, their complemen- have been combined at a single tarity implies we can add the approximate what location. Combining Houston’s four together and approximate would have developed port, Dallas’ inland distribution what would have developed in function, San Antonio’s reach that other reality with a long in that other reality into deep South Texas and river or saltwater bay. If our northern Mexico, and even the hypothesis is reasonable, we with a long river or state’s political capital into one should be able to compare the saltwater bay. place could have produced a industrial structure of the com- Third Coast megalopolis to bined Triangle cities to New rival New York, Los Angeles York, Los Angeles and the other and Chicago. top U.S. metro areas, and its The previous article also place in the hierarchy of U.S suggested that the Triangle cities should be comparable. cities did not develop inde- When we’re finished, we would pendently, as proximity forced know whether the combined Table 1 Economic Characteristics of Texas Triangle and Major U.S. Metro Areas, 2001

Population Personal income Per capita income Cost of living Millions Rank Billions of dollars Rank (dollars) (U.S. = 100)

New York 21.3 1 872.7 1 40,949 n/a Los Angeles 16.7 2 508.2 2 30,360 140.9 Texas Triangle 13.2 3 433.4 3 32,897 96.7 Chicago 9.3 4 331.3 4 35,751 n/a Washington 7.8 5 302.7 6 38,915 112.3 San Francisco 7.1 6 326.8 5 45,778 183.0 Philadelphia 6.2 7 216.2 7 34,750 121.1

NOTE: All metro area population and income figures are based on the consolidated metro area definition. This includes the Texas Triangle definition, except for Austin and San Antonio, for which an MSA definition is used. The cost-of-living figures use the best possible fit, using primary metro area data, for example, for Los Angeles and Philadelphia. SOURCES: Bureau of Economic Analysis; American Chamber of Commerce Research Association.

Texas Triangle cities would role in elevating local income those that cross international constitute a megalopolis. levels. Even aside from the borders.) cost-of-living figures, however, Table 2 lists all location Comparisons we see that per capita income quotients greater than 1.15 for Table 1 lists the nation’s six in the Texas Triangle is not that the Texas Triangle and the six largest metropolitan areas, much different from Philadel- largest U.S. metro areas, indi- ranked by population and total phia, Chicago and Los Angeles. cating industries that are 15 personal income in 2001: New To look at the industrial percent or more overrepre- York, Los Angeles, Chicago, structure of the nation’s largest sented in the metro area com- Washington, San Francisco and metro areas, we turn to the pared with a typical place in 2 Philadelphia. The combined location quotient (LQij ), defined the United States. The list is Texas Triangle metro areas rank as as it was in the January article. based on wages, salaries and No. 3 when inserted into the employer-paid benefits in 2000, list, with 13.2 million people, percent share of income earned using the Standard Industrial in industry i in city j behind Los Angeles (16.7 mil- LQ = Classification system, in use ij percent share of income earned lion) and ahead of Chicago (9.3 in industry i in the United States until last year. About 60 indus- million). The top cities are the tries were available in the Texas 5 same whether ranked by popu- If LQij is greater than 1, it indi- Triangle, for example. The list lation or personal income, cates a larger than normal con- gives us a good idea of these although Washington and San centration of activity in the city cities’ exports, important in Francisco switch places, with (with “normal” based on a typi- defining the local economy Washington one place ahead cal place in the United States) because exports generate the based on population and San and that industry i is a likely income to pay for imports and

Francisco ahead on personal source of exports. If LQij is less support local activity. income.3 than 1, the industry is not well Table 1 shows wide dispar- represented in the city, and the Major Metro Profiles ity in per capita income for the goods or services the industry Export industries in the metro areas. San Francisco and produces are probably imported. Texas Triangle include oil (oil New York stand at the top of For goods and services that are extraction, oil refining, com- the list, and the Texas Triangle inherently local—dry cleaners modity chemicals), sophisti- and Los Angeles are at the bot- and grocery stores, for exam- cated corporate services (engi- tom. Where reasonable com- ple—the location quotient is neering and management parisons could be found, cost- typically close to 1, as the services, business services), of-living indexes are shown.4 goods or services are neither transportation (air transporta- They strongly suggest that high exported nor imported. (Exports tion, water transportation, trans- per capita income and a high and imports are defined as goods portation services), communi- cost of living are related, and and services that leave or enter cations and wholesale trade. high living costs may play a the metro area, not necessarily Financial strength is limited to

2 Table 2 Export Sectors in Major U.S. Metro Areas, as Indicated by Location Quotients

Texas Triangle. Oil and gas extraction (7.49); heavy construction (1.73); electronic and other electric equipment (1.54); chemicals and allied products (1.21); petroleum and coal products (2.22); water transportation (1.32); transportation by air (1.71); transportation services (2.52); communications (1.41); electric, gas, and sanitary services (2.15); wholesale trade (1.31); real estate (1.31); holding and other investment companies (1.54); business services (1.17); miscellaneous repair (1.19); engineering and management services (1.20).

New York. Other forestry and fishing (4.19); apparel and other textiles (1.63); printing and publishing (1.70); chemicals and allied products (1.76); local and interurban transportation (1.98); communications (1.37); apparel and accessory stores (1.42); depository and nondepository institutions (1.47); security and commodity brokers (4.95); insurance carriers (1.28); insurance agents, brokers and services (1.20); real estate (1.15); holding and other investment offices (2.74); private households (1.33); motion pictures (1.58); legal services (1.62); educational services (1.33); social services (1.29); museums, botanical and zoological gardens (1.62); engineering and management services (1.18).

Los Angeles. Furniture and fixtures (1.43); other transportation equipment (1.95); instruments and related products (1.84); miscellaneous manufacturing industries (1.42); apparel and other textiles (2.71); petroleum and coal products (1.37); water transportation (1.87); transportation services (1.63); food stores (1.61); apparel and accessories (1.25); home furniture and furnishings stores (1.24); real estate (1.48); private households (1.90); auto repair and services (1.17); miscellaneous repair services (1.21); amusement and recreation services (1.90); motion pictures (8.91); legal services (1.25); engineering and management services (1.70); local government (1.19).

Chicago. Primary metal industries (2.10); fabricated metal products (1.53); electronic and other electrical equipment (1.37); miscellaneous manufacturing industries (1.22); food and kindred products (1.29); printing and publishing (1.41); chemicals and allied products (1.17); petroleum and coal (1.30); rubber and miscellaneous plastics (1.37); transportation by air (1.48); transportation services (1.49); wholesale trade (1.28); depository and nondepository institutions (1.28); security and commodity dealers (1.16); insurance carriers (1.30); holding and other investment companies (1.18); business services (1.17); legal services (1.53); museums, botanical and zoological gardens (1.82); membership organizations (1.19); engineering and management services (1.41).

Washington. Other forestry and fishing (13.1); business services (1.55); legal services (1.77); educational services (1.40); social services (1.17); membership organizations (2.19); engineering and management services (1.94); federal civilian government (4.78); military (1.99).

San Francisco. Industrial machinery (3.52); electronic and other electric equipment (3.36); instruments and related products (3.34); petroleum and coal products (2.20); water transportation (1.21); apparel and accessories (1.58); home furniture and furnishings stores (1.39); security and commodity brokers (1.50); business services (2.20); engineering and management services (1.36).

Philadelphia. Chemicals and allied products (3.66); local and interurban transportation (1.26); apparel and accessories (1.20); miscellaneous retail (1.16); depository and nondepository institutions (1.40); insurance carriers (1.49); insurance agents, brokers and services (1.43); hotels and other lodging (2.30); health services (1.21); legal services (1.46); educational services (2.12); social services (1.43); engineering and management services (1.15).

NOTE: Location quotients are shown in parentheses; only LQs greater than 1.15 are shown. SOURCE: Author’s calculations.

real estate and investment com- gion. The industries that re- national industries for the panies. main after combining the Trian- largest U.S. metro areas: ap- The most striking aspect of gle cities into a single metro parel and financial services in the Texas Triangle list is that it area are true national indus- New York; movies, amusements has only 16 export industries. tries, reaching outside the state and transportation services in This compares with the 54 for to the rest of the nation. This Los Angeles; primary and fabri- the cities separately: six in fall in the number of industries cated metals in Chicago; gov- Austin, 14 in Dallas/Fort Worth, is one more indication of the ernment in Washington; high 15 in Houston and 19 in San deep-seated economic interde- tech in San Francisco; and Antonio.6 The collapse in the pendence among the four health care and pharmaceuti- number of export industries is metro areas. cals in Philadelphia. the result of many of them The LQs work well in iden- Corporate services are an serving only the Triangle re- tifying a predictable list of important feature common to

3 Table 3 Metro Area Participation in Exports, by Industry (1 = this metro area exports that good or service, 0 = exports do not occur from this metro area)

Texas New Los San Total Triangle York Angeles Chicago Washington Francisco Philadelphia cities Engineering and management services 1 1 1 1 1 1 1 7 Legal services 0 1 1 1 1 0 1 5 Petroleum and coal products 1 0 1 1 0 1 0 4 Business services 1 0 0 1 1 1 0 4 Chemicals and allied products 1 1 0 1 0 0 1 4 Apparel and accessory stores 0 1 1 0 0 1 1 4 Electronic and other electric equipment 1 0 0 1 0 1 0 3 Water transportation 1 0 1 0 0 1 0 3 Transportation services 1 0 1 1 0 0 0 3 Security and commodity brokers 0 1 0 1 0 1 0 3 Real estate 1 1 1 0 0 0 0 3 Holding and other investment offices 1 1 0 1 0 0 0 3 Depository and nondepository institutions 0 1 0 1 0 0 1 3 Insurance carriers 0 1 0 1 0 0 1 3 Educational services 0 1 0 0 1 0 1 3 Social services 0 1 0 0 1 0 1 3 Total industries 9 11 7 11 5 7 8 58

SOURCE: Author’s calculations.

the largest metro areas, with retail apparel shopping (New hurts its numbers, as deposi- engineering and management York, Philadelphia, San Fran- tory and nondepository institu- services the only export from all cisco and Los Angeles) and two tions, security and commodity cities. Five cities export legal for retail home furnishings (Los brokers, and insurance carriers services and four export busi- Angeles and San Francisco). all fail to make the list. Given ness services. Financial services The Texas Triangle and Chicago the number of well-known are strong in Chicago and New are centers for wholesale trade. Texas law firms, it is surprising York, while Philadelphia and Does the Texas Triangle fit that legal services are not San Francisco show strength in in this group as an exporter? exported. Also, legal services some financial services. Wash- Table 3 lists all the industries tend to complement manage- ington, Los Angeles and the that are exported from three or ment, engineering and business Texas Triangle show little or no more of the seven cities. A 1 in services, which are strong in strength in financial services the table means the city exports the state. other than in real estate. goods or services from that in- The bottom line, however, In manufacturing, both dustry; a zero indicates it does is that a combined Texas Trian- petroleum refining and chemi- not. The totals on the right side gle provides a wide-ranging cals are found in four cities. of the table indicate how many complement of sophisticated Silicon Valley gives San Fran- cities export each industry, and urban exports on a national cisco a strong tech sector, evi- the totals across the bottom basis. Even after regional denced by exports of instru- show how many industries exports are canceled out, the ments, electrical machinery and each city exports. number and composition of nonelectrical machinery. The The Texas Triangle does not Texas Triangle exports com- Texas Triangle and Chicago appear out of place on this list. pare favorably with those of also export electrical machinery. It exports nine of these com- the nation’s largest metro areas. Water transportation and mon urban exports, exceeded transportation services are im- by 11 in Chicago and New What It Means portant in two cities, as well as York. Philadelphia exports The Texas Triangle cities the Texas Triangle. Air trans- eight, Los Angeles and San can be seen as parts of what portation emerges as an export Francisco seven, and Washing- might have been a single giant only in Chicago and the Triangle. ton–Baltimore five. The Trian- metro area in the heart of the Four cities are meccas for gle’s lack of financial strength state had history and geogra-

4 phy been different. Still, the regional financial center could County; Chicago–Gary–Kenosha; proximity of the pieces—Hous- not be more secure. Houston Washington–Baltimore; San Francisco– ton, Dallas/Fort Worth, Austin has pined for diversification Oakland–San Jose; Philadelphia– and San Antonio—forced them Wilmington–Atlantic City; Dallas–Fort away from oil. San Antonio has Worth; Houston–Galveston–Brazoria; to specialize in such a way that been accused of being too San Antonio; Austin–San Marcos. they strongly complement each relaxed, allowing other urban 3 The Dallas and Houston CMSAs ranked other. That complementarity rivals—especially Houston and number nine and 10, respectively, allows us to add them together Dallas—to steal growth that in 2001. Based on population, the for a reasonable approximation Boston–Worcester and Detroit–Ann rightfully belongs in South Arbor–Flint CMSAs ranked number of what the single Texas mega- Texas. Austin has leveraged its seven and eight. Table 1 of the lopolis might have looked like distinctive charm to find itself January article contains comparable had geography only cooperated. at the peak and trough of data for individual Texas Triangle Adding the pieces of the metro areas. every speculative bubble that 4 four metros dramatically short- American Chamber of Commerce has moved through the state in Research Association, ACCRA Cost of ens the list of metro exports. the past 30 years. Living Index, various issues, 2001 and Individually, the four metros Our results suggest that the 2002. Data reported for New York have 54 export industries, but personality differences are and Chicago were too limited in geo- combined, the Texas Triangle probably meaningless in terms graphic scope to make any metrowide has only 16. These remaining comparisons. The comparisons that of their ability to greatly affect were available, however, indicate that industries are national indus- the state’s economic develop- Chicago would stand a few percentage tries, and those that disappear ment. At best, they are periph- points above the national average, and have sales that occur only eral. At worst, the family rivalry New York would be well above the within the Triangle. This last national average. is a waste of resources in an 5 observation is the flip side of Nondisclosure of data is a recurring uphill battle against deeply problem. Data are not disclosed in the previous article’s conclu- rooted economic fundamentals. U.S. government publications unless sion: The cities are economic Good news in Dallas or San there are three or more respondents in complements, with strength in Antonio is good news for the the sector, or if one respondent is so any one city matched by weak- rest of the Triangle cities. And large that its data dominate the results. ness elsewhere. Growth in one In a number of cases where nondisclo- because of the division of eco- sure was an issue, we used adjacent or city stimulates growth in com- nomic roles across the Triangle, trend values to fill in and complete plementary industries, many of it is generally futile for one of comparisons. This was especially true which will be located elsewhere the cities to go head-to-head within the Texas Triangle, where any in the Triangle. with another one in its area of one nondisclosure out of four cities There is no question that could eliminate a comparison. Few if economic strength. From this any of the inserted values were mean- the Texas Triangle cities have perspective, it is difficult to see ingful to the results, other than to developed their own personali- these cities as real economic allow a better picture of overall ties. Dallas and Houston are rivals at all, and a strategy of results. 6 conservative and highly busi- cooperative, statewide develop- Export industries for individual Texas ness-oriented; San Antonio is a Triangle metro areas are in Table 2 of ment programs makes much the January article. more relaxed mix of agricul- more sense than competition ture, the military and tourism. within the region. Austin is music, high tech and university life, set against the —Robert W. Gilmer backdrop of state politics. These personality differences, Notes along with sibling rivalries, 1 “The Simple Economics of the Texas Triangle,” Houston Business, January breed their own intercity 2004. squabbles. 2 The broadest definition of each metro Dallas has long pumped area is used, normally the consolidated itself up with the myth that it metropolitan statistical area (CMSA) has no economic reason to definition, except for Austin and San Antonio, which are metropolitan statis- exist and that it lives by its wits tical areas (MSAs). The definitions alone, despite the fact that its used: New York–New Jersey–Long niche as a distribution and Island; Los Angeles–Riverside–Orange

5 Houston BeigeBook April 2004

Job growth remains elu- Downtown would benefit from of service, shortages cropped up sive in Houston. What looked a consolidation of Chevron in ethylene and styrene, and like a picture of solid growth in Texaco into its 1500 Louisiana chlorine customers were put on January—1.7 percent over the location, but this would do lit- allocation. Competition from prior six months, 3.5 percent tle for metro-area occupancy cheap imports has been limited for the last three—changed rates. Retail occupancy is up a by a weak dollar and by Chinese entirely with the February em- bit, and industrial space is purchases of much of the Asian ployment release. Another down slightly. output that might have been month’s data and revisions to shipped to the United States. the prior month’s left Houston Oil Machinery and Services Price increases are being seen with only 1.2 percent growth There is not much change in a long list of basic chemicals for six months and 1.5 percent here. The overall domestic rig and plastics: ethylene, propy- for the last three. Growth is no count has moved up 20 to 30 lene, polypropylene, styrene, longer without jobs, but job rigs in recent weeks, but the polystyrene, chlorine, polyvinyl growth is weak given the eco- rigs are for low-risk, land-based chloride and PET bottle plastic. nomic backdrop of solid U.S. drilling, which adds little to the and global expansion. demand for oil services. Off- Refining shore drilling remains at the Gasoline prices have been Retail Sales depressed levels of the 1999 supported by strong U.S. de- Someone threw the right drilling downturn. Only 89 rigs mand, reduced capacity due to switch during the week after were working the Gulf of Mex- refinery turnarounds, and state Christmas; Houston’s retail ico in early April. No cure is in and local environmental re- sales have been doing fine ever sight for the gulf; seismic activ- quirements for 15 different kinds since. Almost all retailers are ities and producer plans indi- of gasoline. Pump prices set an comfortably meeting plans for cate that no one intends to re- all-time record in March (if not the year, and high-end retailers turn there soon. Capacity is adjusted for inflation). With are substantially exceeding them. slack and price mediocre. Inter- gasoline inventories scraping Cost pressures are growing from national activity remains strong the bottom of the five-year energy and employee benefits, in Latin America and the Mid- range, refiners have enjoyed however. Hiring remains scarce. dle East, weak in West Africa some of their best margins and the North Sea. since 1999. Seasonal turnarounds Real Estate are now ending, capacity uti- The real estate story remains Petrochemicals lization is rising, and invento- largely unchanged. Both new After five years of gloomy ries should respond to higher and used homes opened the news from the petrochemical production in the weeks ahead. year with record sales, driven industry, 2004 has brought the The markets shrugged off by low interest rates. Lower- first signs of recovery. Petro- recent ratification of a previ- priced homes remain the hot chemical demand is very strong, ously announced OPEC pro- segment of the market as first- and only a few areas still suffer duction cut. Unable to pass on time buyers seek to qualify for from serious overcapacity prob- the current high prices in a mortgage. Warm weather and lems. With turnaround season world crude markets, OPEC the end of the school year under way in March, taking members will probably con- should add fuel to this fire in some capacity temporarily out tinue to make crude available. coming months. Apartment occupancy con- tinues its two-year decline, and For more information or copies of this publication, contact Bill Gilmer at prospects are bleak with new (713) 652-1546 or [email protected], or write Bill Gilmer, Houston Branch, units coming on line. Occu- Federal Reserve Bank of Dallas, P.O. Box 2578, Houston, TX 77252. This publication is pancy rates for office space also available on the Internet at www.dallasfed.org. also continue to fall citywide. The views expressed are those of the authors and do not necessarily reflect the positions of the Federal Reserve Bank of Dallas or the Federal Reserve System.