At the Heart of Texas: Cities' Industry Clusters Drive Growth
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At the Heart of Cities’ Industry Clusters Drive Growth Featuring Four Additional Metros Amarillo, Beaumont–Port Arthur, Lubbock and Tyler–Longview A special report of the Federal Reserve Bank of Dallas Second Edition | December 2018 S taff Executive Editor Pia M. Orrenius Publication Editors Laila Assanie Art Director Michael Weiss Darcy Taj At the Heart of Texas is a special report of Data Analysts Digital Designers the Research Department at the Federal Alexander T. Abraham Justin Chavira Reserve Bank of Dallas, P.O. Box 655906, Stephanie Gullo Dallas, TX 75265-5906. Articles may be Olumide Eseyin reprinted on the condition that the source Benjamin Meier Kishya Mendoza Greer is credited and a copy is provided to the Research Department. Associate Editors Online Architects The views expressed are those of the Kathy Thacker Roger Morais authors and do not necessarily reflect official Dianne Tunnell Demere O'Dell positions of the Federal Reserve System. For additional data, visit dallasfed.org/research/heart Contents Section 1: Overview—At the Heart of Texas 4 Section 2: Austin—Round Rock 10 Section 3: Dallas—Plano—Irving 16 Section 4: El Paso 22 Section 5: Fort Worth—Arlington 28 Section 6: Houston—The Woodlands—Sugar Land 34 Section 7: McAllen—Edinburg—Mission 40 Section 8: Midland—Odessa 46 Section 9: San Antonio—New Braunfels 52 Section 10: Amarillo 58 Section 11: Beaumont—Port Arthur 62 Section 12: Lubbock 66 Section 13: Tyler—Longview 70 Appendix 74 At the Heart of Texas: Overview ith five metropolitan areas of 2 million or Importance of Cities more residents, Texas has more big cities per It is the age of the city. Paradoxically, as globalization W capita than most large U.S. states.1 Dallas–Fort put everything and everywhere seemingly within reach, Worth and Houston rank among the top six largest metro- attention has been drawn from national boundaries to politan areas in the U.S. in terms of both population and these smaller units of civilization. This is not new when economic output. In fact, Texas is the only state to have taking a longer perspective; after all, cities have been two metros in the top 10 for both measures. the rock stars of history before, whether it’s Babylon, the The abundance of large cities is an important growth cradle of civilization; Athens, the birthplace of democ- advantage on the state’s list of favorable economic racy; Florence, the origin of the Renaissance; or Bir- factors: central location, rich oil and gas deposits, well- mingham, home of the Industrial Revolution. placed sea and land ports, proximity to Mexico, rapid Cities were centers of population, commerce, learn- population growth, low cost of living and relatively light ing, wealth and economic opportunity long before econ- regulatory burden. Thus, it is no surprise that employ- omists explained why agglomeration matters to growth. ment has grown a percentage point faster in Texas than Cities are dense areas, with relatively high produc- in the nation on average and that state gross domestic tivity and wages compared with noncities. The pro- product growth was nearly twice that of the nation during ductivity advantage stems from agglomeration, which the economic recovery following the Great Recession.2 means firms that co-locate have ready access to a deep Amid this economic expansion and a near 40- labor pool, the easy exchange of ideas and low trans- year low in unemployment, this second edition of At portation costs.3 When firms in like industries cluster, the Heart of Texas, a special report on the historical, they can further leverage the benefits of agglomeration. economic and demographic profiles of Texas and its Examples are Silicon Valley, de facto headquarters of key metropolitan areas, builds upon the first edition the U.S. high-tech industry, and Houston, home to the released in February 2016. bulk of the nation’s oil and gas sector. Harvard econo- Four smaller Texas metros are new to this edition— mist Ed Glaeser calls cities “mankind’s greatest inven- Amarillo, Beaumont–Port Arthur, Lubbock and Tyler– tion” and argues in a 2011 book that cities have led Longview. Collectively, they highlight the economic con- human progress through the ages by acting as engines tributions of smaller cities and more rural areas, as well of innovation.4 as the importance within the state of certain industries, including agriculture and refining and petrochemicals. This edition also moves forward the time period Dominant Clusters Power Texas under study, focusing on economic developments Characteristics such as location, natural resources within Texas and its metros in the 2010–17 post-Great and labor force contribute to an area’s long-run eco- Recession period—a stretch that includes the fracking nomic performance. Industry mix and industry agglom- boom but also the 2015–16 energy bust, which slowed eration are additional important factors. Geographi- the state’s economic expansion relative to its nonenergy cally, groups of firms are concentrated based on the peers. As the state economy slowed notably in 2015–16 technologies they employ, the markets they serve, the due to collapsing oil prices and related exploration goods and services they produce and the labor skills activities, metros such as Dallas and Austin with a more they require. Such industry clusters are important be- diversified industrial base offset weakness in Houston, cause they provide their participants (firms) with access Midland–Odessa and other energy-producing regions. to specialized knowledge and/or resources, enhancing 4 Federal Reserve Bank of Dallas productivity, spurring innovation and attracting new NAICS classifications. The entertainment cluster in Los business and investment in the area.5 Angeles and the auto manufacturing cluster in Detroit An area typically has an economic base that consists are examples of such broad groupings that include the of several dominant industry clusters. These clusters main industry and its suppliers and service providers. typically exceed the national average in their share of em- Chart 1.1 plots industry cluster LQs and growth ployment, output or earnings. Location quotients (LQs), for Texas. Clusters in the top half of the chart, such as which compare the relative concentration of industry energy and mining, information technology, business clusters locally and nationally, are one way of assessing and financial services, construction, and transporta- these key drivers in an area’s economy. An LQ exceeding 1 tion and logistics, are referred to as base clusters. They indicates that a specific industry cluster is more dominant have a larger share of state employment relative to the locally than nationally. In this report, LQs are calculated nation and, thus, an LQ exceeding 1. A base cluster is using industry cluster employment, and industry cluster usually vital to an area’s economy and can be expanding growth is measured by the percentage-point change in its relatively rapidly (star) or growing slowly or declining share of local employment between 2010 and 2017.6 (mature). The presentation here uses annual employment Those in the bottom half are less-dominant locally data from the Quarterly Census of Employment and than nationally. They generally produce services or Wages to compute location quotients. These data are goods for local consumption and, hence, have an LQ readily available at the metropolitan statistical area below 1. “Emerging” clusters, such as defense and (MSA) level and by three-digit-or-higher North Ameri- security, are relatively fast growing, while those growing can Industry Classification System (NAICS) code, facil- slowly or declining are termed “transitioning.” itating analysis. Industry cluster definitions are taken Education and health services clusters combine from Stats America, with some modifications that are public and private sector employment. Thus, apart detailed in the appendix. Clusters generally comprise from the government cluster, all others comprise only multiple interdependent or interrelated industries or private sector employment. Chart 1.1: Energy, IT and Business and Financial Services Help Set Texas Apart from Nation 1. 8 Mature Energy and mining Star Information technology 1. 6 and telecommunications Construction 1. 4 Education Transportation and logistics Food services Computer Chemicals 1. 2 manufacturing Retail 1. 0 Machinery manufacturing Location quotient in 2017 Defense and 0.8 security Business and financial services Health services Advanced 0.6 Government materials Recreation Biomedical Transitioning Emerging 0.4 –1. 5 –1. 0 –0.5 0.0 0.5 1. 0 1. 5 Percentage-point change in employment share, 2010–17 NOTE: Bubble size represents cluster share of metropolitan statistical area employment. SOURCES: Texas Workforce Commission; Bureau of Labor Statistics. Section 1: Overview—At the Heart of Texas 5 Texas’ Leading Clusters the significant presence of refineries and petrochemical Texas has several dominant clusters. An abundance plants near the Gulf Coast. of oil and gas has traditionally made energy-related Texas has evolved into a major high-tech hub (LQ industries a major cluster—it employs 8.6 percent of the of 1.1 in 2017). The industry took off after World War II, state’s workforce and has an LQ of 1.5. Texas’ geological as Dallas-based Texas Instruments and other mili- makeup includes four shale formations—the Permian tary-electronics manufacturers branched into civil Basin, Barnett, Haynesville and Eagle Ford—helping electronics. Texas also flourished during the 1990s make the state the No. 1 producer of oil and gas in the high-tech boom, when the IT and telecommunications nation. Texas produces 39 percent of all U.S. crude oil industries expanded in Austin and Dallas. Employment and 23 percent of U.S. natural gas and employs 12.6 in the IT and telecom cluster grew about 20 percent percent of the workers in the nation’s energy and mining in 2010–17 and now represents 5 percent of the state’s cluster.