sign in sign up
<<
Home , Dallas, Texas Triangle

HoustonBusiness A Perspective on the Economy

FEDERAL RESERVE BANK OF • HOUSTON BRANCH • JANUARY 2004

and salary jobs and 71 percent The Simple Economics of personal income. The last issue of Houston Business of the Triangle described these ’ rapid growth in recent years, which is the primary reason for the convergence of Texas’ per cap- ita income to U.S. income levels. The is out- The size of the four metro- This article takes a lined by Houston, politan areas combined would close look at the and the Dallas/Fort Worth metro- place them among the largest plex, with Austin inside the Tri- in the , comparable Texas Triangle cities angle. The cities are relatively with New York, or and examines the close and connected by major . Indeed, if history and highways, giving the Triangle geography had been slightly dif- conjecture that sides of 268, 199 and 243 miles. ferent, the Triangle cities easily Table 1 summarizes the cities’ could have been one. Although proximity has shaped economies and illustrates their the cities are spread throughout and specialized importance to the state. The the heart of the state, their prox- D/FW metroplex was the largest imity has likely influenced their their economies. of the Triangle metro areas in growth and development. As 2001 based on population, em- each found specialized eco- ployment or income. Austin was nomic roles to serve the rest of the smallest, although it has the Triangle and the state, the closed rapidly on San Antonio others sought out complemen- in recent years, and the differ- tary roles. Since there is rela- ences between the two cities tively little overlap in their eco- are now small. Houston was the nomic activities, and despite the most affluent metro area based distances between them, the Tri- on per capita income, and San angle cities might be better seen Antonio’s income level lagged as a single economic entity. the rest of the group by a sig- This article takes a close look nificant margin. at the Texas Triangle cities and Although the Triangle cities examines the conjecture that make up only 62 percent of proximity has shaped and spe- Texas’ population, they provide cialized their economies. If there 68 percent of the state’s wage is little overlap in the economic

Table 1 Economic Characteristics of Texas Triangle Cities, 2001 for many miles. Two highways proposed by the Republic of Population Employment Personal income Per capita (millions) (millions) (billions of dollars) income (dollars) Texas soon converged nearby. Dallas grew into a service cen- Texas 21.37 10.06 608.5 28,472 ter for surrounding farmlands Triangle cities 13.18 6.81 433.4 32,897 based on its transportation links. By the 1850s, it had such signs Austin 1.32 .71 41.7 33,247 of civilization as grocery and, Dallas/Fort Worth 5.42 2.91 180.1 31,511 dry goods stores, a drugstore, Houston 4.81 2.39 168.0 34,916 boot and shoe shops, an insur- San Antonio 1.63 .80 43.7 26,887 ance agency and a newspaper.

NOTE: Based on metro area definitions; Dallas/Fort Worth and Houston are consolidated metro definitions. Access to markets by water was Employment is wage and salary jobs only. limited to shipments through SOURCE: Bureau of Economic Analysis. the of Jefferson, where only during certain roles of these cities, it would in 1720 and 1731 and three months of the year could goods mean there is little basis for the more relocated there later from move on Cypress Bayou, across historic rivalries that have arisen eastern Texas as the Spanish Lake and ultimately to among them, particularly be- withdrew the lines of their . Dallas’ growth tween Houston and Dallas.1 frontier. Although San Antonio would wait for the railroads, the was located in a large fertile explosion of population on the Past and Present plain and almost all observers Blackland Prairie farms Numerous Texas rivers run commented on its physical after the Civil War, and the north to south toward the Gulf beauty, by the time of the development of the city as a of Mexico, including the Sabine, it had been major cotton-processing center. Trinity, Brazos and Colorado. reduced to a small, somewhat Houston is the state’s major The problem presented to early wretched . Population port; San Antonio is a distribu- Texas settlers was that none of had shrunk steadily in the early tion and agricultural center for these rivers were navigable for 19th century because of the and northern Mex- any significant distance, leaving consolidation of the Mexican ico; Dallas is an inland distribu- ox- or mule-drawn freighter as states of Texas and Coahuila tion point for much of Texas, the primary means to reach and the shift of the capital to , and market, across a coastal plain Saltillo, the disruptions caused ; Austin is the political legendary for its thick gumbo by the Mexican revolution for capital. These are geographic mud when it rained. independence, and continued and political roles that could The Allen brothers founded local flooding. have been scrambled together Houston in 1836 at the headwa- Austin was the almost single- in many other ways. The pres- ters of Buffalo Bayou, seeking handed creation of Mirabeau B. ence of one great navigable out the most interior point with Lamar, second president of the river through the heart of the year-round access to the Gulf of . He was deter- state, or a navigable saltwater Mexico by water. Houston’s mined to have a planned capi- inlet that stretched to Waco, location gave it access to the tal city for Texas along the lines Temple or Brownwood, could sugar and cotton plantations of of Washington, D.C., and was have caused several or all of the to the west equally determined that it should the roles described above to and to the timberlands to the be near the center of the young fall together in a single, true east, offering the enormous republic. Lamar picked the loca- . advantage of cutting 50 miles tion for the capital while on a However, nearly 170 years off the wagon trip to the sea.2 hunting trip in the Colorado removed from the founding of San Antonio was a century River Valley. Much of Austin’s the Republic of Texas, these old at the time of the Texas early history was as a remote cities have assumed important Revolution. The city was village struggling against Indian roles in the state and become founded as part of the Spanish attack with little more than state much more than distribution mission and presidio system to business to support it. centers. civilize and protect . Dallas was founded in 1841 Houston. The state’s major It was the most important mis- by , who set deepwater port—the second sion center in the colony, with up a trading post on the only largest in the United States two missions established there natural ford on the based on tonnage—Houston is 2

home to Texas’ international important technology employ- Table 2 lists all location quo- business community. However, er. Austin is also renowned for tients greater than 1.15 for the the city’s bread and butter are its music industry. Billed as the Texas Triangle metro areas, indi- oil and natural gas, with oil pro- “Live Music Capital of the World,” cating an industry that is 15 per- ducers, oil services and mach- it sponsors a number of music- cent or more overrepresented inery companies, refineries and related festivals and conventions. in that city compared with a typ- petrochemicals directly or indi- San Antonio. The Alamo ical place in the United States. rectly accounting for half the City’s historic role has been as The list is based on wages, sala- jobs. The Texas Medical Center the distribution point for South ries and employer-paid benefits and Johnson Space Center, along Texas and northern Mexico. This in each industry in 2001, using with companies such as Conti- role has grown with the rapid the industry definitions of the nental Airlines, American Gen- expansion of the maquiladora Standard Industrial Classification eral Insurance Co. and HP/ industry and the implementation (in use up until last year). About Compaq, help define the non- of NAFTA. Tourism is a major 60 industries were compared, oil part of Houston’s economy. industry, with Fiesta Texas and with a number of industries not Dallas/Fort Worth. The SeaWorld located there, as well available for some cities due to metroplex still plays its original as the River Walk, El Mercado nondisclosure of data.4 We as- role as a major inland transpor- and other attractions. Lackland sume that this list is a first ap- tation hub and distribution and and Randolph Air Force bases proximation of exports from service center for the surround- and Fort repre- these cities, important in defin- ing area, but now the area it sent a major military presence. ing the local economy because serves stretches over several exports will generate the income states. It is home to D/FW Air- An Analytical Look to pay for imports and support port, the fifth busiest in the History, geography and the local activity. world. Following the oil bust, descriptions above would imply The selected export sectors Dallas has clearly emerged as complementary roles for the in Table 2 broadly confirm the the state’s banking and finan- Texas Triangle cities, but is there city descriptions given above. cial center. Dallas and Fort a way to quantify what these There are six export industries Worth also have a significant cities do and test for comple- for Austin, 14 for Dallas/Fort presence in oil-related activity, ments? One way to isolate what Worth, 15 for Houston and 19 notable on any standard except a city does well, and to find for San Antonio. Austin has the that set by Houston. High-tech- which of its industries export to shortest list of export sectors, nology industries, especially the rest of the nation, is to com- made up primarily of tech or telecommunications, became a pute location quotients (LQij). tech-related industries such as major center of growth in the industrial machinery (comput- , partly a legacy of the percent share of income earned ers), electronic and electrical in industry i in city j region’s history in aviation and LQ = equipment, communications and ij percent share of income earned defense electronics. in industry i in the United States business services, plus state gov- Austin. As the state capital ernment. In Houston, we see and home to the University of If LQij is greater than 1, it indi- oil’s dominance in oil and gas Texas’ main campus, Austin’s cates a larger than normal con- extraction, chemicals, refining major strength has historically centration of activity in the city ( and coal products), been a robust government sec- (with the “normal” comparison pipelines, and backward link- tor. Beginning in the late , based on a typical place in the ages from oil into manufacturing Austin began developing a sig- United States) and that industry i through industrial machinery and nificant presence in high tech- is a likely source of local ex- equipment. Heavy construction 3 nology—IBM Corp. in 1967, ports. If LQij is less than 1, the and engineering and manage- in 1969 and industry is not well represented ment services are closely tied to Motorola in 1974. The arrival of in the city, and the goods pro- construction of large chemical chipmaker-consortium Interna- duced by the industry are prob- and refining facilities. tional Sematech in 1988 pro- ably imported. Some goods are Dallas/Fort Worth’s impor- vided the momentum for the inherently local—dry cleaners tant distribution role shows up 1990s. Today, about 120,000 em- and grocery stores—and the in wholesale trade, transporta- ployees—25 to 30 percent of the location quotient is typically tion services and transportation local workforce—are tied to close to 1 in all cities, as the by air. Its role in finance is seen technology industries, and Dell goods are neither exported nor in insurance and in depository has emerged as the city’s most imported. and nondepository institutions. 3

Table 2 Export Sectors in Texas Triangle Cities as Indicated by Location Quotients

Austin. Industrial machinery and equipment (3.69); electronic and other electrical equipment (3.32); communications (1.17); wholesale trade (2.08); business services (1.47); state government (2.27).

Dallas/Fort Worth Metroplex. Oil and gas extraction (4.82); electronic and other electrical equipment (2.47); trucking and warehousing (1.17); transportation by air (2.49); transportation services (2.12); communications (1.82); wholesale trade (1.47); home furniture and furnishings stores (1.38); depository and nondepository institutions (1.16); insurance agents, brokers and services (1.16); real estate (1.54); holding and other investment offices (1.16); business services (1.35); miscellaneous services (1.37).

Houston. Oil and gas extraction (13.81); heavy construction (3.03); industrial machinery and equipment (1.26); chemicals and allied products (2.43); petroleum and coal products (4.97); water transportation (3.38); transportation by air (1.40); pipelines, except natural gas (6.78); trans- portation services (3.32); electric, gas and sanitary services (3.69); real estate (1.27); holding and other investment offices (2.10); miscella- neous repair services (1.58); legal services (1.34); engineering and management services (1.40).

San Antonio. Oil and gas extraction (1.30); general building contractors (1.16); heavy construction (1.18); miscellaneous manufacturing (1.18); transportation services (2.85); communications (1.96); electric, gas and sanitary services (3.13); general merchandise stores (1.19); food stores (1.29); auto dealers and service stations (1.28); eating and drinking places (1.35); miscellaneous retail (1.18); insurance carriers (2.35); holding and other investment offices (1.72); private households (1.28); auto repair, services and parking (1.19); federal civilian (1.84); military (4.70); (1.16).

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

It maintains one foot in oil (oil gas extraction and semiconduc- City A specializes in green widg- and gas extraction) and one in tors (electronic and electrical ets, B in white and C in blue, tech (electronic and electrical equipment) in Austin and Dal- with each city earning $300. equipment). San Antonio’s large las and heavy construction in They divide production of yel- tourist industry is represented San Antonio and Houston. low widgets, a local good, in a number of retail and serv- We can use these location equally among the cities, to ice industries, and the expected quotients to ask whether the earn $100 each. If we combine strength in federal civilian and Texas Triangle cities have de- the three cities, there is equal military sectors is present. There veloped as rivals or if they income earned of $300 from is also some activity tied to oil in complement each other in pro- each kind of widget. San Antonio, both upstream (oil duction. If these cities comple- We can compute the location and gas extraction) and down- ment each other, exports from quotient for each kind of widget. stream (heavy construction). one will be matched by imports For example, for green produc- In 12 of 60 sectors, some in other cities in the same in- tion in City A, the LQ is (300/ overlap in industrial activity is dustry. Where one city has a 400)/(300/1,200) = 3. The other indicated among the cities. Over- location quotient greater than cells can be filled out, and the lap is expected in regional distri- 1, the others have an LQ value average LQ for each city is LQ′ bution industries such as whole- less than 1. If we combined the = (3 + 0 + 0 + 1)/4 = 1. This sale trade and transportation Texas Triangle cities by simply makes the computed variance services. Industrial machinery is adding them together, the var- for each city: produced in both Austin and iance of the computed LQs Houston, but the machinery is for the combination should Table 3 computers in Austin and oilfield be smaller than an average Variance Change in a Hypothetical Example equipment in Houston. Large of the variance of the indi- airports are found in both Dal- vidual cities. Income earned (dollars) las/Fort Worth and Houston, but Table 3 shows an ele- City A City B City C Combined D/FW’s airport traffic is largely mentary example of cities Green 300 0 0 300 domestic, while Houston’s is that are highly dependent on White 0 300 0 300 international. Real estate, com- each other and that comple- Blue 0 0 300 300 munications, and electric, gas ment each other in produc- Yellow 100 100 100 300 Sum 400 400 400 1,200 and sanitary services have a tion. We use it to show how, large element of service to sur- for these complementary Location quotients rounding hinterland regions cities, variance of LQs falls City A City B City C Combined rather than exports from the re- once the cities are combined. Green 3 0 0 1 5 gion. Head-to-head competition The three cities (A, B and C) White 0 3 0 1 is apparent primarily in oil and produce four kinds of widgets. Blue 0 0 3 1 4 Yellow 1 1 1 1

Table 4 Variance Change Among Location Quotients percent sure that the vari- Dallas,” Federal Reserve Bank of in the Texas Triangle ance has declined signifi- Dallas Houston Business, May 1995. Average LQ Variance Share cantly, and the roles 2 For the early economic history of played by the four cities Houston, Austin and San Antonio, Austin .79 .45 .09 are highly complementary see Kenneth W. Wheeler, To Wear a San Antonio .99 .55 .10 City’s Crown: The Beginnings of 6 Dallas/Fort Worth .98 .48 .43 to each other. Urban Growth in Texas, 1836–1865 Houston 1.26 3.59 .38 (Cambridge, Mass.: Harvard University Conclusion Press, 1968). For Dallas, see Jackie Weighted average 1.07 1.67 The Texas Triangle cities McElhaney and Michael V. Hazel, Triangle combined 1.07 .92 developed as economic “Dallas, Texas,” in The Online (Austin: Texas State SOURCE: Author’s calculations. complements, providing Historical Association, 2002), unique goods to the other www.tsha.utexas.edu/handbook/online. Triangle cities and import- 3 The base of the location quotient used 2 2 ing goods that represented here means that any indicated exports S = (1/N–1) Sum (LQi – LQ′) for 1 strength elsewhere. Why is this are sold to the surrounding hinterland = 1, …, 4 and to cities either in the Triangle or 2 2 2 = (1/3) [(3–1) + (0–1) + (0–1) important? First, it means that throughout the United States. By chang- 2 + (1–1) ] = 2 the Texas Triangle is in fact a ing the base to a list of peer cities of megalopolis in the sense that comparable size, it is also possible to If we combine the cities, how- we can add the pieces together isolate imports that leave the hinterland with a minimum of duplication. and are sold on a broader regional or ever, the combination is self- national basis. Both comparisons were sufficient in every kind of It is spread over a triangular carried out, but the picture of the eco- widget, and all the LQs are area of roughly 250 miles on nomic role played by these cities was equal to 1 for every industry. each side. Second, it implies largely unchanged. See Robert W. Because they are all equal, vari- that despite traditional rivalries Gilmer, Stanley R. Keil and Richard S. and competition among these Mack, “The Service Sector in a ance of the LQs falls to zero. Hierarchy of Rural Places: Potential for Looked at separately, the cities cities, especially Houston and Export Activity,” Land Economics 65 have an average LQ variance of Dallas, they don’t really overlap (August), 1989, pp. 217–27, and 2; once combined, the cities’ much in their economic roles. Robert W. Gilmer, “Identifying Service variance falls to zero. We could isolate only a few Sector Exports from Major Texas Cities,” areas where meaningful rivalry Federal Reserve Bank of Dallas Economic We did these same calcula- Review, July 1990, pp. 1–16. tions for 60 industries in the might take place—oil and gas 4 Data are not disclosed in U.S. govern- Texas Triangle cities; the results extraction and semiconductors ment statistical publications unless there are shown in Table 4. The aver- (Austin and Dallas) and heavy are three or more respondents in the age LQs for Austin, San Anto- construction (San Antonio and sector or one respondent is so large that its data will dominate the results. nio, Dallas/Fort Worth and Houston). 5 Holding and other investment offices Houston are shown, along with By and large, however, one appears as an “export” industry in three the computed variances of the or two Triangle cities have such cities. However, this simply reflects a LQs across all industries. A a secure niche in each export business organizational form more com- weighted average of the LQs industry that others are unable mon in the South—including Texas— to compete effectively. Given than in other parts of the United States. and variances is shown at the Overrepresentation in this case does bottom of the table, using the the lack of competition across not imply exports but an organizational weights or shares shown in the cities, a cooperative effort at anomaly. third column, based on each industrial recruitment and eco- 6 The appropriate test is an F test that the city’s contribution to wages, nomic development programs variance of the LQs for the combined makes sense, even though the cities is less than the variance of the salaries and employer-paid be- cities taken individually. It is a one- nefits in the combined region. cities are spread over an area tailed test, with the computed ratio of Treating each city separately, as large and diverse as the the two variances being (1.67/.92) = 1.82, the average LQ in the Texas Tri- Texas Triangle. with 59 degrees of freedom in the angle is 1.07, and the weighted numerator and denominator. The com- — Robert W. Gilmer puted ratio of the variances falls almost variance is 1.67. exactly on the 1 percent critical value If we combine the Triangle for the test from the tables of the F dis- cities and recompute the LQs, Notes tribution. In other words, we can be the average LQ is again 1.07, 1 The fact that Dallas and Houston have approximately 99 percent sure that the but the variance for the com- economic structures that complement variance of the combined cities has rather than compete with each other fallen. bined cities falls from 1.67 to has been noted in a different context 0.92. A standard statistical test by R. W. Gilmer and Jun Ishii, “Driven tells us we can be about 99 by Differences: GRP of Houston and 5

Houston BeigeBook December 2003

The Houston economy con- period. New housing starts are to forecasts for a mild winter tinues to follow the lead of the expected to slow this year be- and caught some by surprise. U.S. economy, with ample signs cause sales have softened and Inventories were near the five- of economic growth but no job inventories are 25 percent year average in late December. growth to accompany it. The above year-earlier levels. An Energy price swings did lit- rig count is up by more than overbuilt apartment market is tle to change the listless pat- 50 percent from its early 2002 making home ownership less tern of drilling in the United low, the Purchasing Managers attractive. States. The domestic rig count Index is indicating 11 consecu- Office occupancy and rents remains near 1,100, while inter- tive months of expansion, and continue to fall. Only selected national activity continues to a respectable retail performance suburban markets such as The improve. Forecasts for the com- over the holidays points to con- Woodlands and Sugarland are ing year are for more of the sumer income gains. At the same doing well. same, with perhaps a slight time, revised employment data decline in U.S. drilling. indicate only the smallest of Energy Prices upturns in Houston job growth Crude oil prices strength- Refining and Petrochemicals in mid-2003. Rapid productivity ened in mid-November in Refiner margins were growth is the culprit on both response to lower OPEC sup- strong seasonally, helped by sides, providing solid income plies, very low crude invento- very cold weather. Refiners and production gains but hold- ries, terrorism uncertainties and raised output in mid-December ing back job growth. approaching winter. Spot prices in response to higher heating ranged from $30 to $33, with oil prices, and supplies have Retail Sales high natural gas prices and been helped by high import Retailers reported good cold weather affecting prices levels of refined products. holiday sales, although the sea- through mid-December. U.S. Gasoline demand was very son started slowly and was not crude inventories were at the strong throughout 2003, but uniformly good among all stores. lowest levels ever for December. refiners have built inventories The immediate post-holiday Heating oil was the key back to within the normal shopping period has become actor in product markets, and range. more important to overall re- wholesale prices swung from Petrochemical producers sults, making early sales look 82 cents to 96 cents per gallon suffered through another feed- slow and inventories seem high with cold weather, a spike in stock price shock as natural as the season wears on. High- natural gas prices and higher gas prices shot up. In response, end retailers did best, while crude prices. Distillate invento- domestic producers found department stores struggled to ries were well within the nor- themselves absorbing the cost achieve moderate gains. mal range for December. or cutting production. Prices Natural gas prices jumped for plastic resins were generally Real Estate more than 40 percent in Decem- stable through December. Apartment occupancy con- ber, pushing gas prices to near tinues to decline, reaching the $7 per thousand cubic feet in lowest levels in a decade. Con- midmonth. The very early and cessions are already being very cold weather ran counter made on all fronts to attract renters, and another 20,000 units are under construction. MLS sales of existing homes set a November record by 1 For more information or copies of this publication, contact Bill Gilmer at percent, and home prices are (713) 652-1546 or [email protected], or write Bill Gilmer, Houston Branch, Federal Reserve Bank of Dallas, P.O. Box 2578, Houston, TX 77252. This publication is up 4 percent over the same also available on the Internet at www.dallasfed.org. 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.