This commentary originally appeared in the Austin American-Statesman on February 1, 2016.
Think back 30 years ago to 1986.
That was the last time Texas had a prolonged, severe recession associated with a sustained drop in oil prices while most of the U.S. continued expanding.
Although the recent Great Recession hit the U.S. hard and oil prices briefly tumbled, it was merely a speed bump in a thriving, diversified Texas economy.
We are now in an episode that meshes these previous periods with sustained lower oil prices, continued U.S. economic growth — albeit much slower than in the 1980s — and a diversified economy.
Texas has been America’s jobs engine by creating 40 percent of all U.S. civilian jobs during the last eight years. Despite substantially lower oil prices since June 2014, Texans employed more net nonfarm jobs in 10 of the last 12 months.
Texas’ economy has slowed recently. Oil-dependent areas may contract if things continue, but will this period be reminiscent of the severe 1986 recession or the hiccup in 2009?
The underlying market factors driving oil prices matter. The demise of OPEC — the Organization of the Oil Exporting Countries — led to them flooding the global market with oil, contributing to lower oil prices in 1986. This supply-driven drop in oil prices didn’t influence most of the U.S. but it certainly hurt Texas.
The mining industry, dominated by oil and gas activity, composed about 20 percent of the state’s real private economy and five percent of the labor force in the early 1980s. A 61 percent decline in oil prices before reaching a low in July 1986 contributed to a 38 percent contraction in the mining industry.
This rattled the housing and financial markets, leading to the real private economy contracting by 6.7 percent in 1986 and 2.3 percent in 1987 with a 2.2 percent drop in nonfarm jobs while the real U.S. economy expanded by 3.5 percent in both years.
Texas’ economy transformed, thereafter supported by expanded trade with Mexico and Canada after the North American Free Trade Agreement. It reduced the mining industry’s share of the real private economy to 12 percent in 2009. A side effect of this diversification is greater dependence on the rest of the U.S. economy felt during the Great Recession.
The global recession in 2008 contributed to a demand-driven 70 percent drop in real oil prices, which led to a 35 percent decline in Texas’ mining industry. There was a 7 percent contraction in the real private economy, with a 2.8 percent decline in nonfarm jobs in 2009. This is at a time when — unlike 1986 — the U.S. economy contracted by 2.8 percent. But the Texas economy quickly rebounded with robust output and job growth in subsequent years.
The state’s mining industry is now about 15 percent of the real private economy and employs only 2.5 percent of the labor force. Driven by a substantial oil boom funded with cheap credit by the Federal Reserve and transformative hydraulic fracturing technology, the slower credit spigot and OPEC’s continued production contribute to weaker global oil demand and a global oil-supply glut. These supply-and-demand factors drove real oil prices down 70 percent since their last high in June 2014.
The effects so far haven’t been as severe as previous episodes. The mining industry grew by 2.2 percent while the real private economy expanded by 4.1 percent in 2014 with no sign of a major economic contraction in 2015 — though that data isn’t yet available.
Although there are weaknesses — such as the mining industry losing 33,600 jobs and the manufacturing sector shedding 41,900 jobs last year — economic diversification is apparent with 209,900 private-service jobs and 166,900 total jobs added.
Regions will be influenced differently. More oil-dependent Houston had job creation of only 0.5 percent during the last 12 months, but Austin’s job creation is up by 4.1 percent with more diversification.
Texas has weathered the storm of both a steep drop in oil prices and a slowing global economy relatively well compared with past episodes. Although the future is unknown, the success of the Texas model based on economic freedom and individual liberty should be enhanced so Texans have the best opportunities to prosper no matter the economic circumstance.
Ginn is an economist in the Center for Fiscal Policy at the Texas Public Policy Foundation. He may be reached at [email protected]. The foundation has organized an event that will include these issues and more on Feb. 9.