BARTON SMITH PREDICTS A SLOW ACCELERATION
IN THE HOUSTON RECOVERY
UH Economist Outlines Key Forces Stimulating
and Deterring Local Growth in the Next Few Years
HOUSTON, November 4, 2004 – With oil prices above $50 per
barrel, why isn’t Houston’s economy booming?
Barton Smith, University of Houston professor of economics, has
the answer.
During his annual economic forecast symposium, Smith discussed
the major changes to the regional economy that have altered the
relationship between area growth and oil prices. These include the
proportionally smaller role of energy in the region’s economic
base, the decline in national and statewide production of oil accompanied
by an accelerated interest in exploration abroad, the fear by the
energy industry that the current price bubble might soon burst,
and the fact the many non-energy sectors of the regional economy
are still contracting in the aftermath of the national recession
earlier this decade.
The UH director of the Institute for Regional Forecasting addressed
more than 1000 business and civic leaders at the Hyatt Regency Downtown
at his program, “The Changing Face of Houston: Implications
for the Future.” He urged his audience to reject simple-minded
extrapolations of the past and to recognize that “Houston
has always been a city of dynamic change, requiring a constant re-evaluation
of just what makes Houston tick.” In making his case, Smith
reviewed the structural changes that have occurred within Houston’s
economy every decade since oil was discovered 90 miles east of the
city at Spindletop more than a hundred years ago.
“No two decades were the same,” Smith said. “Each
had different driving forces and different outcomes, and there is
no reason to assume that this transformation process will not continue.”
Smith also examined the demographic changes that make Houston different
today. Some are commonly understood by Houstonians – such
as the dramatic increase in the proportion of Hispanics in the area.
However, he also pointed out other important changes that receive
less attention such as the aging of the region’s population,
the significant decline in metropolitan area family size, the significant
increase in “other minorities” of foreign birth, and
the dramatic rise in real family income, an increase that was only
partially sidetracked by the energy bust of the mid 1980s.
The UH symposium also examined the current state of the local economy,
concluding that the recovery is gaining momentum but not as strong
as might be expected because of the sluggishness of the national
economy. The latter phenomenon, he reports, is due to the continued
caution of the American consumer, a phenomenon that was expected
and was a part of last year’s forecast. “This year’s
local economic performance is right on target with last year’s
expectations,” Smith said. “Year-over-year growth is
almost 1.2 percent which translates into nearly 25,000 new jobs
for the region. I expect that number to be revised upward to some
degree when the final numbers are released in February.”
Nonetheless, Smith warned that neither the national recovery nor
the regional recovery is like to be as strong as past recoveries.
“There remain too many detriments to growth right now,”
Smith stressed. “These include continued worries over terrorism
and foreign entanglements, high energy prices, and a pending housing
market bust in many parts of the nation.”
With the exception of excess supply in the local apartment market,
the residential market in Houston does not suffer from most of the
housing market problems elsewhere nor from the speculative bubble
that has emerged in some markets, which have pushed homes prices
up in many cities by more than 20 percent per year.
“While the greatest vulnerability is within urban markets
of the West and East Coasts, the pending housing bust is a threat
to Houston because of the sheer size of the national economy likely
to be affected. The cities at greatest risk are home to more than
a third of the nation’s population and as a consequence a
collapse in home prices there will significantly affect the consumer
and national economic growth.”
This will affect the Houston economy in which more than 50 percent
of its economic base is directly tied to the strength of the national
economy.”
On the positive side, Smith indicated that the threat to many of
the nation’s large urban housing markets will constrain the
Federal Reserve Bank from raising interest rates as far as it might
otherwise have done as the recovery matures.
“The ‘Fed’ will be caught been a rock and a hard
place,” Smith suggested. “It will want to raise interest
rates to protect the dollar and to keep overall inflation in check,
but it will be worried that excessive rates hikes will create such
a severe home market correction that the national recession could
quickly return.”
About the University of Houston
The University of Houston, Texas’ premier metropolitan research
and teaching institution, is home to more than 40 research centers
and institutes and sponsors more than 300 partnerships with corporate,
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in the country, stands at the forefront of education, research and
service with more than 34,400 students.
For more information about UH visit the universitys Newsroom at www.uh.edu/admin/media/newsroom.
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