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HoustonBusiness

A Perspective on the Houston Economy


FEDERAL RESERVE BANK OF DALLAS • HOUSTON BRANCH • JANUARY 2004

and salary jobs and 71 percent


The Simple Economics of personal income. The last
issue of Houston Business
of the Texas Triangle described these cities’ rapid
growth in recent years, which
is the primary reason for the

This article takes a


close look at the
T he Texas Triangle is out-
lined by Houston, San Antonio
and the Dallas/Fort Worth metro-
convergence of Texas’ per cap-
ita income to U.S. income levels.
The size of the four metro-
politan areas combined would
place them among the largest
plex, with Austin inside the Tri- in the United States, comparable
Texas Triangle cities angle. The cities are relatively with New York, Los Angeles or
and examines the close and connected by major Chicago. 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 city 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
Population Employment Personal income Per capita
proposed by the Republic of
(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.
SOURCE: Bureau of Economic Analysis.
limited to shipments through
the inland port 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 Caddo Lake and ultimately to
among them, particularly be- withdrew the lines of their New Orleans. 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 cotton 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, Texas Revolution 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 village. 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 South Texas 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 Oklahoma, Louisiana and
market, across a coastal plain Saltillo, the disruptions caused Arkansas; 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 Republic of Texas. 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 Brazos Valley 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- megalopolis.
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 New Spain. Dallas was founded in 1841 Houston. The state’s major
It was the most important mis- by John Neely Bryan, 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 Trinity River 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 Sam Houston 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-
1990s, 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 ij = equipment, communications and
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 (petroleum and coal products),
been a robust government sec- (with the “normal” comparison pipelines, and backward link-
tor. Beginning in the late 1960s, 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
nology — IBM Corp. in 1967, ports.3 If LQij is less than 1, the and engineering and manage-
Texas Instruments 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); local government (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 LQ s
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-
Income earned (dollars)
airports are found in both Dal- vidual cities.
City A City B City C Combined
las/Fort Worth and Houston, but Table 3 shows an ele-
D/FW’s airport traffic is largely mentary example of cities Green 300 0 0 300
White 0 300 0 300
domestic, while Houston’s is that are highly dependent on
Blue 0 0 300 300
international. Real estate, com- each other and that comple- Yellow 100 100 100 300
munications, and electric, gas ment each other in produc- 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 LQ s falls City A City B City C Combined
rather than exports from the re- once the cities are combined. Green 3 0 0 1
gion.5 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
Yellow 1 1 1 1
4
Table 4
Variance Change Among Location Quotients percent sure that the vari-
in the Texas Triangle Dallas,” Federal Reserve Bank of
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 see Kenneth W. Wheeler, To Wear a
San Antonio .99 .55 .10 are highly complementary City’s Crown: The Beginnings of
Dallas/Fort Worth .98 .48 .43 to each other.6 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 McElhaney and Michael V. Hazel,
The Texas Triangle cities
Triangle combined 1.07 .92 “Dallas, Texas,” in The Handbook
developed as economic of Texas 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 are sold to the surrounding hinterland
= 1, …, 4 strength elsewhere. Why is this 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
we can add the pieces together isolate imports that leave the hinterland
If we combine the cities, how-
and are sold on a broader regional or
ever, the combination is self- with a minimum of duplication. 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 LQ s 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.
that despite traditional rivalries Gilmer, Stanley R. Keil and Richard S.
Because they are all equal, vari-
Mack, “The Service Sector in a
ance of the LQ s falls to zero. and competition among these 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
We could isolate only a few Sector Exports from Major Texas Cities,”
variance falls to zero.
Federal Reserve Bank of Dallas Economic
We did these same calcula- areas where meaningful rivalry 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
construction (San Antonio and sector or one respondent is so large
age LQ s for Austin, San Anto-
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-
industry that others are unable mon in the South — including Texas —
weighted average of the LQ s
than in other parts of the United States.
and variances is shown at the to compete effectively. Given 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
nomic development programs variance of the LQs for the combined
city’s contribution to wages,
cities is less than the variance of the
salaries and employer-paid be- makes sense, even though the 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
numerator and denominator. The com-
angle is 1.07, and the weighted
puted ratio of the variances falls almost
variance is 1.67. — Robert W. Gilmer 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 LQ s, 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
economic structures that complement variance of the combined cities has
but the variance for the com-
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

T he Houston economy con-


tinues to follow the lead of the
period. New housing starts are
expected to slow this year be-
cause sales have softened and
to forecasts for a mild winter
and caught some by surprise.
U.S. economy, with ample signs 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
For more information or copies of this publication, contact Bill Gilmer at
set a November record by 1
(713) 652-1546 or bill.gilmer@dal.frb.org, or write Bill Gilmer, Houston Branch,
percent, and home prices are
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.