Texas economy to return to potential in 2017 after staving off recession, bank economists say

12/10/2015

HOUSTON -- Shifts in global growth fundamentals such as the strengthening of the U.S. dollar and repressed oil prices may have weakened the outlook for Texas, but the economy is still expected to grow 1.9% in 2015 before returning to its full potential in 2017, BBVA Compass economists say in their latest report.

Three factors contributed to the Lone Star state's ability to stave off a recession, the bank's economists say: the discordant timing of the impact from a strengthening dollar and the mining sector slowdown; the evolution of the oil and gas industry structure so that it's more innovative and flexible; lower systemic risks to the financial sector as a result of its lower risk appetite and a more cautious lending environment.

"We maintain that there would have to be prolonged periods whereby (West Texas Intermediate) spot prices remain below $30/bbl and significant deterioration in manufacturing output and exports, for Texas to be at risk of negative growth," wrote BBVA Compass Senior Economist Boyd Nash-Stacey. "In the long run, the outlook for Texas remains bright."

Despite rampant layoffs across the oil sector, Texas is today more diverse and less reliant on oil for economic growth than in the past, Nash-Stacey wrote, putting the overall impact of the oil price depression on the economy at moderate to mild.

"The industry has undergone a transformation, with shale drilling offering a production function that is less lumpy, offers faster paybacks and the flexibility to respond to business cycles and commodity price fluctuations," he said.

Nash-Stacey said that this and other findings underpin the BBVA Compass economists' conclusion that the risks to the Texas economy have tilted to the downside.

"Ultimately," he concluded, "short-term factors will inevitably fade, again bringing to the forefront Texas' true value as a global leader in growth and innovation."

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