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San Antonio 2019 Economic Forecast

It is that time of year for economic forecasts, so here is my forecast for the San Antonio economy in 2019. An update of the San Antonio economy through October and more detail on the forecast can be found here.

Like the U.S. and Texas economies, the San Antonio economy continues to show healthy growth. Employment through October grew 2.47% compared to October 2017, which is about at the historical average growth rate for the region. This is not bad given the extraordinary length of this expansion. The unemployment rate in San Antonio was at 3.2%, the second-lowest among the major metropolitan economies in the state. However, growth in San Antonio has been pretty strong across all sectors of the economy up until about six months ago when year-over-year employment growth in many sectors started to slow and even turn negative. These trends are shown in the following graph where it is clear that growth in the information, construction and mining, manufacturing, and professional and business services industries has started to decline.

Employment Growth in SA Jan 2017-Oct 2018

It is also a sign of economic strength that the unemployment rate in San Antonio is so low. There is mounting anecdotal evidence, though, that the labor market is very tight. There are surely people who are still underemployed or who are not counted as unemployed because they have dropped out of the labor force, but I think we are at the point where growth is going to be driven by growth in the labor force and/or increases in productivity. This is going to be a constraint on growth into the near future.

Similar trends are also occurring at the state level, and the leading index for the Texas economy has been trending down since about May. It is too early to tell if this is an indication that the Texas economy is headed for a downward turn, but it bears watching.

On the national front, one of the best predictors of a downturn in the economy is the yield curve. The yield curve is very close to inverting, and in fact, the yield curve based on the difference between the 5-year and 2-year bond rates has already inverted. Once the yield curve inverts, it is a good bet the economy will move into a recession not too long after the inversion. Relatedly, recessions are typically preceded by the Federal Reserve raising interest rates, which they have been doing and are most likely going to continue to be doing. The housing market nationally and in San Antonio has been strong for a number of years now, but it got a bit frothy, again, and while it remains strong in San Antonio, it is starting to soften in other major metropolitan areas in Texas, particularly Dallas, and other parts of the country.

There are also some worrying trends in the global economy as growth has slowed in China and many countries of the European Union. While there are surely many factors playing into this, the trade war is not helping matters.

The current expansion is now the second-longest in our nation’s history. It is not going to go on forever. Sorry, but if we learned anything from the Great Recession, it is that the business cycle is not dead. There is typically a trigger, though, that turns the economy into a recession. As already mentioned, the inverting of the yield curve, raising of interest rates by the Federal Reserve (which, by the way, is the right thing for them to do, in my opinion), the trade war, Brexit, severe downturn in the housing market, and slowing global growth could each be that trigger. There may also be others not mentioned.

The upshot is that I believe we will continue to see the San Antonio economy grow into 2019, but I predict (as do many other economists) that we will move into a recession toward the end of 2019 or in 2020. It may not be as severe as the Great Recession, but I am very concerned about the federal government’s ability to respond to it. This is due to the fact that the Federal Reserve may not have as much room as they need to lower interest rates, which may mean they have to resort to quantitative easing again. But, there could be pressure not to implement such a policy again. A similar issue concerns me with respect to the ability of the federal government to provide any sort of fiscal stimulus given the increasing federal budget deficit due to the recent tax cuts of the Trump Administration. If the deficit is over $1 trillion by the time the recession hits, are the policymakers going to be willing to provide an economic stimulus large enough to pull the economy out of the recession, since it will make the deficit even worse?

In this environment, I think San Antonio will continue to see growth in 2019, but the growth in employment will likely slow to somewhere in the range of 1.75-2.25%. The unemployment rate is also likely to tick up a bit to about 3.5-4.0%.

Insights #2: Innovation is a Collective Process.

I am currently reading The Value of Everything by Mariana Mazzucato, and one of the great insights she provides in the book is the key role that the public sector plays in innovation. It busts the stereotype of innovation being driven by the lone inventor toiling away in his or her garage or dorm room. I believe she has written a book on this very topic, which I have not read, yet, but it is high on the reading list. I think the following passages summarize this insight pretty well.

Understanding both the role of the public sector in providing strategic finance, and the contribution of employees inside companies, means understanding that innovation is collective: the interactions between different people in different roles and sectors (private, public, third sectors) are a critical part of the process. Those who might otherwise be seen as lone entrepreneurs in fact benefit from such collectivity; moreover, they stand on the shoulders of both previous entrepreneurs and taxpayers who, as we will see, often contribute to the underlying infrastructure and technologies on which innovation builds (p.194).

Examples she provides include:

  • The smartphones many of us depend on these days are driven by technologies created with public funding.
    • The internet and SIRI were developed with funding from the U.S. Department of Defense.
    • Touchscreen display was developed with funding from the CIA.
    • GPS was developed with funding from the U.S. Navy.
  • The U.S. National Institutes of Health has funded the research supporting the development of two-thirds of the most innovative pharmaceuticals.
  • U.S. Department of Energy has funded many of the greatest breakthroughs in energy (p. 194).

As she then goes on to point out, “In the very early days it is often public R&D agencies or universities that fund the science base, and only when innovation is close to having a commercial application do private actors enter” (p. 195).

 

Source:

Mazzucato, M. (2018). The Value of Everything. New York, NY: PublicAffairs.

Insights 1: Econs and Humans

I am launching a new series – called “Insights” – that will include posts on brief statements of wisdom or viewpoints that I come across in my readings or other sources. My hope is that this will pique your curiosity and encourage further exploration of the topic.

The first insight comes from Dr. Daniel Kahneman. I just finished reading his book, Thinking, Fast and Slow, which is full of great insights, especially if you have an interested in human behavior and economics. If you have not read it, I highly recommend it.

In this passage from the book, an “Econ” is the name given to the fictitious person modeled in neoclassical economics.

In a nation of Econs, government should keep out of the way, allowing the Econs to act as they choose, so long as they do not harm others. If a motorcycle rider chooses to ride without a helmet, a libertarian will support his right to do so. Citizens know what they are doing, even when they choose not to save for their old age, or when they expose themselves to addictive substances. There is sometimes a hard edge to this position: elderly people who did not save for retirement get little more sympathy than someone who complains about the bill after consuming a large meal at a restaurant. Much is therefore at stake in the debate between the Chicago school and the behavioral economists, who reject the extreme form of the rational-agent model. Freedom is not a contested value; all the participants in the debate are in favor of it. But life is more complex for behavioral economists than for true believers in human rationality. No behavioral economists favors a state that will force its citizens to eat a balanced diet and to watch only television shows that are good for the soul. For behavioral economists, however, freedom has a cost, which is borne by individuals who make bad choices, and by a society that feels obligated to help them. The decision of whether or not to protect individuals against their mistakes therefore presents a dilemma for behavioral economists. The economists of the Chicago school do not face that problem, because rational agents do not make mistakes. For adherents of this school, freedom is free of charge (p. 412).

Source:

Kahneman, D. (2011). Thinking, Fast and Slow. New York, NY: Farrar, Straus, and Giroux.

Using Data to Foster International Trade, Foreign Direct Investment, and Collaborations Among Metropolitan Areas

The City of San Antonio has been engaged in a six-year process to identify opportunities in foreign markets for international trade, foreign direct investment, and institutional collaborations. The effort was lead by The Brookings Institution, and with the support of JPMorgan Chase, the final portion of the process, called the Global Cities Initiative, was recently completed. In this stage of the process, each of the nine cities involved in the process selected an industry or two on which to focus their efforts in determining these global opportunities. In the case of San Antonio, our specific focus was on the cybersecurity industry. The culmination of the work was the release of the report by The Brookings Institution, Six Steps for Metro Areas to Prioritize Global Markets.

The six steps include:

  1. Organize for action
  2. Select a priority specialization
  3. Set the goal
  4. Measure global market opportunity within the specialization
  5. Factor in market accessibility
  6. Combine and synthesize data

As they are listed, these steps are rather generic and do not say much. I was fortunate and honored to be a part of the San Antonio team working on the project, so I can say with first-hand knowledge, it is quite a thorough process that has educated and enriched the knowledge of the communities involved about the opportunities in cities around the world for particular industries. I am sure it can do the same for other cities that want to engage in the process. If you want to get into the detail, I highly recommend you read through the report authored by Max Bouchet, Marek Gootman, and Joseph Parilla of The Brookings Institution. It can be found here.

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Unemployment Rate in San Antonio at Its Floor

The unemployment rate in San Antonio in July was at a seasonally adjusted rate of 3.2%. Since May 2017, it has been in the range of 3.1-3.5% each month. This is about as low as the unemployment rate has ever been in San Antonio since January 1990, as far back as the data goes. The lowest it ever got was in March and May 1999 when it reached 2.9% in each of those months.

As shown in the graph, for about the past year, the unemployment rate has been near the level it was during the dot come bubble leading into the recession in 2000 and about one-half to almost a full percentage point lower than the unemployment rate during the housing bubble preceding the Great Recession.

It seems to me that the San Antonio economy has been at its full-employment level of unemployment, so it is most likely the unemployment rate will only be going up over the next year or so. It may continue to hover in the aforementioned range for several months, but it appears to have hit its floor.

 

Unemployment SA July 2018

 

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Accounting for Non-Market Activities and Equal Pay in the San Antonio GDP

Dr. Belinda Roman and I recently completed a working paper titled, Women in the Economy. It is the first paper completed in our new research program on women in the economy. One of the many shortcomings of the gross domestic product measure is that it excludes any activity that is not conducted within a market (i.e., non-market activities). A large component of non-market activities is household production. This includes any activity it takes to run a household for which the activity is not paid, like child-care, meal preparation, yard work, and house cleaning that is done by the residents of the household. One focus of the paper was to measure the value of non-market household production in San Antonio. We also measured the addition to GDP if women received equal pay in the labor market. The following chart summarizes the results.

Slide1

As shown in the table, placing a market value on household production would add an additional $20.8 billion to GDP in San Antonio. it should be noted that household production includes the production by both men and women, but time use data indicate that women conduct the vast majority of household production. Additionally, if women received equal pay, another $18.2 billion would be added to GDP. Accounting for these two components of economic activity would raise GDP in San Antonio from $109.3 billion  to $148.3 billion in 2016.

We also recently published an op-ed article in the San Antonio Express-News that summarizes the study. The article can be found here.

Yield Curve Continues to Trend Toward Inverting – Strong Indicator of Recession

Yesterday The New York Times published an article titled, “What’s the Yield Curve? ‘A Powerful Signal of Recessions’ Has Wall Street’s Attention” (https://www.nytimes.com/2018/06/25/business/what-is-yield-curve-recession-prediction.html). If you have the time, it is worth a read because the author, Matt Phillips, discusses the importance of the yield as a predictor of recessions. As I have discussed in at least one previous blog post, the yield curve is one of the best indicators of recessions. As Phillips notes, “every recession of the past 60 years has been preceded by an inverted yield curve, according to research from the San Francisco Fed.”

The graph below shows the yield curve through June 25, 2018. The gray bars indicate recessions, so the relationship between the inversion of the yield curve and recessions is pretty clear. It is also pretty clear that the yield curve is trending toward flattening (i.e., approaching zero in the graph). As noted in the article, the inversion of the yield curve does not give much of an indication of when the recession will occur, except that it will be in the fairly near future. As I have mentioned before, I think we will see the U.S. economy dip into recession by late 2019 at the earliest or sometime in 2020.

Yield curve thru 6-25-18

 

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U.S. Economic Expansion Now Second Longest in History

The U.S. economic expansion is now the second longest in history at 107 months.

Of course, this is great, but I think we also have to consider the possibility that the economy is going to run out of steam in the near future and start to go in another direction.

My thought is that by the end of 2019 or at least in 2020, this will start to occur. As shown in the following table, the expansion will be the longest in history if it keeps going through the middle of next year. Despite the nonsense spewed by some renowned economists before the Great Recession, we were reminded that expansions do not go on forever.

The business cycle is clearly not dead, and this expansion is likely to end in the near future.

US Economic Expansion thru May 2018

GDP and the Role of Women in the San Antonio Economy

My colleague, Belinda Román and I, have been working on a study of a more accurate measure of the role of women in the San Antonio economy. The results were released this past Wednesday at the San Antonio Hispanic Chamber’s Women’s Award Luncheon. The presentation can be found here.

This is the first study done under our new Women in the Economy Research Program at the SABÉR Institute. There is still much to be researched in this area, but we began by calculating what the gross domestic product of the San Antonio metropolitan economy would be if the non-market household production activities were counted in GDP and if women received equal pay to men.

Household production includes, in part, activities like child care, yard work, preparing meals, house cleaning, maintenance and repairs of the house, and travel time related to such activities.

As of 2016, GDP in San Antonio was $109.3 billion, and with these adjustments, GDP would be about $149.1 billion. We are still working to complete the full report, but it will be released in July.

Steve

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Forecast of the San Antonio Economy as Presented to the GFOAT

I gave a speech today to the San Antonio chapter of the Government Finance Officers Association of Texas on the San Antonio economy. I will pull out specific charts and talk about them in detail over the next couple of weeks, but here is the entire speech for now. In short, the economy looks strong and should continue to be strong for the next year or so, but I think the probability of another recession starting within the next couple of years is pretty high.

Steve

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