November 2003
Federal Reserve Bank of Dallas
Houston Branch

Economic Progress in the Texas Economy 1969–2001

Since 1969, the Texas economy has grown rapidly, consistently matching or exceeding the nation’s economic growth. Table 1 shows that real personal income growth rates in Texas matched the U.S. rate even during the oil bust years of 1979–89 and greatly exceeded it in other periods. Measured by total population, growth in Texas was substantially greater in all periods. The state’s largest metropolitan areas—Houston, Austin, San Antonio and the Dallas/Fort Worth metroplex—which together make up what is known as the Texas Triangle in the heart of the state, contributed the largest part of this growth, especially since 1979. Outside the Texas Triangle cities, real income growth has failed to match the United States’ since 1979, although population growth has been a little faster.

This growth has improved Texas’ economic position relative to the rest of the United States. Texas moved from the nation’s fourth most populous state in 1969 to second in 2001, trailing only California but ahead of New York and Florida. In personal income, Texas has moved from the sixth largest state economy in 1969 to third today, behind California and New York.

The state’s large metropolitan areas have similarly moved up the ranking of the nation’s largest cities.[1] As seen in Table 2, Houston, the D/FW metroplex and San Antonio made most of their climb through these rankings between 1969 and 1979.[2] Since 1979, Houston and the metroplex have shared the ninth and tenth positions in population, while San Antonio slowly moved upward to rank 32nd in population and 35th in personal income. Austin, however, has made steady and dramatic gains. In 1969, at No. 75 in population, Austin was the size of Canton, Ohio, or Fort Wayne, Ind. But by 2001 (at No. 39), it compared favorably with Nashville or New Orleans.

Table 3 summarizes the contribution of these different metro areas to Texas’ personal income growth. Except for the oil bust years, Houston contributed about 30 percent of the growth, and Dallas/Fort Worth contributed the same by the late 1970s. San Antonio has provided a steady 6 to 8 percent, and Austin’s contribution doubled from 4.1 percent to 8.3 percent. All the metro areas combined (collectively designated the Texas Triangle) contributed three-fourths of the state’s income growth between 1989 and 2001.

In this article, we will measure the success of the Texas economy not by its size, growth rates or ranking but by the state’s ability to improve the welfare of its citizens— that is, raising its per capita income levels to those of the nation, joining and perhaps outperforming the U.S. mainstream. Per capita income presents a number of flaws as a measure of general welfare, but it serves here simply as a widely recognized and useful summary of the standard of living.[3]

Per Capita Income in Texas
In 1969, Texas per capita income was $3,373, or 87.7 percent of the U.S. level. But fueled by the oil boom after 1973, Texas per capita income grew rapidly and briefly exceeded that of the United States by 1981–82 (Figure 1 ). The oil and real estate bust of the 1980s quickly erased these gains, and by the end of the decade Texas income returned to 87.9 percent of the U.S. figure.

The 1990s brought new advances relative to U.S. income as oil, high tech and a NAFTA/maquiladora boom along the border fueled another burst of Texas economic growth. By 1998, Texas per capita income returned to 94.4 percent of U.S. levels, but did not progress further through 2001.

We can examine the sources of per capita income growth, both geographically and by income components, such as wages and salaries, proprietor’s income, transfers and property income. From a geographic perspective, the Texas Triangle cities fueled both the state’s growth and most of its recent convergence with U.S. per capita income. By component, the most interesting results come from the growth of wages and salaries and proprietor’s income.

Framework for Study
The general framework used here is shown in Table 4, which summarizes Texas per capita income growth by component of income, geographic area and time period (1969 through 2001).[4] The data are presented as percentage point contributions to average annual real per capita income growth in each region and time period.[5] For example, the growth of per capita income in Texas from 1969 to 1979 averaged 3.6 percent per year, with most of the growth (3 percent per year) coming from wages and salaries and smaller contributions from property income (0.2 percent), transfer payments (0.2) and other per capita income (0.4). Proprietor’s income per capita grew more slowly, reducing the overall growth rate by 0.2 percent.

The components of income definitions follow standard conventions for accounting for personal income in the national income and product accounts. The definitions are fairly obvious: wages and salaries; farm and nonfarm proprietor’s income earned by sole proprietorships, partnerships and tax-exempt corporations; property income from dividends rent and interest; and transfer payments for no current services rendered. The “Other income per capita” category is a residual made up primarily of benefits paid to wage and salary workers, but it also includes a residence adjustment for workers who live and work in different areas.

The rationale for the geographic focus on the Texas Triangle, as partly discussed above, is primarily that three-fourths of the region’s personal income growth came from these metro areas after 1989. Also, these cities have provided most of the forces driving income convergence. While per capita income levels were, on average, well above national norms and rising through the 1990s within the Triangle, they were falling back to near 70 percent outside of it.

Figure 2 shows the income growth relative to the United States of the four Triangle cities since 1969. The gains and losses of the oil and real estate boom and bust are visible in all four cities, but most notably in Houston and Austin. All cities made gains in the 1990s, especially Austin; San Antonio made the least progress, despite beginning from the lowest per capita base. The two high-tech metros began losing ground against the national average well before the U.S. recession began in 2001, with Austin peaking at 110 percent of U.S. levels in 1999 and Dallas/Fort Worth at 112 in 2000. Houston reached 115 percent of U.S. per capita income in 2001 and San Antonio 88 percent.

The different income levels and very different behavior over time of the four cities might seem surprising in light of their geographic proximity. But in fact, it may be this very proximity that guarantees their different personalities. Because no pair of cities is more than 240 miles apart, each city has assumed a role in the state economy that sets it apart and makes it distinct from the others.

Although we will return to this subject in the next issue of Houston Business, one could speculate that if Texas geography had been different—navigable rivers or a saltwater inlet that cut into the heart of the state—the four cities could easily have been one. The port, inland distribution point and political capital could all have been in the same place. Thus, adding the cities’ current population produces a not far-fetched approximation of what might have been a single metro area, because the cities play such diverse economic roles. The bottom of Table 2 shows how such a combination would rank among U.S. metro areas today: behind New York and Los Angeles but moving ahead of Chicago in both personal income and population in the 1990s.

It is difficult to generalize about or easily characterize the area outside the Triangle, which includes cities as different as El Paso, Amarillo, Texarkana and Beaumont. The decline of agriculture in the second half of the 20th century certainly played a role in the region’s poor performance. In addition, the proximity to the Mexican border presents challenges to state economic development, specifically acting as a drag on any measure of state economic progress or welfare, including per capita income.

Gilmer, Gurch and Wang have examined the Texas border cities using the same framework employed here.[6] The border cities’ average per capita incomes are only 50 to 60 percent of the national average and have only occasionally matched or exceeded the growth rate of the state as a whole, as Laredo did in the 1990s. Per capita income for El Paso, by far the largest city on the Texas–Mexico border, fell from 73 percent of the U.S. average in 1969 to 63 percent in 2001. Although the border saw rapid gains in income and jobs in the 1990s, rapid growth in population due to high birthrates and in-migration meant living standards did not improve nearly as much as overall growth statistics might indicate.

What the Numbers Mean
Except for the oil bust years, Texas’ per capita income outgrew the United States’ by a significant margin. The difference was a full percentage point from 1969 to 1979 (3.6 percent versus 2.6 percent) and a half percentage point from 1989 to 2001 (2.2 percent versus 1.7 percent). Over the entire 32-year period, however, with the oil bust and recovery factored in, the difference in favor of Texas narrows to 0.2 percent—2.3 percent versus 2.1 percent—and per capita income rises from 88 percent to 94 percent of the national average.

Also except for the oil bust years, most of the growth in real per capita income came from increases in real wages and salaries—80 percent in 1969–79 and 109 percent in 1989–2001. Over the entire 32-year period, gains in real wages and salaries account for 72.6 percent of per capita income growth. During the growth years, wages and salaries contributed at least 80 percent of income growth both inside and outside the Texas Triangle cities.

Proprietor’s income makes its largest contribution from 1989 to 2001. Houston has the strongest contribution from the self-employed in this period (1 percent) and during the previous period (0.5 percent) as well. Gilmer shows that in 16 Texas and Louisiana cities, all with strong ties to oil, the first result of the oil bust was generation of a large number of new “proprietors,” presumably a result of forced entrepreneurship as people unemployed by the downturn started new businesses. [7] This was followed in the late 1980s and early 1990s by rapidly growing proprietor’s income, the fruit of successful new businesses started years earlier. The analogy of a forest fire leaving behind the seeds for regenerating the forest seems to apply to Texas in recent years, with entrepreneurship sowing the seeds. On average, proprietor’s income contributed 0.5 percent to per capita income growth in Texas Triangle cities in the late 1990s.

The property income component (dividends, rent and interest) is the biggest contributor to per capita income growth during the oil bust and recovery years. These periods saw a large run-up in property values, which fell back slowly in the late 1980s, and a sharp increase in interest rates due to inflation and tight monetary policy. The contribution is small during 1969–79 and negative during 1989–2001.

Other income per capita contributes most in 1969–79, is small in 1979–89 and turns slightly negative in the most recent period.

A Closer Look at Wage and Salary Growth
Because wage and salary growth per capita accounts for such a large share of Texas per capita income, we will look at it more closely. We can divide wages and salaries per capita (WS/P) into two parts: wages and salaries per employee (WS/E) and employment population ratio (E/P).

WS/P = WS/E × E/P.

Further, there are two reasons for the growth of wages and salaries per employee: (1) improvements in the industry mix that allow workers to move into higher-paying industries, and (2) specific advantages the region offers in resources, labor supply, infrastructure or other local factors. This region-specific advantage is called differential regional earnings.[8]

WS/P = WS/E × E/P = Industry Mix Differential × Regional Earnings × E/P.

Table 5 summarizes the contribution of each element to real per capita income. The first column is wages and salaries per worker; the second and third columns divide this category into two parts. Industry mix was clearly a significant factor in all areas and in every period. Texas was clearly shedding low-wage jobs and replacing them with better-paying jobs throughout the entire period.

We also see gains from differential regional earnings in the two periods of rapid growth. In the 1990s, the Texas Triangle cities added 0.6 percent per year to per capita income, thanks to these advantages. The measure clearly highlights the state’s booms and busts. Houston adds 0.8 percent per year from 1969 to 1979, which turns to – 0.8 percent in the following decade. Large regional differentials in Austin (2.4 percent) and Dallas/Fort Worth (0.8 percent) mark the tech boom of the 1990s. A look back at Figure 2 shows that these cities were already giving back some of these tech gains by 2001.

During the two decades of strong growth, the state generated jobs faster than the rate of population growth, despite rapid in-migration (Table 6 ). Per capita job growth has occurred both inside and outside the Triangle cities, despite the fact that the border regions, as mentioned above, were unable to attain job growth at rates much faster than the population grew. Growth in jobs per capita has, in turn, pushed up per capita income at a 1.5 percent annual rate during 1969–79 and 0.7 percent during 1989–2001. The slight decline in the contribution of jobs to income during the 1980s oil bust (–0.1 percent) is primarily due to Houston and areas outside the Triangle cities.

Conclusion
Measured by standards of population, employment and income growth, the Texas economy has outperformed the U.S economy since 1969. As shown in Table 7, by 2001 the state as a whole had raised its per capita income to 94 percent of the national average, up from 88 percent in 1969. Over the same period, the average annual growth rate of per capita income was 2.3 percent for Texas versus 2.1 percent for the United States.

Economic progress has been uneven over time. The oil boom briefly pushed Texas per capita income above the nation’s in 1981–82. In the subsequent collapse of oil, banking and real estate, Texas fell back to almost its 1969 position relative to the United States. Most of the progress has occurred since 1989.

Table 7 also indicates the uneven geographic progress. In fact, the forces of convergence toward U.S. levels have mostly come from the Texas Triangle metropolitan areas of Houston, the D/FW metroplex, San Antonio and Austin. All these cities have outperformed the United States since 1969, with the most dramatic gains coming out of Austin. The addition of a large high-technology workforce to a stable, if less well-paid, government and university base fueled both rapid growth and rising per capita income in the state capital. Except for San Antonio, all the Texas Triangle cities enjoy living standards above the U.S average.

The uneven nature of Texas’ economic history makes it difficult to judge the future. The geographic concentration of growth seems unlikely to change, but the state’s advantages relative to the rest of the nation (as measured by differential regional earnings) were dominated by the oil boom from 1969 to 1979 and to some extent by the high-tech expansion of 1989–2001. Advantages were concentrated first in Houston, then in Austin and Dallas/Fort Worth. Predicting the source or location of the next great round of expansion is impossible; however, since 1969 Texas’ low cost of living and doing business, tax advantages, climate and lifestyle have prepared the state for further growth and development, including periodic excesses. These Sunbelt advantages should make renewed economic expansion in Texas—and continued progress in raising the state’s living standards—simply a matter of time.

Notes The consolidated metropolitan statistical area definition for Houston and Dallas/Fort Worth is used for all statistics in this article. The ranking of metro areas includes consolidated statistical metropolitan areas, but then excludes all the parts of these CMSAs (metropolitan and primary metropolitan statistical areas) in the subsequent ranking process. The end years used here—1969, 1979, 1989 and 2001—are all peak years in the U.S. business cycle. Although Texas and its metro areas did not always follow the U.S. business cycle, particularly in the 1980s, these years were typically periods of economic expansion for Texas, making comparisons with the United States appropriate. The most notable flaw is insight into the size distribution of income among the population. However, this article divides per capita income into enough categories by component and geography to give insight into how income growth is affected by regional wage levels, job growth, population growth and location of the state’s largest metro areas. The framework was developed by Daniel H. Garnick and Howard L. Friedenberg (1982), “Accounting for Regional Differences in Per Capita Personal Income Growth, 1929–79,” Survey of Current Business 62 (September): 24–34. Also see Daniel H. Garnick (1990), “Accounting for Regional Differences in Per Capita Income Growth: An Update and an Extension,” Survey of Current Business 70 (January): 29–40. Constant dollars are obtained by deflating with the personal consumption expenditure deflator (1996 = 100) for all areas. Robert W. Gilmer, Matthew Gurch and Thomas Wang (2001), “Texas Border Cities: An