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At the Heart of Texas: Cities’ Industry Clusters Drive Growth


Houston–The Woodlands–Sugar Land: Texas' Gulf Coast Hub and Nation's Energy Capital

At a Glance

Houston–The Woodlands–Sugar Land

Population (2014): 6.5 million
Population growth (2006–14): 17.1 percent
Median household income (2014): $60,072
National MSA rank (2014): No. 5*
Kauffman Startup Activity Index rank (2015): No. 8*
*The Houston–The Woodlands–Sugar Land metropolitan statistical area (MSA) encompasses Austin, Brazoria, Chambers, Fort Bend, Galveston, Harris, Liberty, Montgomery and Waller counties. The Kauffman Startup Activity Index, a measure of business creation in the 40 largest U.S. metropolitan areas, is further explained in the Appendix.

  • Houston began as a port city, rising to prominence as one of the top three busiest deepwater ports in the U.S.
  • The Texas oil boom began at Spindletop, 75 miles to the east, and the Houston area quickly became the energy capital of the U.S. and home to oil companies, refineries and petrochemical plants.
  • While the energy industry remains the dominant cluster, Houston has diversified, and the manufacturing, chemicals and health industries have grown in importance.
  • Falling oil prices and a decline in exports pose a challenge to the Houston economy, and a strongly growing health industry can’t pick up all the slack.

HISTORY: An Energy Complex Emerges from a Port City

Houston was founded in 1836 along Buffalo Bayou, a waterway leading to the Gulf of Mexico. At the time, the city was dependent on agriculture and commerce, and most business involved selling supplies to area farmers.

Because Buffalo Bayou was difficult to navigate, trade tended to pass through Galveston, 50 miles away on the coast. Rail lines connected Houston to the countryside, and by 1861, Houston was the rail center of southeast Texas. The U.S. government began widening and deepening Buffalo Bayou in 1881, and when the Houston Ship Channel was finally completed in 1914, Houston became a deepwater port, soon ranking among the top three ports by volume in the U.S.

Drillers struck oil in 1901 at Spindletop, 75 miles to the east near Beaumont, catalyzing the oil boom in Texas. Sinclair Oil Co. built the first major oil refinery in Houston in 1918, and many others followed, constructing facilities along the Houston Ship Channel.

Forty oil companies had Houston offices by 1929. During World War II, demand for petrochemical products skyrocketed, and Houston quickly developed one of the largest petrochemical plant concentrations in the U.S. Houston was an international energy capital by the 1970s, expanding with the oil boom but also suffering during the 1980s bust.[1]

INDUSTRY CLUSTERS: Energy and Related Industries Dominate

Chart 5.1 shows the composition of industry clusters in Houston, organized by location quotient (LQ), a measure of a cluster’s share of local employment relative to its share nationally. Each cluster is plotted based on employment share change between 2006 and 2014.[2]

Energy and Related Manufacturing Among Houston's Dominant Clusters

Clusters in the “star” quadrant, such as mining and energy, have a large share of employment relative to the nation (an LQ exceeding 1) and are fast growing; “emerging” industries, such as health, are smaller relative to the nation (an LQ less than 1) but also fast growing. “Mature” sectors, such as the chemical industry, are more concentrated but slower growing; “transitioning” segments, such as government, are smaller relative to the nation and are slower growing.

Energy and related companies by far make up the largest cluster in Houston, employing 14 percent of the workforce. Houston has more Fortune 500 companies than any other Texas city, and out of the 26 local companies on the list in 2015, only four were unrelated to the energy industry. Apart from Fortune 500 firms such as Phillips 66, ConocoPhillips and Marathon Oil Corp.—whose headquarters are in Houston—the city’s largest employers include units of Exxon Mobil Corp. and Shell Oil Co., each employing more than 13,000 workers locally.[3]

Related oilfield manufacturing and services companies that support the energy extraction firms include National Oilwell Varco, Schlumberger and Halliburton. This network has led to a high concentration of machinery and fabricated metal manufacturers.

Similarly, the chemical industry is a major cluster, though its relative size has declined recently. Dow Chemical Co., for example, employs 6,600 workers. Many of the major energy companies, including Exxon Mobil, also manufacture chemicals.

Although its share of transportation and logistics employment has declined since 2006, Houston retains its position as a major port city and regional commercial hub. The United Airlines hub, the carrier's largest, is located at George Bush Intercontinental Airport. The airline employs 17,000 people in Houston.

The health cluster, accounting for 8 percent of Houston’s workforce, has also grown significantly in recent years. The area’s two largest employers, with more than 19,000 workers each, are Memorial Hermann Health System and the University of Texas MD Anderson Cancer Center. Though Houston’s concentration of health care workers remains below that of the U.S. (with an LQ of 0.92), employment grew 36 percent from 2006 to 2014 (Chart 5.2).

IT and Energy-Related Manufacturing Lead Employment Growth in Houston

The major industry clusters in Houston pay significantly more than other industries (Table 5.1). The average annual wage for mining and energy, for example, is $120,000; the average worker in Houston earns $64,500. Overall, workers employed in the most concentrated clusters—those with LQs greater than 1—earn on average more than twice as much as workers in less-concentrated clusters ($96,000 versus $46,100). While real (inflation-adjusted) wages have increased 9.4 percent overall since 2006, pay has grown 10.7 percent in the most concentrated clusters and 2.5 percent in less-concentrated ones.

Table 5.1: Energy and Related Clusters Drive Houston Workers’ Earnings
Cluster Houston   U.S.
  2006 2008 2010 2012 2014   2014
Machinery manufacturing 88,556 88,741 93,793 98,364 98,975 66,715
Mining and energy 109,553 113,440 115,480 120,750 120,088 76,815
Fabricated metal manufacturing 59,181 62,989 61,517 65,198 65,436 53,130
Construction 60,914 63,960 63,739 66,701 70,413 55,041
Chemicals 94,390 95,397 97,286 99,784 102,907 69,856
Defense and security 72,245 68,189 69,999 69,372 72,203 59,588
Utilities 119,634 124,107 115,164 120,369 122,414 98,149
Glass and ceramics 52,639 56,232 51,331 54,750 55,285 51,073
Transportation and logistics 64,039 66,232 73,449 81,226 75,998 51,043
Advanced materials 82,363 82,287 82,884 85,188 86,434 79,703
Business and financial services 93,974 97,049 98,450 100,147 102,094 92,957
 
Clusters with location quotient >1 86,686 89,375 91,422 95,495 95,981
Clusters with location quotient <1 44,979 45,021 46,064 45,704 46,100
Average earnings (total) 58,969 60,930 60,876 63,235 64,512 51,361
NOTES: Clusters are listed in order of location quotient (LQ); clusters shown are those with LQs greater than 1. Earnings are in 2014 dollars.
SOURCES: Texas Workforce Commission; Bureau of Labor Statistics; authors’ calculations.

DEMOGRAPHICS: Houston Population More Diverse

Demographics in Houston—the state’s most populous metro, with 6.5 million residents—differ from the other major metros. While Austin, Dallas and Fort Worth all have dominant non-Hispanic white populations, Houston’s Hispanic population of 36.3 percent is nearly as large as the white non-Hispanic population of 37.8 percent. The black share, 17.2 percent, and Asian share, 7.3 percent, are higher than in any other Texas metro area in this report (Chart 5.3).

Population More Diverse in Houston than in Other Major Metros

Rapid job growth in the high-paying energy industry has made Houston a popular destination for migrants, domestic and foreign. Apart from the Texas border metros, Houston has the largest foreign-born population share, 23.1 percent. Roughly two-thirds of the foreign born are from Latin America, and about a fourth are from Asia.

Houston trails Dallas and Austin in share of the population with a bachelor’s degree or higher. This reflects the abundance of energy industry and manufacturing jobs, many of which pay well but do not require a college degree. However, Houston’s population is more educated than Texas’ overall. Thirty-one percent of Houston’s population holds a bachelor’s degree or higher; the Texas average is 27.8 percent.

EMPLOYMENT: Impact of Shale Boom and Bust

Houston was hard hit by the Great Recession, losing 4.6 percent of its jobs between August 2008 and November 2009. Among the large Texas metros, only DFW lost more. However, Houston bounced back strongly, with employment expanding 18.1 percent from December 2009 to December 2014, or 3.4 percent per year. Among the large metros, only Austin came back faster, up 4 percent per year during the period.

Houston’s rapid postrecession growth is largely due to the shale oil boom. With such a high concentration of firms in energy or related industries, shale exploration fueled Houston’s employment prospects, driving growth directly and indirectly. Firms that directly participate in fossil fuel production, refining and petrochemicals expanded significantly, as did companies that provide support to energy producers, such as machinery manufacturers, construction and real estate firms, and business and financial services enterprises.

However, energy-fueled booms are sensitive to price busts. In response to crashing oil prices in late 2014, the Houston job market wavered in 2015. Between December 2014 and November 2015, employment was nearly flat. Job losses were not only concentrated in goods-producing sectors such as energy and manufacturing, but also in some service sectors. Professional and business services and real estate also experienced labor market declines in 2015.

OUTLOOK: No Recession … Yet

Houston’s economy is heavily tied to energy, with nearly 16.4 percent of 2014 real gross domestic product attributed to the industry. Thus, an energy price decline negatively affects the area economy, slowing job gains, damping energy-related investment and creating downward pressure on demand for various services and commercial real estate, especially office space. The effects of low oil prices are not expected to be as drastic as those during the 1980s oil bust because Houston is more diversified, largely due to its health care and export sectors.

Because Houston is a port city, exports are vital to the economy and support more than 400,000 area jobs, by some estimates.[4] However, the export industry faces challenges in the short term as the unusually strong U.S. dollar increases costs for foreign buyers, reducing export demand. Additionally, the International Monetary Fund lowered 2016 global growth projections from 3.6 percent to 3.4 percent, dimming export growth prospects.[5]

Still, parts of the energy industry will expand over the long term. New petrochemical plants and liquefied natural gas terminals are under contract, with construction expected to start in 2016. These projects will initially provide employment for many construction workers, although the plants will require relatively few operations employees once they’re complete.

Additionally, Houston’s large health care industry is expected to grow to support a burgeoning aging population. More than 600,000 Houston residents are over age 65, and this cohort is expected to grow significantly in the coming decades as baby boomers age.

Houston—The Woodlands—Sugar Land Growth Outlook
Drivers Challenges
  • Refinery operators and petrochemical producers are benefiting from low oil and gas prices.
  • Construction of new petrochemical plants and liquefied natural gas terminals planned in coming years will boost construction employment in the medium term.
  • A strong health care industry will continue to expand along with expected population gains, especially with a projected increase in the 65-and-older population in the next few decades.
  • Low oil prices negatively impact growth in the upstream energy industry and beyond.
  • Energy-related jobs will decline further given the plunge in rig counts.
  • Demand for commercial real estate may wane further.
  • Apartment and single-family home growth may diminish.
  • Slowing exports due to a stronger dollar and weaker global growth will damp port activity.

Notes

  1. The history of Houston is taken from the Texas State Historical Association’s Handbook of Texas, tshaonline.org/handbook/online/articles/hdh03.
  2. Individual industry cluster shares do not add to 100 because some smaller industries at the three-digit-or-higher level in the North American Industry Classification System (NAICS) are included in multiple clusters, while some industries are not part of any of the clusters shown. Clusters include other related industries. For instance, semiconductor manufacturing (NAICS 3344) is included in both the advanced materials and information technology and telecommunications clusters. (See the Appendix for more information.)
  3. Data on major Houston employers are taken from the Greater Houston Partnership’s 2015 Houston Facts, www.houston.org/assets/pdf/economy/Houston%20Facts_web.pdf.
  4. See the Greater Houston Partnership’s 2015 Houston Employment Forecast, Dec. 11, 2014, www.houston.org/pdf/research/quickview/Employment-Forecast.pdf.
  5. See the International Monetary Fund’s World Economic Outlook, October 2015, www.imf.org/external/pubs/ft/weo/2015/02/pdf/text.pdf.
At the Heart of Texas