2016 Regional Report: The Southwest

The Southwest states are well-positioned for the growth that's taking place among U.S. factories relocating to or expanding in Mexico.

TexasTexas may still be the Sunbelt’s economic center, as Waco-based economist Ray Perryman claims, but the Lone Star economy is feeling the blues. The collapse of oil prices has softened the top state industry, while evaporating natural gas profits have shredded payrolls. Last year, Houston lost 6% of its construction and mining jobs and 8% of its manufacturing jobs. After a long run as the country’s foremost job creator, Texas lost that title last year to California. In addition to energy sector retrenchment, export sales were cramped by the combo of a stronger dollar and weakened overseas demand.

Austin, largely unexposed to the energy sector, paced the nation in job growth last year. It may do the same this year too. Austin’s appeal to employers clearly lies with its talented, high-tech workforce. What lures A-list workers to Austin? “It’s the combination of quality of living, the relaxed culture, the outdoors alongside the urban setting, the music and the economic opportunities associated with industries that are growing,” says Mike Rollins, CEO of Austin’s Chamber of Commerce.

Perryman notes the area’s “workforce advantages and presence in key emerging sectors,” particularly IT, manufacturing, finance, insurance and real estate. The area added 32,000 jobs between May 2014 and May 2015, led by hospitality industry gains, for a 7.9% growth rate. Perryman forecasts continued strong performance through 2016 led by growth in services, durable manufacturing, finance, insurance and real estate.

A recent national study by PwC and the Urban Land Institute named Dallas-Fort Worth the top U.S. market for real estate investment, development, and homebuilding. Austin was No. 2. Locals cheer the major expansion of Fort Worth Alliance Airport, expected to enhance logistics considerably. Says Perryman: “We look for growth to continue at a strong pace.”

The Lone Star State racked up some major wins last year, including the $1.6 billion Total Petrochemicals facility in Port Arthur, and General Motors’ $1.4 billion expansion in Arlington. In
Austin, major expansions and relocations were announced by Google and Charles Schwab; Apple began moving employees into its brand-new hemispheric headquarters.

Gov. Greg Abbott, stepping into the boots of his famously pro-business predecessor, Gov. Rick Perry, set the tone for his new administration by slashing the state’s franchise tax 25%. The Dallas-Plano-Irving metropolitan division added jobs at a 3.8% rate during the May 2014—May 2015 period; Perryman forecasts more robust growth in 2016. Houston, hammered by the downturn in energy prices, replaced some of its lost jobs with lower-paying positions in education, health care and hospitality. “We all know the price slump is temporary and that Houston is resilient,” says Austin-based economic development consultant Angelos Angelou. San Antonio regained some luster in 2014, as the pace of job growth more than doubled to 4.2%.

ArizonaArizona continues its fitful post-recession recovery. The state, once a job-creating juggernaut, stands at about 80% of peak payroll. Some signs signal better days ahead. Glendale-based site selector Deane Foote contends his home state “is certainly over the hump. Things are very good here. New jobs are being created around the state.” He touts the new pro-business gubernatorial administration of Doug Ducey and sees international investor interest—key to the state’s past mojo—returning. Says Foote: “Foreign direct investment is coming in again from all over Asia and Europe.”

2016 should be the year Arizona regains its economic energy, says George Hammond, director of the Economic Business and Research Center at University of Arizona’s Eller College of Management. Dr. Hammond forecasts job creation will inch past the national average this year and continue rising through 2020.

Notorious in past years for aggressive recruitment policies targeting California companies over the state line, the Grand Canyon state seems poised to resume those efforts. “Arizona is the place companies come to scale up,” says Chris Camacho, CEO of Greater Phoenix Economic Council. “A company of 20 people in San Francisco can afford to be a company of 200 people in Phoenix.”
Arizona added jobs faster than the national average in the 12-month period between September 2014 and September 2015: 2.3% compared with 1.9%. Greater Prescott paced state job expansion with a 3.4% rate during that period, followed by Greater Phoenix (2.5%) and metro Tucson (1.4%).

The closely watched construction sector reversed recent contractions, enough to grow slightly last year. Software looks to be the biggest gainer long-term; Camacho projects 40% growth over the next 10 years. Business leaders point to Apple’s $2.2 billion new data center going up in Mesa as another turnaround sign.

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