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HoustonBusiness A Perspective on the Houston Economy FEDERAL RESERVE BANK OF DALLAS • HOUSTON BRANCH • DECEMBER 2006 Income Growth Shows Houston’s Economic Strength and Maturity The most recent data available should relieve concerns that we are getting poorer, that Houston is a low-wage city or that our standard of living is below that of other large U.S. cities. T he focus of current economic analysis in a major metropolitan area like Houston is almost always on the labor market. Wage and salary employment and unemployment statistics are both comprehensive measures of the local economy’s performance, but more important, they are timely. The measures are released at the same time, within about 30 days after the close of the month reported. Other economywide gauges, such as wages and income, are reported with a lag of many months at best. Yet other measures — like production — are not reported at all. This article looks at Houston’s recent economic performance in terms of wages, salaries and total income. As we end 2006, some of the data will sound like the product of a long time ago. However, it’s the most recent available. The numbers should relieve concerns that we are getting poorer, that Houston is a low-wage city or that our standard of living is below that of other large U.S. cities. These local income data also clearly signal strong economic progress in Houston, both for the long term and in the current commodity cycle. Per Capita Income and Components The most comprehensive income measure for U.S. metropolitan areas is the personal income series from the Bureau of Economic Analysis, usually reported as local per capita income. This measure includes wages and salaries, proprietors’ income, transfers to individuals, and income from dividends, interest and rent. Table 1 shows 2005 per capita income (personal income divided by population) for Houston and 11 other metro areas that can be considered the city’s peers based on either population or total personal income. By either measure in 2004, the 12-city list is the same, with New York, Los Angeles and Chicago the largest three metro areas. Based on total personal income in 2004, Dallas–Fort Worth is No. 8 and Houston No. 9, followed by Miami, Detroit and Atlanta. On the 2005 list, we see the highest per capita income in high-wage cities like San Francisco, Washington and Boston. Houston falls in the middle of the pack, in the No. 6 spot. High-wage cities, however, also have a high cost of living. We can adjust the income data for those cost of living differences using information the Council for Community and Economic Research publishes in the form of an index. The index is based on a quarterly survey of the cost of groceries, utilities, transportation, health care, and miscellaneous goods and services in nearly 300 cities.1 It is no surprise that adjusting income for the cost of living significantly shuffles the order of cities in Table 1. Houston, Dallas, Chicago and Atlanta shoot to the top of the list, while San Francisco, Los Angeles, New York and Detroit fall to the bottom. While a low cost of living should not be confused with a high quality of life, it is clear that a dollar goes much further in Houston and Dallas than it does in cities on the bottom of the list. Table 1 also shows which cities experienced the most rapid per capita income growth in 1999– 2005. To make this comparison, we adjusted each of the metropolitan areas for inflation, using a consumer price index specific to each. The winners in this race are primarily on the Eastern Seaboard (Washington, Philadelphia, New York and Boston). Only Houston breaks into this group, landing at No. 4 thanks to real per capita income growth of 1 percent a year. Table 2 compares the 1999 – 2004 performance of some major components of total personal income in Houston and all U.S. metro areas combined.2 Houston comes in at a 2.9 percent annual rate, beating the U.S. metro average by a full Table 1 2005 Per Capita Income Adjusted for Cost of Living Adjusted Atlanta Boston Chicago Dallas Detroit Houston Los Angeles Miami New York Philadelphia San Francisco Washington Per capita income (dollars) 35,009 48,158 38,439 37,075 36,650 39,052 36,917 36,293 45,570 40,468 51,964 49,530 Rank Per capita income (dollars) Rank Change 1999–2005 (percent) Rank 12 3 7 8 10 6 9 11 4 5 1 2 35,833 34,671 37,211 39,737 20,967 44,529 23,454 31,450 22,649 32,220 29,728 33,948 4 5 3 2 12 1 10 8 11 7 9 6 –.2 .9 .3 .3 –.3 1.0 .6 .6 1.0 1.2 .7 1.6 11 5 9 10 12 4 8 7 3 2 6 1 SOURCES: Bureau of Economic Analysis; Bureau of Labor Statistics; Council for Community and Economic Research, ACCRA Cost of Living Index, various issues; authors’ calculations. Table 2 Major Components of Personal Income 2004 level (billions of dollars) Personal income Wages and benefits Proprietors’ income Rents, interest and dividends Transfers to individuals U.S. metros Houston 8,488.9 5,984.2 789.7 1,329.0 1,156.9 190.8 130.2 38.0 22.3 17.4 Annual growth, 1999–2004 (percent) U.S. metros Houston Difference 1.9 2.0 3.4 –.8 4.2 2.9 2.5 4.7 .9 5.3 1.0 .5 1.3 1.6 1.0 NOTE: Percentage differences may not add up due to rounding. SOURCES: Bureau of Economic Analysis; Bureau of Labor Statistics; authors’ calculations. percentage point. Wages, comparison is to all U.S. metrosalaries and employer-paid politan areas. Nominal dollar benefits — which constitute wages and benefits per Housabout 70 percent of personal ton worker were 7 to 8 percent income — grew about 0.5 perhigher than in the typical metro cent faster in Houston than in area in both 1999 and 2004. the U.S. metros. The share of Calculations in the lower part proprietors’ income — the inof the table show that nominal come of the self-employed — is wage and employer-paid paytwice as big in Houston as the U.S. metro average and grew 1.3 percent faster. Transfer Table 3 payments are less important Increase in Real Wages and Benefits Per Worker, 1999–2004 in Houston than in other metro areas, but grew at a U.S. metros Houston 5.3 percent annual rate verReal wages per worker 1999 $46,432 $49,859 sus 4.2 percent elsewhere. Real wages per worker 2004 50,153 54,245 Given falling interest rates Annual percentage increase and a weak stock market, it’s Nominal wages 4.5 5.2 no surprise that rents, inter– Inflation 2.4 2.6 est and dividends performed = Real wages 2.0 2.5 poorly in this period, though – Employment .4 .8 = Real wages per worker 1.6 1.7 they did better in Houston. Table 3 looks at wages NOTES: Real wages are in 2004 dollars; percentage changes may not and salaries and employeradd up due to rounding. paid benefits. Again, the SOURCES: Bureau of Economic Analysis; Bureau of Labor Statistics; authors’ calculations. 2 Figure 1 ments per worker grew 5.2 percent annually in 1999 – 2004, but adjusted for inflation, they grew 2.6 percent. Houston employment during this period of jobless recovery from the recession expanded only 0.8 percent per year on average. As a result, real wages per worker rose 1.7 percent in Houston, not much different from the 1.6 percent of the U.S. metros. The city’s faster nominal wage growth is primarily attributable to faster job growth during this period, not higher hourly or annual compensation. We can update Table 3, but only by narrowing the focus, since numbers on 2005 employer-paid benefits are unavailable. Figure 1 shows how real wages and salaries per worker have changed in the Houston metro area in recent years. They rose 1.8 percent in 2005—stronger than the turnaround year of 2004, when they went up 1.4 percent. Based on the many reports of ongoing labor shortages and a general scarcity of workers at all levels in Houston, the outlook for even higher numbers for 2006 is excellent. Income by Occupation Houston’s deep roots in oil, natural gas and chemicals sometimes raise doubts about whether it’s a blue- or whitecollar town, about our knowledge base compared with other cities’, and where we stand in terms of occupational mix and compensation by occupation. Table 4 shows 22 major occupational categories, along with the average pay in Houston and the typical peer city and the difference between them. The occupations are ranked from best- to worst-paid in the peer cities. Houston pays a significant premium over the other cities in six of the seven best-paid occupations : manIncrease in Houston’s Inflation-Adjusted Wages Per Worker, 1998–2005 agement, legal, comPercent puters and math, 5 architecture and 4 engineering, business and finance, 3 sciences and health 2 care practitioners. The premium is 1 largest in engineer0 ing and science; the exception is busi–1 ness and finance. –2 Looking at lower1998 1999 2000 2001 2002 2003 2004 2005 paid occupations, with the notable SOURCES: Bureau of Labor Statistics, Quarterly Census of Employment and Wages; Federal Reserve Bank of Dallas; authors’ calculations. exceptions of production and transportation, Houston ratio is greater than 1, the city pays wages below the peer-city has more than a typical share; average. The top seven catewhen it is less than 1, it has gories are likely tied to a naless than a typical share. tional market and Houston’s With the exception of engineed to draw higher-than-averneers and scientists, compared age skills. The occupations at with its peers, Houston is not the bottom are probably a well represented in the top product of the local labor marseven. Generally, the city’s ket. Although pay is below the strengths throughout the list repeer-city average, a cost-of-livflect a well-known industry mix. ing adjustment similar to that Its reliance on engineers is in made for per capita income in oil and gas extraction, chemicals Table 1 would move cities like and refining, and aerospace. Houston and Dallas to the top Strength in transportation is tied of the compensation list, even to transmitting energy (pipelines, in these local markets. for example), being a major To determine if Houston is port, and moving goods prowell represented in the bestduced by a manufacturing base and worst-compensated occularger than is found in most pations, we computed concenpeer cities. tration ratios for each occupaHouston’s notable weakness tion, or the percentage share of in computers and math comthe occupation in the city, pared with its peers might be divided by the percentage attributable to the proximity of share in the nation as a whole: Austin and Dallas, which both percentage share of an have a significant high-tech occupation in the city base. Similarly, weakness in Concentration ratio = percentage share of an business and finance probably occupation in the U.S. reflects Dallas’ emergence in the 1990s as the state’s finanThe ratio is computed for cial center. both Houston and the 12 peer Does Houston have its cities combined, and both share of these highly compenratios are compared with the sated jobs? There is a large national average. When the break ($12,785 per year) in the ratio is 1, the city has a share list of annual compensation by typical of places throughout peer cities after health care the United States. When the 3 Table 4 2005 Wages and Concentration Ratios for Houston and Peer Cities Average wages (dollars) Concentration of occupations Houston Peer cities Difference Houston Peer cities Difference Management Legal Computers and math Architecture and engineering Business and finance Life, physical and social science Health care practitioners 93,190 85,460 69,780 72,600 60,710 67,650 59,610 91,263 82,914 65,350 63,222 61,277 58,928 57,812 1,927 2,546 4,430 9,378 –567 8,722 1,798 1.08 1.18 .95 1.61 .98 1.17 .98 1.17 1.41 1.45 1.10 1.26 1.17 .97 –.08 –.22 –.50 .51 –.28 0 .02 Arts, entertainment and media Education, training and library Community and social services Construction and extraction Installation, maintenance and repair Protective services Sales and related 39,750 43,220 36,980 30,570 37,320 35,270 34,560 45,027 43,472 39,674 38,303 37,255 35,617 33,774 –5,277 –252 –2,694 –7,733 65 –347 786 .74 .99 .56 1.27 1.08 .99 .98 1.24 .96 .88 .89 .90 1.06 1.01 –.50 .03 –.32 .38 .18 –.08 –.03 Office and administrative support Production Transportation and material moving Health care support Personal care and services Building and grounds Farming, fishing and forestry Food preparation and serving 29,780 32,090 29,240 20,970 22,030 17,670 19,400 16,180 29,890 28,141 26,569 24,532 23,731 22,476 19,724 18,732 –110 3,949 2,671 –3,562 –1,701 –4,806 –324 –2,552 .99 .92 .97 .83 1.06 1.02 .24 .95 1.05 .78 .91 .87 .99 .99 .20 .92 –.06 .14 .06 –.04 .07 .03 .04 .03 SOURCES: Bureau of Labor Statistics, Metropolitan Area Occupational Employment and Wage Estimates, May 2005; authors’ calculations. practitioners and before arts, entertainment and media. A second break ($3,884) occurs after sales and before office and administrative support. Using these breaks, we can categorize the top seven occupations as highly compensated and the bottom eight as the lowest paid. Compensation across the top seven averages $68,681 per year, while for the lowest paid, the average is $24,224. The remaining seven occupations pay $39,017 annually. For all 12 cities, we computed the share of highly compensated jobs in total employment. Figure 2 summarizes the results. Nationally, 19.5 percent of jobs are highly compensated; the 12 peers average 22.8 percent. Washington, Boston and San Francisco are the three metro areas that clearly stand out as having extraordinary concentrations of white-collar, or knowledgebased, workers. The average for the other nine cities is 20.7 pare 1999 to 2005. The differpercent, leaving Houston (at 21 ence between the two years in percent) typical of this group. the share of jobs in high- and The share of jobs in the low-pay occupations for each lowest-paid occupations is city and the nation is shown in summarized in Figure 3. For Figure 4. Those differences are these jobs, the national average generally small in both comis 49.7 percent and the 12-peerpensation groups. city average is 47.1 percent, The national average saw with Washington, Boston and no change in the share of San Francisco again standing highly compensated workers, out from the pack. The average but the share of workers in for the remaining nine cities is low-pay occupations fell by 1.1 48.8 percent, with Houston coming in at 47.7 percent. It is hard to Figure 2 Percentage of Metro-Area Jobs in the Seven make a case for Highest-Paid Occupations Houston as a lowMiami wage city when Los Angeles places like Dallas, Detroit Chicago, Los Angeles Houston and Atlanta have a Dallas New York larger share of lowChicago wage workers. Philadelphia To determine Atlanta trends, calculations San Francisco similar to those in Boston Washington Figures 2 and 3 were National carried out for 1999, 15 20 25 30 allowing us to comPercent 4 35 SOURCES: Bureau of Labor Statistics, Metropolitan Area Occupational Employment and Wage Estimates, May 2005; authors’ calculations. Figure 3 Percentage of Metro-Area Jobs in the Eight Lowest-Paid Occupations of jobs in the poorly paid. Washington Conclusions Houston New York income data arrive Philadelphia with a significant Houston lag, but what’s been Atlanta released so far conDallas Miami firms a pattern of Chicago accelerating growth Los Angeles already seen in the Detroit employment statisNational tics.3 Job growth in 30 35 40 45 50 55 Percent 2002 – 03 was virtuSOURCES: Bureau of Labor Statistics, Metropolitan Area Occupational Employment ally nonexistent, but and Wage Estimates, May 2005; authors’ calculations. it began to pick up in 2004. Final numbers for both 2005 and 2006 percent. Jobs in midlevel occuwill put it near 4 percent, and pations were the net recipient. the Beige Book and other For the 12 peer cities, the averreports have focused on a age change from 1999 to 2005 shortage of workers. was a 0.9 percent drop in the Preliminary 2005 reports share of jobs in well-paid occuwere of engineering and techpations and a 1.2 percent nical skills in short supply, but decline in the lowest paid. workers are now difficult to Again, the jobs in occupafind at all levels and in all tions with pay in the middle industries. Total wages appear were the recipient, a trend to have initially followed the shared by seven of the 12 path of employment, with little cities. Atlanta, Boston and or no increase in hourly or Washington all showed a rising annual pay. However, the limshare of well-compensated ited data through 2005 show occupations and a declining workers drawing higher wages, share at the bottom of the a trend that has probably scale. Only Houston and Los strengthened in 2006. Angeles showed a decline Houston’s per capita among the jobs in the best-paid income and wage levels are occupations and a rising share typical of the country’s top dozen cities. Figure 4 There are large difChange in the Share of Jobs in High- and Low-Pay ferences in income Occupations, 1999–2005 and wages across Miami these cities, but there Los Angeles are also large differDetroit ences in the cost of Houston living. A dollar spent Dallas by a middle manageNew York High pay Chicago ment employee in Low pay Philadelphia Houston goes much Atlanta further than in most San Francisco peer cities, so when Boston Washington per capita income is National adjusted for the cost –4 –3 –2 –1 0 1 2 3 of living, Houston Percent SOURCES: Bureau of Labor Statistics, Metropolitan Area Occupational Employment rises to the top of Boston San Francisco and Wage Estimates, May 2005; authors’ calculations. 5 the list. Although a low cost of living does not guarantee a high quality of life, high salaries in cities like New York, Washington and San Francisco provide less purchasing power than might be apparent. Finally, Houston’s occupation profile matches the city’s strong role in extractive and manufacturing industries, with an especially large number of engineers and scientists, transportation employees and factory workers. Houston pays a premium for highly skilled workers, perhaps because it demands a higher level of skills than its peers. The city pays significantly less, however, for lowpaid workers. But again, when adjusted for the cost of living, these wages improve dramatically compared with other large cities. Houston’s mix in terms of the number of jobs found in high- and low-wage occupations is typical of that of the largest cities in the country. — Robert W. Gilmer Charles L. James Gilmer is a vice president of the Federal Reserve Bank of Dallas. James is a graduate student in economics at New Mexico State University. Notes 1 2 3 The index can be criticized for having varied participation by urban area from quarter to quarter, surveying a relatively short list of items that primarily reflect a middle-management standard of living, and excluding state and local taxes. The major components shown in Table 2 do not add up to local-area personal income. Benefits employers paid to government pension funds must be subtracted, plus an adjustment made for commuters who earn their income in one area and live in another. Table 2 does not cover 2005 because although data are available for total personal income, a breakdown by major components is available only through 2004. “Oil Exploration Booms— Is Houston Next?” by Robert W. Gilmer, Houston Business, March 2006. Houston T he Houston economy continues to boom. Seasonally adjusted unemployment has fallen to 4.7 percent, the lowest rate since 2001. Allowing for known data revisions to come, Houston has created 99,000 wage and salary jobs in the past 12 months. While there are dark clouds in the distance — most notably, a slowing U.S. economy and rising natural gas inventories — the immediate problem in key local industries remains labor shortages, backlogs and long lead times. Retail and Auto Sales Retail sales turned weak in recent weeks, with most retailers failing to meet their October or early November plans. Year-ago comparisons would be misleading because of consumer buying after the hurricanes. But recent strong months had led retailers to plan on solid increases for October. Now, the results of the past few weeks have raised concerns about the coming holidays. September auto sales were very healthy, up 14 percent from a year earlier. Real Estate Strong job growth is supporting most of Houston’s real estate markets. Existing-home sales were up 18 percent in September from a year earlier, with the median price rising 3.1 percent. New-home sales were up 6 percent. The office market has made dramatic absorption and occupancy gains in recent months, led by Class A and central business district space. Industrial real estate remains strong, but the BeigeBook November 2006 retail market has softened. The post-Katrina apartment market continues to move in reverse, with falling occupancy and lower rents over the past six months. Energy Prices and Drilling The price of West Texas Intermediate is near $60 per barrel and has moved in a narrow range between $57 and $61 in recent weeks. Natural gas fell under $6 per thousand cubic feet in late August, under $5 in mid-September and briefly under $4 in late September. Price has steadily strengthened and been in the $6 – $8 range since mid-October. This apparent strength defies the fundamentals of over 3.4 trillion cubic feet of gas in storage, when the Energy Department estimates maximum storage of 3.6 trillion cubic feet. In response to possible weak natural gas prices, domestic drilling has flattened at high levels over the past three months. Unconventional gas in the Rockies and Canadian drilling in Alberta have been most affected so far. A few smaller land-based rigs have come offline, and dayrates continue to rise — just more slowly than before. International activity continued to grow significantly, with every continent adding rigs in recent months. Refining Gulf Coast refineries have returned from maintenance and are now operating at high levels. The return was delayed in some cases by labor and construction shortages or relatively weak margins that offered less incentive to hurry back into production. Refining margins have been $8 – $10 per barrel, strong by historical standards but half to one-third the margins enjoyed over the summer. Petrochemicals Petrochemicals were mixed. Ethylene production has been affected by a series of planned and unplanned outages that have supported prices and kept profit margins high. Expectations are for lower prices in the future as outages end, the price of natural gas falls and the demand for downstream plastics shrinks. Demand for butadiene, in contrast, is very strong. Price is high, helped by strong demand for natural rubber, and margins are excellent. Isobutylene, used in the production of many consumer products, weakened in October, but returned strongly and is pushing capacity limits in November. For more information or copies of this publication, contact Bill Gilmer at (713) 483-3546 or bill.gilmer@dal.frb.org, or write Bill Gilmer, Houston Branch, Federal Reserve Bank of Dallas, P.O. Box 2578, Houston, TX 77252. This publication is also available on the Internet at www.dallasfed.org. The views expressed are those of the authors and do not necessarily reflect the positions of the Federal Reserve Bank of Dallas or the Federal Reserve System..
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