Houston’s Call to Arms Houston MSA job growth appears to have suffered only a minor dip Recent Houston MSA job reports show surprisingly little job loss given the post 2014 oil and gas industry downturn. On the surface, the reports seem to show little more than a short and mild down dip in jobs, with an upcoming return to normal. Figure 1: Houston MSA Nonfarm employment Mild dip in overall employment, followed by continued growth Source: Texas Workforce Commission This report was created at the request of Center for Houston’s Future by KPMG. In preparing and providing this report, which was developed pro bono, KPMG has undertaken no role and expresses no view that could be considered public policy advocacy or lobbying. This report was developed as a holistic work and should be read only as such. While Houston’s overall job growth may continue on an upward trajectory, there has been a significant loss of high value, high multiplier jobs in Houston’s economy. Job losses in oil and gas and energy-related sectors (e.g., equipment manufacturing) are significant. Nonetheless, because jobs in service-providing sectors (e.g., restaurants and hotels) have increased, it appears that job losses have been offset by gains. Figure 2: Houston MSA energy sector job losses and top non-energy sector gains Source: Texas Workforce Commission However, this masks an underlying issue of job value Looking at the job market from the point of view of overall employment is deceiving. It masks an underlying issue relevant to Houston MSA’s distinguished economic growth for the decades leading up to the 2014 downturn: job value. When comparing job multipliers across the selected sectors, the issue of job value becomes evident. Houston has lost in that category disproportionately. High multiplier jobs are those that drive the flow of capital in the economy – for example creating or directing 2 Page new investment projects – which in turn creates new construction and additional service-industry jobs. Figure 3: Multiplier effect for selected sectors Source: IMPLAN Typically high multiplier jobs provide higher compensation as well, which increases local spending and business activity, therefore supporting additional jobs in sectors such as retail and restaurants, and even demand for more doctors and lawyers. Figure 4: Average annual compensation for selected sectors 3 Page Source: Texas Workforce Commission Houston, a historical outperformer, is now losing ground As the oil and gas industry grew over several decades prior to 2014, Houston MSA’s high multiplier jobs grew alongside it, resulting in an economic growth rate that outpaced the US average and peer cities such as Atlanta and Dallas. Currently, however, the greater Houston economy, measured in terms such as GDP, real wages, and discretionary income per capita is growing far less than many peer cities, and on most measures declining. Figure 5: Houston MSA vs. US and peer average per capita net earnings 4 Page Long term discretionary income advantage is now declining, while US and peer average are both rising Net Earnings: Earnings less housing and taxes Source: US Bureau of Economic Analysis Peer group includes: Atlanta, Austin, Chicago, Dallas, Denver, Phoenix If Houston’s economy continues on its current trajectory, the city is headed towards a situation similar to Denver pre its recent technology driven turnaround, or San Francisco pre the high tech boom. Houston should not rely entirely on an oil and gas industry upcycle to re-establish high value job levels Turning Houston’s job market decline – particularly in the realm of high value jobs – will not be easy. While the oil and gas industry is expected to stay a large and critical part of the energy landscape for many years, the consensus view is increasingly becoming one of ‘lower oil price for longer’, or even ‘lower oil price forever’. 5 Page Figure 7: Houston MSA oil and gas related jobs vs. peak year: historical and scenario forecasts Optimistic Lower for longer Lower forever Source: US Bureau of Labor Statistics, Institute for Regional Forecasting Additionally, oil industry jobs are continuing to show a trend of increasing productivity, meaning less jobs are required to perform the same level of activity. 6 Page Figure 6: Texas oil production vs. Upstream oil and gas employment* Production has increased significantly beyond 2014 levels despite lower levels of employment Source: Texas Alliance of Energy Producers, Federal Reserve Bank of Dallas *Note: 2018 Oil Production forecasted base on January and February 2018 monthly rate As a result, although oil prices and oil industry growth are stabilizing, Houston cannot count on the oil and gas industry to cycle upward to the extent of vintage early 1980’s or 2014 boom. In order to bring back the extent of high multiplier jobs lost post 2014, other avenues will need to be pursued. Additional events reinforce the need for a targeted, leadership-backed effort and integrated plan Further recent events in greater Houston, including Hurricane Harvey and losing out as a potential finalist for Amazon’s second Houston did notTurner make and headquarters, have led key leaders such as Sylvester Amazon’s short in list…we are Bob Harvey to issue a ‘call to arms’ regarding change Houston. obviously disappointed and As disappointing and heartbreaking believe this is a wakeup call as [not making the Amazon cut] is, for Houston it serves as a wakeup call that we -Bob Harvey 7 Page must move at a much quicker pace -Sylvester Turner While infrastructure improvements are a clear part of the future need, attracting high value industries, companies, and the talent associated with high value jobs is an equal or greater imperative. KPMG’s ‘Magnet City’ case study effort analyzed cities that went through a down period – similar to Houston’s current ‘call to arms’ – and were able to successfully transform and grow, attracting new businesses and residents. The common thread between these cities was an integrated plan tying together business, talent, and infrastructure efforts that worked in tandem to create outperforming economic growth. Such cities include Oklahoma City, that lost out on a major United Airlines maintenance depot due to ‘poor quality of life’, and San Francisco, that had to rebound after a major earthquake in 1989. Figure 8: KPMG Magnet City case study examples 8 Page The key to re-establishing an outperforming growth trajectory lies in targeting select high value industries The key is which industries Houston can benefit from, and how to attract these industries and associated talent. Several initiatives are underway to foster entrepreneurship and innovation in Houston (e.g., Station Houston, The Cannon), which is a good start and will help grow Houston’s venture capitalism presence. However, the timing and level of high multiplier jobs from these efforts will only close a small portion of the gap. Houston will also need to focus on growing industries with high potential impact that fit well with Houston’s existing companies, assets, and talent skillset. One key area is healthcare, where there is potential to expand Houston’s already significant health care R&D base and grow health care manufacturing. A second key 9 Page area is chemicals, where there is opportunity to extend basic petrochemicals in specialties and plastics. Then there are additional sectors that have an existing capability and/or high applicability in Houston, but will require additional effort to grow. The first is utility scale renewables, where skills in the Houston economy in terms of land acquisition and major project management could lend themselves to businesses that develop utility scale solar and wind farm projects, as well as large scale power transmission projects. Lastly, the rise of data science, and its applicability to multiple industries – including the many oil and gas and health enterprises already in Houston – creates the potential to grow both programming and computer engineering fields. 10 P a g e Figure 11: Targeted industries and multipliers In order to succeed, this effort will require support and commitment from leadership A call to arms will require the broader support and commitment of the business community to build and diversify Houston’s business base, supplementing the ongoing critical role of the oil and gas industry. Lessons learned by cities who went through a similar call to arms and successfully turned around their economy highlights that concerted plans to tie infrastructure and other investments to talent and business attraction strategies is the path to success. Greater Houston leadership should seize this moment to orchestrate such an integrated plan for Houston. 11 P a g e