Chamber forecast sees tight labor, housing markets as biggest threat to Austin economy

Austin’s economy continues to be one of the strongest in the nation and should stay that way for the foreseeable future, but a national economist said the city’s extremely tight labor market is likely acting as a drag on the area’s overall growth.

That was one of the takeaways shared Thursday by Sarah House, senior economist for Wells Fargo Securities and one of the featured speakers at the Austin Chamber’s annual Economic Outlook luncheon, where attendees also heard presentations on the importance of cybersecurity for private and public entities. The event also served as something of a farewell for Mike Rollins, the longtime head of the chamber who announced his plans to retire from the organization early next year.

House began her talk by looking at national economic factors, saying the current 10-year economic expansion is expected to continue through 2020, though the rate of national gross domestic product growth will likely slip under 2 percent.

She said trade uncertainty caused by tariffs on goods from China and assorted European countries, and changing trade policies at home and abroad, are the biggest risks for continued economic growth, with the pace of government spending offering few options for stimulus programs in the coming years if a recession does set in.

Closer to home, House said Austin benefits from Texas’ 4.5 percent rate of GDP growth, which is the best in the nation.

The city’s unemployment rate of roughly 2.6 percent has started to slow hiring in all sectors, in large part because businesses are unable to find enough candidates to fill open positions.

That dynamic is also playing into the rising cost of housing in the area, with developers and others involved in the real estate industry reporting difficulty finding the builders and skilled trades workers needed to complete housing and commercial projects on time. The strong flow of newcomers into the area is adding even more pressure to the local housing market, with home prices rising roughly 5 percent year-over-year and the total supply of housing figured at just over two months. For comparison, an economy with a six-month housing supply is considered to be normal and will keep home prices from rising at a prohibitive rate.

“It’s part of the overall pace of growth. If you can’t find workers you can’t do these construction projects and you can’t expand your business,” House told the Austin Monitor after her presentation. “So there’s a limiting force on the overall pace of growth because when you look at an economy’s potential to grow, so much of it comes down to how fast the labor force is growing, if you have those workers available and how productive those workers are.”

Locally and nationally, House said low unemployment is starting to accelerate wage growth, with wages for lower- and middle-class jobs growing by more than 4 percent compared to a rate of just over 2 percent for upper-class workers.

“There’s not a lot of slack right now and that’s why we’re seeing these wage pressures bubble up and that does make it more expensive to do these investments, which also acts as a brake on how fast the economy can grow in a place like Austin.”

Local leaders have turned their attention in recent years to the state of middle-income workers. Both the city and county are pitching in to emphasize training for health care, information technology and advanced manufacturing positions, which are seen as offering the best opportunities for “up-skilling” low-wage earners into livable incomes.

House said that approach by local government officials makes sense.

“There’s education, whether that’s traditional K-12 (or) also some of the technical and vocational education where a lot of the gaps are in the labor force because we don’t have enough people for vocational type work,” she said. “Getting people the proper training there is certainly an area where the government can play a role.”

If the national economy does slide into a recession in the near future as a result of trade wars, House said Austin’s heavily service- and tech-based economy will probably see a slowdown, but should continue to grow.

“Austin is going to be insulated since it is more of a service-based economy and a lot of the growth has been based on tech,” she said. “So the trade exposure, which is the biggest risk out there, isn’t as high in Austin. Austin is still in a very good place. You still have positive flows of migration and population, so that’s going to be a really steadying force. If the rest of the country went into a recession, growth in Austin would slow but it will continue to grind on.”

Photo by Steve made available through a Creative Commons license.

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