“Boom” Is a Four-letter Word
Thanks to high tech, the Texas economy is surging—just as it was in the early eighties. So how come nobody wants to talk about it?
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JOE LIEMANDT HAS BEEN DOING PRETTY well lately. Last year, at the age of 28, he became the youngest self-made member of the Forbes 400, a list of the wealthiest people in the country. He is worth a sweet half a billion dollars. What is most remarkable about Liemandt’s achievement is that he did not make his money the old-fashioned way: drilling for oil or developing real estate. He didn’t even make his money assembling computers. Liemandt is the founder of Trilogy Development Group, based in Austin, and he made his money designing software programs. As the Industrial Age wanes and the Information Age waxes, high tech is usurping the place of oil, just as oil once supplanted agriculture. Next year for the first time economists are predicting high tech will contribute more to the state’s economy than oil. The rise of technology began with Texas Instruments, grew with Michael Dell, and has now reached maturity with Joe Liemandt. In the past Texans commonly made their fortunes from the land—first with cotton, then cattle, then oil, then real estate—but Liemandt’s success proves that the state finally has a truly modern economy.
The surge of high tech has also coincided with an upswing in all parts of the economy, making the prosperity of people like Liemandt emblematic of the prosperity of Texas as a whole. For ten straight years the state has experienced steady economic expansion. Not every region has benefited equally—thousands of jobs have been lost along the border and in the oil patch—and in the past two years the pace of growth has slowed down somewhat, but the length of the expansion is still exceptional. This period of sustained growth is nearly as long as the eleven-year stretch that culminated with the oil craze. In other words, we’re in the middle of something akin to a boom. So how come we can’t admit it? Well, it isn’t a boom in the old sense. The expansion has been gradual, not jet-fueled. But compared with the debilitating bust of the eighties, the nineties have been good times indeed. Nonagricultural employment in the state, the most widely used indicator of economic growth, has been climbing at an average of 2.58 percent (as opposed to an average of 5.38 percent during the oil boom). Yet Texans feel a widespread aversion to the very word “boom,” which only conjures up thoughts of its corollary—“bust.” “A boom is such a thing as is apt to terminate and go backward,” says Dallas developer Trammell Crow, who nearly lost his real estate empire to his bankers after the bottom fell out of the market in the late eighties. Texas Department of Commerce analyst Branner Stewart adds, “‘Boom’ almost has a negative connotation.”
The current expansion does possess many of the hallmarks of a boom, however, such as increased productivity and low unemployment. After a decade of steady gain, even oil and real estate are once again showing signs of health. Call the cheery good feeling permeating the state the New Boom. It is a cautious, thrifty, highly disciplined, sometimes mean-spirited phenomenon that bears little resemblance to its freewheeling, free-spending older cousin. During the bust, cars displayed bumper stickers that read “O Lord, Please Send Us Another Oil Boom—We Promise Not to Screw It Up This Time,” and the New Boomers tend to make money with exactly that kind of wariness. Joe Liemandt earned his money by designing “sales configuration software,” a tool that allows companies to buy and sell products more efficiently—basically he made a mint by helping others pinch pennies. Despite his net worth, which could easily support several homes, Liemandt doesn’t even own one. He rents an apartment near his office, an austerity he explains by saying real estate isn’t a wise investment.
The New Boom also differs from the old in scale: The biggest winners last time were behemoth companies that employed armies of people, while this boom involves a large number of start-ups that employ just a handful of people. But the biggest difference of all lies in the prevailing attitudes. The Old Boom made us think we were better, smarter, luckier, and richer than the rest of the nation. The bust popped the great balloon of our narcissism; if anything, it seemed to say that we were dumber, unluckier, and poorer. This time around we are prospering in tandem with the nation, and what we have learned is that we are only a little bit better than everybody else.
AUSTIN HAS BECOME THE EPICENTER of the New Boom in the way that Houston was the epicenter of the old one. From 1990 to 1995 Texas led the nation in the creation of high-tech jobs, surpassing California to become the country’s leading producer of computer chips last year. Laid-back Austin is now ringed by factories that process silicon 24 hours a day, 365 days a year. Motorola has become the city’s largest private employer, and the factories have attracted more than 150 equipment suppliers to the area as well.
Austin is also the headquarters of several leading producers of personal computers. There is no more prominent example of Austin’s new afï¿½uence than Michael Dell, the 32-year-old billionaire who became an industry legend by manufacturing cheap computers and selling them directly to consumers. As profits at Dell Computer climbed to $518 million last year, Dell began building himself a Bill Gates—style palace—reportedly a 33,000-square-foot estate with ten bedrooms, twelve bathrooms, and two pools. Perhaps more typical of the New Boom, however, is the austerity of cybermogul Stephen S. Kahng. Four years ago Kahng’s Power Computing Corporation, based in suburban Round Rock, became the first company to manufacture Macintosh clones. No fancy architecture here: When the company ran out of space, he leased a building that had previously held a Wal-Mart. Never mind that Power Computing has been called the country’s fastest-growing start-up; revenues are predicted to hit $700 million this year.
A bevy of smaller firms has sprung up alongside these large operations. Austin now has 1,100 multimedia companies, at which the average number of employees is fewer than five. And the proliferation of start-ups has attracted eleven venture capital firms to the area, as well as additional money from venture capital firms on the West Coast. In 1996 Austin companies received $66 million in venture capital, a 62 percent increase over 1995.
Increased reliance on high tech brings perils as well as gains, of course. Last summer’s dip in orders for chips caused a sharp contraction in the semiconductor business, and nearly all chip manufacturers were forced to put expansions on hold; some, such as Motorola, even imposed layoffs. Statewide, the slump contributed to a slowdown in the growth of nonagricultural employment—that rate dropped to 2.3 percent last year, down from 4.2 percent in 1994. In other words, while it was once true that the best indicator of the health of the Texas economy was the price of a barrel of oil, today a more significant figure is the so-called book-to-bill ratio, which is the ratio of orders to sales in the chip business.
Still, the less hectic pace of growth should give Austin’s infrastructure a chance to catch up with its population. More than 100,000 jobs were created in the city during the past six years, boosting its population by 20 percent, putting 170,000 more cars on the roadways, and setting off a surge in construction projects. Downtown development includes the glass-and-brick extravaganza for GSD&M (the largest advertising agency in the Southwest), and scores of subdivisions have transformed the city’s periphery.
Big D Gets Bigger
THOUGH AUSTIN GETS THE CREDIT FOR THE CYBERBOOM, Dallas was really its birthplace—the single-chip microprocessor was invented at Texas Instruments. Dallas still produces large numbers of computer chips, but the area has expanded into telecommunications, as opposed to software. The advent of fiber optics, the deregulation of the phone business, and the exponential rise of traffic on the Internet have combined to swell profits in this sector, and Dallas has not suffered the same sort of slowdown as Austin. Last year Dallas led the state in job creation, and in December its unemployment rate dipped to 3.4 percent, the lowest since 1990.
Emblematic of the New Boom is 49-year-old Kenny Troutt, the founder of Excel Communications. Troutt grew up in an Illinois housing project, but today he’s a billionaire. After losing his shirt in oil and construction, he made his money in the long-distance business. In the past four years Excel’s revenues have exploded from $20 million to $1.4 billion. True to the spartan spirit of the new era, Troutt eschews opulence. “I’ve seen people build a business by living, thinking, eating, and sleeping for the business,” he says. “Then, as soon as they start making some cash, they start buying a ranch and taking vacations, and the business suffers. I don’t ever want to do that.” You never heard talk like that from Don Dixon, the real estate developer who ran Vernon Savings and Loan Association in the eighties. Dixon got around Dallas in his Ferrari “company car” and around the country in his ï¿½eet of five planes.
During the old boom, Dallas was home to the big loans, big buildings, and big deals that characterized the period’s glory days. Today Bunker and W. Herbert Hunt have lost their empire, and Sanjiv Sidhu (a native of India who left Texas Instruments to form his own software company) is getting rich. Banks that were a symbol of the city’s standing as a citadel of commerce have been obliterated; hallowed institutions like RepublicBank have been outpaced by national names like Bank One. But Dallas has retained its status as a corporate hub. Among the businesses planning to move their headquarters to the area are Blockbuster and Cadbury Schweppes. And not all of the New Boom’s beneficiaries are upstarts: Texas Instruments is now the leading maker of digital signal processors, a device that a modem can’t operate without.
Lately even the construction cranes are back. Dallas once led the nation in available office space, but last year occupancy climbed to its highest level since 1982, generating a need to build again. Most of the new construction is taking place along the Dallas North Tollway and in suburbs like Plano and Frisco: To get to Southfork Ranch today, TV oil baron J. R. Ewing would have to drive his Mercedes through a canyon of new skyscrapers.
FORT WORTH NEVER DID GO WILD during the last boom, and only one of the city’s banks failed during the bust. At first it looked as though Fort Worth might be spared the fate of other Texas cities, but then the Berlin Wall came down. Defense contracts with companies like General Dynamics had funneled billions annually into the Tarrant County economy (thanks to former House Speaker Jim Wright), and when the Pentagon budget was slashed, those dollars vanished. In 1989 37 percent of all manufacturing jobs in Fort Worth were tied to defense spending, but today that figure has been cut in half.
In the past six years, however, the number of jobs here has climbed 17 percent, housing permits 32 percent, and restaurant sales 33 percent. Unemployment has fallen to 3.2 percent. “These are good times,” says Mayor Kenneth Barr. “We’re reaping the investment of the past twelve to fifteen years.” Among the biggest investors in Fort Worth are the Basses, who have brought a dozen new restaurants and two movie theaters with twenty screens between them to the blocks on either side of redbrick Main Street. Next May the $60 million Nancy Lee and Perry R. Bass Performance Hall will open as well. Less showy but more consequential is the success of the 8,300-acre Alliance Airport, a business terminal developed by Ross Perot, Jr., for corporate clients who don’t want to bother with the hassle of DFW. The new airport is a job-creation machine: Twenty-four companies signed up as tenants last year, including a regional hub of Federal Express, a Nokia cellular phone factory, and a $1.3 billion fabrication plant of Intel Corporation, the world’s largest computer-chip maker.
$20 a Barrel
WHILE PARTS OF THE STATE RECUPERATED EARLY, it was impossible for Houston to forget the bust as long as the price of oil hovered near $15 a barrel. Exploration and production now make up only 36.4 percent of Houston’s export-based economy, while it formerly made up 68.7 percent, but Houston still leads the world in almost every segment of the oil and gas industry, from exploration to plastics, and one third of the country’s energy-related business takes place there. In 1980, when the price of a barrel of oil went to $35, Houston’s fortunes soared. And after the price of oil fell below $10 on April 1, 1986, Houston was on its way to losing one out of seven jobs—more than 221,000 total. But by 1990, that many new jobs had been created again, as positions lost in the oil patch were replaced in business services, engineering, and health. Now even Houston’s traditional economic pillars, oil and real estate, are back.
As in Dallas, Houston’s commercial real estate market perked up after a glut of space was finally absorbed. Offices that were vacant for years are being leased once more; the biggest deal so far has been the move of global natural gas marketer NGC from far-ï¿½ung offices on the Northwest Freeway to eleven ï¿½oors of the 71-story First Interstate Plaza Downtown, which took 235,000 square feet of office space off the market. The city’s fortunes are mirrored in the fate of the once-thriving but long-closed Rice Hotel, which is currently undergoing refurbishment as a condominium.
To understand how the energy business recovered you need to know just one statistic: Over the past six years, the cost of finding a barrel of oil and bringing it to market has dropped by 40 percent. Because of technoligical revolution and the bust-induced layoffs, most companies can now make money even if oil sells for $17 or $16 a barrel. And recently the price of oil has stabilized at around $20—twice what it was at the nadir of the collapse. Two cold winters have kept the price of natural gas between $2 and $4 per thousand cubic feet, sending petrodollars pouring into Houston again.
After shedding thousands of employees, the major oil companies have become sprightlier, while smaller companies have assumed a greater role. Mike Prescott, who runs a two-person exploration company called Big M, has become one of the wealthiest men in Houston. “It’s sort of tongue-in-cheek,” he says of his firm’s name. “We’re not a big company at all.” But Prescott pursues big ideas, and when he struck two giant gas fields, he became a multimillionaire. Like the wildcatters of old (this is Houston after all), Prescott bought a mansion in Houston, a beachfront condominium in Los Angeles, and lakefront property on Tahoe. Two years ago, he updated his business by spending $50,000 on a state-of-the-art personal computer that he loaded up with special features so that it can process the same amount of geological data as any mainframe owned by a major oil company.
But as the oil industry has become more efficient, it has also come to play a less significant role, as was starkly apparent when the chip slump and the Mexican peso devaluation of 1994 combined to slow the state’s growth. “Texas has become much less energy dependent,” says Fiona Sigalla, an economist with the Federal Reserve in Dallas. “Last year was really startling to me. You saw the energy industry take off, and yet the Texas economy continued to cool. Oil does not drive the Texas economy like it did before.”
THIS PARADOXICAL REGION HAS LED THE STATE in job growth over the past six years, but also leads the state in unemployment. That is true because no matter how many jobs are created, there are never enough to satisfy all who arrive looking for work. Since 1991 the population of border towns has grown by an astounding 22.2 percent—twice the rate of cities elsewhere in the state. A unique mix of profit and poverty has resulted.
That the border would be out of step with the rest of Texas is not surprising, as the area has always marched more to the beat of the Mexican economy. The devaluation of the peso was felt profoundly here: Before their economy went into free-fall, Mexican nationals spent an estimated $2.8 billion a year in border cities like McAllen, Laredo, and Brownsville, but in 1995 spending dropped to $2.07 billion, and last year it slipped further still to $1.87 billion. NAFTA has indisputably made the region busier, but trade brings both gain and loss.
Consider Laredo, where last year more than one million trucks crossed the international border, up 106 percent from five years before. But look at what’s crossing: The city’s top export is vehicle parts, and its top import is motor vehicles. In other words, automobiles are being built at maquiladoras, American factories on Mexican soil just across the Rio Grande. Ironically devaluation benefited maquiladoras by making them more profitable (at the expense of their Mexican work force), but it hurt less-educated workers on the American side of the border. El Paso, the worst hit of all the border cities in Texas, has lost 5,600 primarily low-skilled jobs to Mexico over the past three years; at the same time, companies that rely on maquiladoras have also created new engineering positions in El Paso, conveniently near their assembly plants in Ciudad Juárez.
Clearly the biggest losers of the new era are low-skilled workers across the state. In El Paso hundreds of people are taking bus rides to temporary jobs in states as far away as Alaska. In Austin rents have jumped nearly 50 percent. The north side of Fort Worth is thriving, but inside Loop 820, unemployment runs twice the citywide average and neighborhoods are lined with boarded-up stores. “We’re becoming a dual economy,” says Bernard Weinstein of the University of North Texas’ Center for Economic Development and Research. “Along with the boom has been an increase in poverty.”
How Long Will It Last?
ORDERS HAVE BEGUN TO INCH BACK UP in the chip business. “We are hiring again and everything looks good at Motorola,” says company spokesman Dan Rogers. “The semiconductor industry has begun a slow turnaround.” And Mexican money has started ï¿½owing into the state again. “We’ve seen a bounce back,” says Keith Phillips of the Federal Reserve Bank in San Antonio. “Spending by Mexican nationals is apparently up about thirty percent this year.” For these reasons, the state should probably grow at the same pace or better this year compared with last. The new economy is less susceptible to collapse resulting from catastrophic events affecting one commodity like oil. On the other hand, the state’s fortunes more closely mimic those of the nation now; Texas used to be relatively immune to national recessions, but that’s not true anymore. Like a longtime bachelor who has just become a married man, Texas is more responsible but has lost a measure of independence. Should interest rates rise, causing a national slowdown, Texas will slow as well. The worst thing that could happen is that Texans could forget the lessons of the bust and borrow too much money to finance visions of unending growth. We have to accept that the slow and steady progress of the New Boom is probably better for us than the explosive growth of oil.