The latest report from the Bureau of Economic Analysis (BEA) shows that many states’ economies improved in the third quarter of 2016. Real gross domestic product (GDP), a measure of inflation-adjusted economic output, increased in 48 states and the District of Columbia. This contributed to a faster U.S. annualized economic growth rate of 3.5 percent that quarter but then slowed to a 1.9 percent pace in the fourth quarter, which aligns with this national economic expansion’s growth rate that’s the slowest since WWII.
Faster GDP growth rates indicate increased economic activity that typically includes more job opportunities, higher pay, and other benefits. Although the U.S. reported unemployment rate averaged 4.9 percent in 2016, which some economists consider to be at or near full employment, the more accurate underutilization rate (U6) that includes the unemployed, underemployed, and discouraged workers of 9.6 percent suggests slack in the labor market.
The figure below shows that Texas’ real GDP increased by 4.3 percent in the third quarter, which ranks 12th highest nationally. This translates into an increase in economic output by $28 billion to $1.65 trillion, or 9 percent of the U.S. economy. Economic growth contributed to an average unemployment rate in 2016 of 4.5 percent with a U6 rate of 8.6 percent in the Lone Star State.
Sectors of the Texas economy that contributed to the 4.3 percent growth rate were dominated by the wholesale trade (0.78 percentage points), finance and insurance (0.56 percentage points), and real estate and rental and leasing (0.46 percentage points). The only industry that was a drag on economic growth was the mining industry (-0.11 percentage points) from continued contraction in the oil and gas sector. However, that sector looks to get some reprieve as oil prices have increased since the third quarter.
Texas is the second largest state economy only behind California ($2.59 trillion), which expanded at a slower 3.3 percent rate in the third quarter. Regarding sectoral growth differences between these two states, Texas’ faster overall growth rate was driven primarily by sectoral positive growth differences in nondurable-goods manufacturing, wholesale trade, real estate and leasing, and agriculture.
On a larger scale, if Texas and California were separate economies, they would rank 11th and 6th, respectively, worldwide. By a private estimate of the cost of living, the Golden State has a 49 percent higher cost of living than Texas. This means greater purchasing power for many Texans compared with Californians.
Despite the declines in oil and gas-dominated areas statewide for the past two years, including the third quarter of 2016, Texas’ diverse economy and relatively limited government has supported economic expansion in most quarters during that period. While things look to improve with potentially higher oil prices and pro-growth federal policies, there’s much that the Texas Legislature can do to unleash economic growth by limiting spending and cutting taxes, especially eliminating the business margins tax.
Ph.D. Economist at the Texas Public Policy Foundation. Blog posts are publications by the author.