Defense Work, Tourism : Texas Cities Diversifying Out of Slump

The story had a familiar Texas-in-the-dumper ring to it: The Dallas Ballet, unable to raise $350,000, was forced to cancel its 1988 season.

Alas, poor Texas had taken it in the chops once again. Here was yet another sign that the entire Lone Star State was still in the grip of a lingering economic malaise.

But perhaps not.

True enough, Dallas is in deep trouble. Like Houston before it, it kept putting up glass-and-steel office buildings as fast as banks would make ill-advised loans. Now it is so overbuilt that it will take years to fill the empty office space. Partly as a result, the federal government has spent billions of dollars in recent weeks to bail out ailing financial institutions.

High Vacancy Rate

Austin, the state capital, is in much the same fix, with an office vacancy rate of 31.6%, which leads the nation. All of its new hotels are in foreclosure.

But much of Texas, including once-devastated Houston, is beginning to hum again.

Big oil, as much a symbol of Texas as armadillos and the Alamo, drove and dominated Houston’s economy for decades. And when the bottom fell out of the market, it sent the city into a nose dive. But prices have stabilized enough so that there is money to be made even in the energy industry if a wary eye is kept on the spending ledger.

And Houston, having seen the folly of building an economy on a single leg, is now diversifying. One company that once made oil well drill bits is now manufacturing missile nose cones.

Oil Image Gone Forever

That same kind of transformation is happening in other parts of the state as well. Texas is putting on many faces these days, from defense contracting to Shamu the killer whale, at San Antonio’s newly opened Sea World. Gone forever is the image of Texas as the land of gushers, where the fate of the state is determined by the price of a barrel of oil.

The various cities of Texas are marching to their own economic drummer. What is happening in El Paso has little bearing on the economic health of Houston. Dallas may have big money problems, but neighboring Ft. Worth does not.

“Talking about the Texas economy is a fiction or an average that doesn’t tell you a lot,” said James Cochrane, the chief economist for Texas Commerce Bancshares Inc.

The Dallas Ballet is a good example of that phenomenon. Although Dallas couldn’t raise $350,000 for its dancers, the Houston ballet company’s endowment approaches $15 million, making it the richest in the country.

The state’s comptroller, Bob Bullock, divides Texas into five regions when making his economic forecasts. Joel Garreau, in his book “The Nine Nations of North America,” contended that Texas should be in three of the “nations” because of the diversity of the state.

The Texas economy is really a number of economies within geographic boundaries that enclose 267,000 square miles of land--108,000 square miles larger than California. It is made up of city states, making the term “Texas economy” a misnomer.

San Antonio, the state’s third-largest city, is driven by tourism and the military. Ft. Worth runs on defense contracts and El Paso’s salvation has been the twin-plant system operating on the Texas-Mexico border. Under that system, American companies take advantage of cheaper labor on the Mexican side to assemble their products. Austin depends on state government and the University of Texas for its economic base.

Striking Disparities

But nowhere are the disparities more obvious than Houston and Dallas, the old and the new symbols of Texas’ economic troubles.

In a land where football is king, the Houston Oilers-Dallas Cowboys exhibition game Aug. 28 was a metaphor for the fortunes of the two cities. The Oilers, long an also-ran, thrashed the self-proclaimed “America’s Team” 54-10. In Houston, they are talking about the Oilers’ being playoff contenders, reflecting the general upbeat mood of the city after years of painful economic contractions. Although they are less than an hour apart by air, the cities couldn’t be more different; Dallas is pinstripes to Houston’s blue work shirt.

“Houston and Dallas essentially lead different economic lives,” Cochrane said. “They are different in terms of what they do. They perform different roles.” The stories marking the beginning of the Houston recovery are now plentiful enough to know that it is no fluke, although Cochrane and others caution that the rebound will be a slow one compared to the hyperactive pace of the boom years.

Compaq Computer Corp. has announced that it will expand its Houston operation and hire 5,000 new employees. The city’s jobless rate stands at 6.3%, the lowest in 4 1/2 years. In June and July, more homes were sold in Houston than ever before, and housing prices are again on the rise in some parts of the city. Engineers, laid off in droves during the bust, are now in demand. The city added 26,000 new jobs to its work force in 1987.

See-Through Buildings

New car sales are up and so is hotel occupancy. Trammell Crow Co., a major national developer, actually bought an office building in Houston, the city that only three years ago had so much vacant office space that it was noted for its see-through buildings--you could see through them because they were empty. Houston still has a huge supply of empty office space, but the supply is finally shrinking. One of the major factors in the recovery of the city is that 55 chemical plants are either being built or enhanced in the Houston area, at a cost of $2.5 billion.

And then there is the U-Haul ratio: for the first time since the oil bust, there are more trailers coming into Houston than leaving.

The story of Dallas is almost a flip side of the coin. After years of unchecked building, spurred by tax incentives and the deregulation of the savings and loan industry, Dallas is drastically overbuilt. Almost 30% of its 136 million square feet of office space stands vacant and construction is at a virtual standstill.

Law firms are reporting that 1987 was a profitable year, but much of their new work was in bankruptcies and in merger and acquisition activity. Home sales are up, but the average price fell more than 12% compared to June of 1987. Unemployment went from 5.8% in May to 6.5% in June. In September of last year, Dallas area banks held 40% of the state’s bad loans.

And while Dallas has had a net increase in the number of jobs, Jim Gaines of Houston’s Rice Center said the difference between the cities is the direction of the economic curve.

Nowhere to Go but Up

“The Houston trend line has been going up while Dallas’ has been going down,” he said. But Gaines and others also say that Houston reached a point in 1987 when there was nowhere to go but up. It had hit the bottom of the pond. Between 1981 and 1986, Houston lost 25% of its industrial base. And in a 14-month period that ended in January, 1987, Houston lost a staggering 147,000 jobs. Now, with the city’s recovery on the move, it is adding about 4,000 jobs a month.

Dallas may have taken a tumble, but it was not nearly so serious as Houston’s. Because of that, Dallas’ eventual return to economic health should not take as long or be as painful.

Economists also say that, in the short term, neighboring Ft. Worth, which is often lumped with Dallas, will be the city that carries the day because it has two years of defense contracts to keep its economy on the move. Dallas, on the other hand, must adjust to the fact that the construction craze is over and that those jobs are lost.

San Antonio Forges Ahead

Meanwhile, San Antonio, often overshadowed by Dallas and Ft. Worth, is forging ahead in the tourist industry, while at the same time making a stab at becoming a contender in the biomedical field. A new $170-million Sea World--almost triple the size of the original in San Diego--opened on Memorial Day and is already approaching 2 million visitors. And retired Gen. Robert F. McDermott, the chairman of USAA Insurance Co., one of the city’s largest employers, said negotiations are under way with Opryland to build a multimillion-dollar theme park in San Antonio.

McDermott, a major figure in the city’s economic circles, said San Antonio, with its five major military bases, had often been left out of corporate plans because it was considered a military town. But now, he said, a combination of ambiance, in-place research facilities and low living costs may be attractive to high-tech companies.

‘Turnaround Is Here’

“I think the time has come for California to start spilling things our way, just because the cost of living out there is getting so high,” he said. “I think our time has come and the turnaround is here. We can’t wait for oil prices to go back up.”

McDermott also said that while tourism is needed, there was another reason to lure high-tech industry to San Antonio: “The problem is the minorities, and they are the growing segment of the population. Their future has to be built on something more than $4-an-hour tourist jobs. I think that’s an obligation of the present generation to provide for the future.”

Depends on Industry

So how is Texas? It depends on the city or the industry. But certainly the overall numbers remain impressive. Bullock, the state comptroller, estimated recently that Texas would be ending the fiscal year $100 million in the black, the first time that has happened in the state since 1985. Last year, the state was $745 million in debt.

And, by 1990, Texas is expected to move into second place in the United States in population, exceeded only by California.

‘Future Looks Bright’

“The worst is over and the future looks bright,” Bullock said in a recent report.

But almost everyone agrees that the future will not simply repeat the past, that from now on Texas will not be in high gear while the rest of the nation is in recession, as has happened before. Texas has changed. As Bernard L. Weinstein, the director of the Center for Enterprising at Southern Methodist University, put it: “Maybe the story is that the Texas economy has become much more like the American economy.”