Why Texas May Lead the Nation's Turnaround

Texas has always been something of a separate country when it comes to politics and culture. Lately, the state seems to be functioning as its own economic republic. While it hasn't been immune to the issues plaguing the nation, the housing market, employment rate, and overall growth in Texas are relatively strong. Chalk some of that up to accidents of geology and geography. But the Texas economic tiger also reflects the conscious efforts of a once parochial place to embrace globalization.

On several measures of economic stress, Texas is doing quite well. The state unemployment rate is 8.2 percent —high, but still one that many states would envy. (California's is 12.5 percent; Michigan's is 14.1.) It entered recession later than the rest of the country—Texas was adding jobs through August 2008—and started slowly adding jobs again last fall, thanks mostly to its position in the largely recession-proof energy industry.

The Texas housing market also has fared better than many. The mortgage delinquency rate (the portion of borrowers three months behind on payments) is 5.78 percent, compared with 8.78 nationwide, according to First American CoreLogic. That's partly because relaxed zoning codes and abundant land kept both price appreciation and speculation down. But it's also due to several attributes not commonly associated with the Lone Star State: financial restraint and comparatively strong regulation. Unlike those of many of its neighbors, Texas's laws prohibited consumers from using home-equity lines of credit to increase borrowing to more than 80 percent of the value of their homes.

As it has for decades, energy is driving Texas's economy. But it's not because the state's wells are gushing crude. In November 2009, Texas wells produced 1.08 million barrels per day, about half as much as they did in the late 1980s. In recent years, natural gas has been undergoing a renaissance—the state's production rose about 35 percent between 2004 and 2008. And Texas has received a big boost from a different, renewable source of energy: wind, where the state's size and history of independence has enabled it to jump-start a new industry. Texas has its own electricity grid, which is not connected to neighboring states. That has allowed it to move swiftly and decisively in deregulating power markets and building new transmission lines. "We can build transmission lines without federal jurisdiction and without consulting other states," says Paul Sadler, executive director of the Austin-based Wind Coalition. Texas recently surpassed 10,000 megawatts of capacity, the largest by far of any state and enough to power 3 million homes, Sadler says. Wind energy is also powering employment—creating more than 10,000 jobs so far. And it has attracted foreign companies, including Danish turbine maker Vestas and Spanish renewables giant Iberdrola.

While its political leaders may occasionally flirt with secession, Texas thrives on connection. It surpassed California several years ago as the nation's largest exporting state. Manufactured goods like electronics, chemicals, and machinery account for a bigger chunk of Texas's exports than petroleum does. In the first two months of 2010, exports of stuff made in Texas rose 24.3 percent, to $29 billion, from 2009. That's about 10 percent of the nation's total exports. There are more than 700,000 jobs geared to manufacturing goods for exports in Texas, says Patrick Jankowski, vice president of research at the Greater Houston Partnership. "A lot of it is capital goods that the Asian, Latin American, and African [countries] are using to build their economies."

Thanks to that embrace of globalization, the Texas turnaround may help lead the nation's economic turnaround, just as California's economy was once a bellwether. Now that Texas has become a player in the global economy, we can expect a new kind of swagger.