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Recovery and Resiliency Grant

Economic Development

Project Description

COVID-19: Threat and Opportunity for Economic Resiliency of Southeast Texas

Project Funded

by the U.S. Department of Commerce EDA Federal Grant

Economic Development Threats of Southeast Texas Generated by COVID-19

Lamar University College of Business research team’s extensive research experience gives a unique understanding of the economy of Southeast Texas (SETX). The research team believes that the crisis generated by COVID-19 has already and will continue to dramatically impact this region. The economy of Southeast Texas relies on two major drivers of growth: oil and gas, and construction and real estate.

The oil and gas sector, directly and indirectly, employs more than 50,000 workers in the Beaumont - Port Arthur MSA. These 50,000 skilled employees represent over 30% of the employed population of the region. The sector showed GDP annual compound growth of between 9.3% (2018/2017) and 21% (2017/2016) (U.S. Department of Commerce Bureau of Economic Analysis, 2019). Major employers in this sector are refineries - Exxon Mobil, Motiva, Valero, Total, and petrochemical plants - Dupont, BASF, Chevron, and Goodyear. These companies have billions of dollars of assets and revenues invested in Southeast Texas. The oil and gas sectors are important for the stability and growth of the local economy of this region.

Texas Workforce Commission data shows that employment in the construction and real estate sector as a percentage of total employment in Hardin, Jefferson, and Orange counties was 12.46%, 13.91%, and 12.41%, respectively (Texas Labor Market Highlights, 2019). The COVID-19 pandemic creates significant risks to the financial health of businesses and the well-being of people of SETX.

Possible threats to the economic stability of SETX involve six major areas:

Dependence on the oil and gas industry.

Oil price declines negatively impact small and large businesses of the Southeast Texas region.
The main players in this sector of SETX announced reductions in investments and capital expenditures.
Reduced demand for gasoline and other fuels can create significant economic harm to the region.
As a result, the SETX region will lose a significant amount of tax revenue.

According to the 2018, Southeast Texas Economic Region Snapshot published by the Texas Comptroller of Public Accounts, petroleum and coal products manufacturing and chemical manufacturing represent two of the top four largest industries in the region. Lower oil prices resulting from the pandemic and price wars between Saudi Arabia and Russia raise the likelihood that Southeast Texas will see a significant economic setback. A report by Business Insider indicates that the plunge in oil prices is placing oil output and investment at risk in Texas. Patrick Jankowski, senior vice president of research with the Greater Houston Partnership, forecasts that a drop in oil and gas prices also means a blow to Southeast Texas’s chemical and plastic production. It is reasonable to expect that the economic effects of the pandemic will ripple through other businesses in the Southeast Texas region.

Construction and real estate development

The declines in this sector are a result of the slowdown of expansion projects of the oil and gas sector.

Construction and real estate development will experience declines due to the slowdown of expansion projects in the oil and gas sector. To illustrate, Chevron Phillips has announced that it will delay its decision to build a $5.8 billion plant in Orange, Texas. The initial decision was expected to be made in Fall 2020. This plant would provide operations to convert natural gas liquid ethane into ethylene and would also include construction of some administrative buildings. The residential real estate market also could be impacted due to higher unemployment in the Southeast Texas region and delays in business expansions. Sheri Arnold, president, and broker at Coldwell Banker Commercial, Arnold and Associates has indicated that some small businesses may struggle through this downturn and may not make it, but she expects more creative and innovative use of commercial real estate facilities in Southeast Texas.

COVID-19 hits Small and Medium Enterprises hard

Almost half of the workforce in Texas is employed by small enterprises and many employees are in danger of losing their jobs due to pandemic.

According to data presented in the last report of Small Business Profile by the U.S. Small Business Administration small businesses employ 45.6% of Texas employees. In addition, 99.8% of Texas businesses are considered small enterprises with less than 500 workers.

Demand for other services and products

Like in the rest of the nation, COVID-19 has resulted in lower and modified demand for goods and services across the economy.

According to the Federal Reserve Texas Service Outlook Survey, the Texas service sector saw a dramatic decline in the month of March. Following three months of steep decline, the Texas service sector showed signs of growth in June. However, 28 percent of the respondents of the June survey expect conditions in general business activity to worsen. The June Texas Retail Outlook Survey showed that sales activity surged in June, with increases in the sales index, which is a key measure of state retail activity. These results follow plummeting retail sales in Texas, as reported in the Retail Outlook Surveys for the months of March and April.

Supply chains for goods and services

Restructured supply chains may be required by disruptions associated with the pandemic.

A report by IBC Bank on the COVID-19 pandemic highlights how U.S. dependence on far-flung supply chains can pose a threat to public health, economic vitality, and even national security. To illustrate, limited access to critical medical supplies, manufactured goods, and technology components magnified the impact of the pandemic. At the local level, ExxonMobil Beaumont responded to the supply chain shortage by producing hand sanitizer to be donated to Jefferson County, the City of Beaumont, and Baptist Hospital. ExxonMobil Beaumont also donated 25,000 gallons of fuel (gasoline and diesel) to Jefferson County and the City of Beaumont for use in first response vehicles.

The strains on supply chains due to COVID-19 may cause Congress to consider infrastructure legislation that results in investments in ports of entry and transportation systems. As the fourth-largest port in the U.S. in terms of tonnage and the largest strategic military outload port, the Port of Beaumont and roads and bridges across Southeast Texas could stand to benefit from infrastructure legislation enacted by Congress. In addition, the shortages of Personal Protective Equipment (PPE) have been attributed to supply chains that relied excessively on foreign producers. It is possible that there will be new government guidelines regulating the supply chains for these essential products.

Methods and outlets for delivery of products and services may be altered because of disruptions associated with the pandemic and safety guidelines that may be mandated by federal, state, and local authorities.

As consumer demand has shifted away from traditional consumption to more “stay at home” consumption, producers have had to adjust their supply chains. For example, food suppliers have had to adjust from supplying restaurants to supplying households. This has resulted in different packaging requirements and delivery routes. Online shopping, grocery delivery, and curbside pickup are now commonplace.

Declining economic growth projections

Most economic models including IMF, World Bank, OECD, and the Federal Reserve Board predict negative growth of the US economy which might lead to a possible recession, or even worse, to a depression.

Economic projections made by Federal Reserve Board members and Federal Reserve Bank Presidents on June 10, 2020, point to an expected unemployment rate of 9.3 percent at the end of 2020 and remaining elevated at 5.5 percent until the end of 2022. The Federal Reserve is projecting a sharp economic decline, with a projected contraction in real Gross Domestic Product of 6.5 percent in 2020.

Well-respected researchers have concluded that the novel Coronavirus COVID-19 has created an unprecedented situation and activated all these threats against our economy on a large scale and a long-term basis. Columbia University professor and Nobel Prize winner, Dr. Joseph Sitglitz, recently expressed his opinion about the current crisis and economic resiliency stating that: “This crisis is exposing some deep vulnerabilities in our economy and our society, that we've constructed an economy which is not resilient. It's like a car without a spare tire. We were getting more and more efficient in a very, very narrow short-term sense. And we were seeing the bigger picture vulnerability.” This global crisis is a major test of the resiliency of all small, medium, and large enterprises of Southeast Texas for various reasons:

Indebtedness

Businesses in our region are incurring debt and they will spend years paying it off before undertaking additional investment. According to the U.S. Department of the Treasury, over 52,150 businesses in Texas received the Paycheck Protection Program (PPP) loans. Nearly 6,300 of these businesses received loans in excess of $1 million. The three categories of businesses that received the most loans are restaurants, physician offices, and oilfield service companies, all of which represent important segments of the Southeast Texas economy. In Beaumont, eighteen businesses received loans in excess of $1 million and two businesses received loans of over $5 million, potentially retaining 3,586 jobs. In Orange, nine businesses received loans in excess of $1 million, potentially retaining 1,379 jobs. In Port Arthur, eleven businesses received loans in excess of $1 million, potentially retaining 1,978 jobs. Businesses that fail to meet certain criteria will have to repay these PPP loans, which will further strain their cash flows and their ability to invest in new projects.

Inflation and unemployment

Production cuts and labor force cuts will lead to higher unemployment rates and inflation.

Less consumer spending

During economic crises and uncertainties, people save more and spend less. A June 2020 survey by McKinsey and Company on U.S. sentiment during the coronavirus crisis concluded that consumers believe that the impact of COVID-19 on their finances will last for months. As a result, consumers are shifting their spending habits toward essentials. Consumers report a negative purchasing intent with respect to most product categories with the exception of groceries, household supplies, and entertainment. Significantly, 73 percent of consumers are not comfortable going back to ordinary out-of-home activities, which has led to significant growth of 15 percent to 30 percent in online channel user growth. The survey also pointed out significant decreases in consumers’ household income, household spending, and household savings.

The economy will not recover quickly

Experts originally thought that once the economy opened it would bounce right back. But this scenario is less likely to happen at this time because even if the economy is open, not everyone will go out until feeling that it is safe to do so.

In addition to the above-mentioned threats and consequences Southeast Texas Regional Planning Commission (SETRPC) in its strategies and implementation plan identifies that “natural disasters, cyclical depressions, and workforce issues contribute to the problems”. The worldwide crisis will lead to the SETX region-specific and nationwide threats of increased unemployment and economic slowdown at a higher rate in Southeast Texas than in other more economically diverse regions of Texas. Therefore, the situation requires urgent actions to accelerate recovery and identify opportunities for resiliency. This intensifies the need to promote and raise awareness of local economic development actions of Southeast Texas identified in the Comprehensive Economic Development Strategies of SETRPC.

Project’s impact on economic recovery and resiliency of Southeast Texas from COVID-19 pandemic.

The proposed project for EDA has the capacity to help Southeast Texas recover and become more resilient from the current economic disruption caused by COVID-19. Project goals and objectives define how this grant can help the Southeast Texas region to overcome current economic distress. The outcome of this project are a strategic response to COVID-19. The knowledge, skills, and abilities obtained during this project will allow businesses and the public sector to be better prepared for long-term economic distress. Researchers recognize that for our economy to effectively recover from COVID-19 it is necessary to have a shared vision of the future economic growth in SETX and catalyze locally developed public and private strategies. The SETX economic development strategies, projections, recommendations, and solutions proposed by this project will take into consideration vulnerabilities, restructured supply chain, competitive advantages, and economic development drivers of the Southeast Texas region. The researchers also believe that successful risk management, recovery, and resiliency of the economy of Southeast Texas also requires collective action. The advisory board established by this project will consist of the main public and private stakeholders of the Southeast Texas economy. Researchers will actively collaborate with the SETX Regional Planning Commission.

Project Goals, Outcomes, Continuity, and Tasks

Project Goals

Goal 1. Describe and enumerate the vulnerabilities of this region’s economy caused by COVID-19.

Goal 2. Determine future growth strategies and business models solutions that will aid in recovery from economic distress and disruptions resulting from COVID-19.

Goal 3. Establish a virtual SETX Economic Development and Analysis Resource Center (EDARC) at Lamar University that will house strategies, information, and the results of this study.

Project’s General Outcomes

The outcomes of this project will help to accelerate the recovery of Southeast Texas negatively impacted by COVID 19 pandemic. The ultimate goal is to find solutions to help to bring business activity back to pre-pandemic levels.

Outcome 1. Regional outreach and communication with all stakeholders via reports, publications, and web page.

Outcome 2. Comprehensive cluster analysis report: impact of COVID-19 on businesses of Southeast Texas. Interconnection of industries and shift-share analysis of the SETX region's economy before and after the pandemic.

Outcome 3. Recovery guide for businesses: practical, applicable, and realistic recommendations and solutions on how to overcome business disruptions and distress.

Outcome 4. Advisory board for the project consisting of industry, local government, and non-profit organizations of Southeast Texas.

Outcome 5. Virtual EDARC sponsored panel forums and advisory board meetings to discuss and study future economic prospects and vulnerabilities of the region.

Outcome 6. The virtual SETX Economic Development and Analysis Resource Center (EDARC) will serve as a platform to anticipate and model economic development scenarios of the SETX region.

Project Continuity

SETX Regional Planning Commission in its comprehensive economic development strategy identifies Lamar University as an institution with a major impact on education, quality of life, and workforce of Southeast Texas. In addition to this, our research team strongly believes that LU College of Business has talent and resources to become an advocate of local economic growth. Through business research and entrepreneurial training, the College of Business has the capacity to find solutions and to bridge public-private collaborative resiliency.

Established research tools, models, protocols, and methodologies will be available to use for continuous analysis of local economic development of Southeast Texas. Expertise gained during the project will help with future economic shocks, recessions, and depressions attributed to pandemics, disasters, and other economic hardships.

Establishing a virtual SETX Economic Development and Analysis Resource Center (EDARC) and gaining expertise/knowledge will help develop resiliency plans to prevent and respond to future economic disruptions caused by unforeseen major events like COVID-19.