McKinney & Olive, on the north edge of downtown Dallas, was developed by Crescent Communities. This project was the recipient of a ULI North Texas Impact Award for Innovation.

With the Texas economy firing on all cylinders, 2018 looks to be another good year for many industries, including residential real estate and both the energy and industrial sectors. But key demographic changes could challenge the future prosperity of Texas and other states.

“In the context of a strong U.S. economy, DFW [Dallas/Fort Worth] is extremely strong,” said Robert Kaplan, president of the Federal Reserve Bank of Dallas. Kaplan spoke on a wide range of economic issues in January at the Urban Land Institute’s sold-out Emerging Trends event in Dallas.

To continue growing the gross domestic product, Kaplan said the United States needs to grow productivity and workforce participation. But to do that, it needs to address demographic issues: the widening skills gap and the aging labor force, among them.

Texas has two major economic tailwinds, said Kaplan. First, it is seeing increased migration due to its favorable business climate and affordable cost of living. Secondly, the rebounding energy sector—a big employer in places such as Dallas, Houston, Midland, and Odessa—is likely to continue to see improvements as companies increase drilling and capital expenditures.

While the dynamics of the Texas and national economy are strong, Kaplan said, the recent tax bill passed by Congress and signed by President Trump comes with positives and negatives.

The reform portion that reduced corporate tax rates “will hopefully make U.S. companies more competitive and make it more likely that U.S. companies will be domiciled here, hire workers here, expand capacity here, and create greater sustainable competitiveness and investment. That part is constructive,” he said.

However, Kaplan expressed concerns about the tax cut portion of the bill, which was funded by increasing the nation’s deficit. In a nation at full employment, the tax cut stimulus will create a short-term bump in gross domestic product (GDP) that, when it trails off, will leave the country more leveraged than before, he said.

Structural Trends

Kaplan said the United States must also address several long-term structural issues affecting the economy, including its aging demographics. As baby boomers retire, workforce growth is slowing and that will become a headwind for GDP growth, he said. The participation rate of people aged 16 to 64 years in the workforce has declined from 66 percent in 2007 to about 63 percent in recent years. Over the next ten years, Kaplan said, it may slip further, to about 61 percent. Other developed countries enjoy workforce participation at higher rates because they have better educated and well-trained workers, he said.

Kaplan urged his audience of real estate business professionals to get involved in doing their part to reduce the nation’s skills gap, saying it was a multiyear “long slog” that local cities and communities must tackle.

The need includes improved childhood literacy, improved college readiness so that more people who go to college actually graduate, and a dramatic overhaul of workforce development for high school–educated workers facing restructurings.

“We need to focus on human capital and upgrade it in the United States,” he said. “We are leading the world in many ways; human capital ain’t one of them.”

Kaplan challenged the business leaders in the audience to do something about it, such as partnering with local nonprofit organizations or colleges to support and create programs to address the issue.

“Productivity isn’t growing the way it should because the skill level of our workforce is lagging [that of] most other developed countries—a big problem for the United States,” Kaplan said. “Unless we upgrade those skill levels, we are going to grow more slowly.”

Kaplan said he expects GDP growth of 2.5 percent this year only, 2.2 percent next year, and just 1.8 percent in 2020, which he called “alarming” based on the country’s current debt.

Energy Industry’s Impact

Kaplan also talked about the energy industry, which accounts for 8 percent of the state’s GDP and is the biggest single contributor to job growth in the state. Kaplan said he expects 3 percent job growth in Texas this year, the highest in several years. That means Texas should add about 366,000 new jobs this year. The state added 305,900 jobs in 2017, ranking number three in the nation for job growth last year, with an unemployment rate of just 3.8 percent, a record low.

Texas’s Permian Basin should continue to lead in an “outsized way” in U.S. oil production as the energy industry responds to strong global demand, he said. OPEC production curtailments last year, which are still in place, helped firm the price of oil last year and bring back production in the Permian Basin.

Oil prices could experience some volatility over the next three years, but, further out, global demand bodes well for the industry’s future, he said.

“The outlook for the energy industry is pretty darn positive,” he said.