Economist: A "mild" recovery ahead

Texas will see a "mild" economic recovery next year, but it will be muted by questions about consumption and commercial real estate, according to an economist with the Federal Reserve Bank of Dallas.

Keith Phillips, speaking at a Texas Taxpayers and Research Association gathering in Austin, called consumption — that's consumer and business spending, in English — "the elephant in the room" in terms of the Texas economy. Housing in Texas isn't the disaster it has been in other states, and spending is the bigger problem here.

The Texas comptroller's office has reported double-digit declines in sales taxes for five months in a row — a direct measure of what Phillips is talking about. For the state, that raises serious questions about the budget over the next year-and-a-half; at some point, it becomes unlikely that the economy will grow quickly enough to bring in expected levels of state revenue. That could turn what initially looked like a balanced budget — when lawmakers finished writing it last May — into one without enough revenue to support the spending plan. The people who watch the state budget for a living already expect to face a huge revenue and spending mismatch in 2011, when they write the new budget. If the economy remains sick in bed, it'll just add to those problems.

Phillips is betting things will improve "gradually" and "mildly" next year. He forecasts the state will end up losing a net 319,000 jobs this year and think that will improve next year, but slowly: His prediction is that jobs will grow by about 1 percent. The normal rate of growth, when the economy is rolling, is about 2.8 percent, he said.

Looking back, he said Texas probably started its version of the recession in the second half of 2008, and he said October of this year might turn out to have been the low point. He hedged on that last point: "I wouldn't put money on it and probably don't even care what they call it," he joked.

Phillips is a senior economist and policy advisor in the bank's San Antonio branch, expects holiday retail sales to be "a little better than expected." He used the phrase "mildly positive" to describe what he's expecting.

He's got misgivings about commercial real estate, which he called "the bogeyman behind the door."

"One of the things that will keep the economy from bouncing back strongly next year is commercial real estate," he said.