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At the Heart of Texas: Cities’ Industry Clusters Drive GrowthSpecial Report# At the Heart of Texas: Cities’ Industry Clusters Drive Growth* * *### Austin–Round Rock: Government and High Tech at the State’s Center#### At a GlancePopulation (2017): | 2.1 million —|— Population growth (2010–17): | 22.5 percent (Texas: 12.1 percent) Median household income (2017): | $73,800 (Texas: $59,206) National MSA rank (2017): | No. 31* Kauffman Startup Activity Index rank (2017): | No. 2* *The Austin–Round Rock metropolitan statistical area (MSA) encompasses Bastrop, Caldwell, Hays, Travis and Williamson counties. The Kauffman Startup Activity Index, a measure of business creation in the 40 largest U.S. metropolitan areas, is further explained in the appendix. * Austin’s political and educational influence arose from its position as the state capital and home to the University of Texas. * Today, the region is a major high-tech hub for both the state and the U.S. and home to numerous large and small technology companies. * Fueling Austin’s rapid economic expansion is its young and well-educated workforce. * Austin’s employment growth appears little affected by the slowdown in the state economy attributable to low oil prices, and the area will likely experience continued solid growth in the near term.* * *#### HISTORY: A Government, Education and Technology HubAustin was established in 1839 as the capital of the Republic of Texas. Thecity became the westernmost railroad station along the Houston and TexasCentral Railway in 1871, and with no other railroad towns for miles in mostdirections, it became a trading center.[1]Austin’s status as Texas’ political center remained uncertain until 1872, whenthe city was chosen as the permanent capital in a statewide referendum. In1881, it was selected as the site for the new University of Texas.Oil-boom growth in the early 20th century largely bypassed Austin, and thecity fell from its fourth-place population ranking in Texas in 1880 to 10thplace in 1920. Completion of two dams in the early 1940s greatly aided thearea’s subsequent growth.Expansion of Austin’s key education and government sectors supported theregion in the 1950s and 1960s. Buoyed by chamber of commerce efforts to expandthe economic base and by a flourishing research program at UT, majortechnology firms such as IBM, Texas Instruments and Motorola began locating inthe area in the late 1960s and early 1970s. Austin gradually emerged as ahigh-tech center. Of the 108 largest employers in the area in 2016, 56 werehigh-tech firms.[2]#### INDUSTRY CLUSTERS: Hotbed for High TechCluster concentration is measured by location quotients (LQs), which comparethe metro-area and U.S. economies. Growth in a cluster is measured by thepercentage-point change in its employment share between 2010 and 2017.[3]Chart 2.1 displays the composition of industry clusters in Austin–Round Rock.The top two quadrants—“mature” and “star”—display industry clusters with alarger share of employment relative to the nation (LQs exceeding 1). Theseclusters are vital to the metro-area economy and can be expanding relativelyrapidly (star) or growing relatively slowly (mature). Clusters shown in thebottom two quadrants—such as advanced materials and biomedical—are smallerrelative to the nation (LQs below 1). These less-concentrated clusters arelabeled either “emerging” if they are fast growing or “transitioning” if theyare slow growing.##### Chart 2.1: Austin Thrives as a High-Tech HubNOTE: Bubble size represents cluster share of metropolitan statistical areaemployment. SOURCES: Texas Workforce Commission; Bureau of Labor Statistics; authors’calculations.The underpinnings of Austin’s economy are government, education and thetechnology industry. Computer manufacturing boasts nearly four times theconcentration in Austin than in the U.S., reflecting the significant presenceof manufacturers of personal computers and related goods and services such asDell, Apple, Advanced Micro Devices and Applied Materials.Dell, with 13,000 local workers, and Apple and IBM, each with 6,000 employees,are among the area’s largest employers.[4] Additionally, a sizable footprintfrom numerous hardware, software, computing and systems designcompanies—including tech giants Samsung, Intel and Hewlett-Packard—make theconcentration of Austin’s information technology and telecommunicationscluster 2.5 times that of the nation.[5]As the state capital and home to the flagship UT campus—a highly regardedresearch institution—Austin’s government and education sectors are large. Boththe federal and state governments and the university are top area employers.Other concentrated clusters include publishing and information, defense andsecurity, energy and mining, and business and financial services. The defenseand security sector nearly doubled in size from 2010 to 2017, making it thefastest-growing cluster in terms of job growth and complementing both UT andthe significant technology presence in the region (Chart 2.2). Thetransportation and logistics, agribusiness, and business and financialservices sectors take the following three spots among rapidly growingclusters.##### Chart 2.2: Austin Job Gains Led by Defense, Business Services andTransportation ClustersNOTES: Percent change in employment is shown in whole numbers. Each cluster’sshare of jobs is shown in parentheses (rounded to one decimal place). SOURCES: Texas Workforce Commission; authors’ calculations.Food services is important to the local economy, and along with recreationservices, this cluster highlights the tourist draws of such events as AustinCity Limits and South by Southwest (SXSW). An Austin slogan, “Live MusicCapital of the World,” is a nod to the numerous live music venues.The health cluster, which employs 8.7 percent of Austin’s workforce, has alsogrown significantly in recent years. The second- and third-largest privateemployers in the city are the Seton Healthcare Family, with 10,270 employees,and St. David’s HealthCare, with nearly 8,600 employees. The summer 2017opening of the Dell Seton Medical Center, a significant component of the newDell Medical School at UT, has also expanded opportunities for health careworkers in the area. Though the concentration of health industry employmentremains below that of the U.S. (LQ is 0.73), cluster employment has increased32 percent since 2010.Austin’s star and mature clusters pay considerably higher wages than theirless-concentrated counterparts (Table 2.1). Computer manufacturing,information technology and telecommunications, and business and financialservices boast some of the region’s best-paying jobs. In fact, the averageearnings within computer manufacturing were around $141,000 in Austin in 2017,more than double the metro’s average of about $59,700 across all sectors.Overall, Austin residents employed in the base clusters (those with LQsgreater than 1) earn 46 percent more on average—$78,600 versus $53,900—thanthose employed in less-concentrated clusters.Moreover, wages in three of Austin’s top four most-concentratedclusters—computer manufacturing (LQ of 3.6), information technology (LQ of2.5) and defense and security (LQ of 1.4)—were significantly higher than thenational average for those clusters in 2017.Table 2.1: Annual Earnings in Austin Higher than U.S. Average in SeveralDominant Clusters — Cluster | Austin | | U.S. | 2010 | 2012 | 2014 | 2016 | 2017 | | 2017 Computer manufacturing | 134,849 | 134,613 | 127,210 | 137,120 | 141,034 | |120,226 Information technology and telecommunications | 110,531 | 110,169 | 104,068 |110,332 | 115,479 | | 106,629 Business and financial services | 90,174 | 90,887 | 91,559 | 97,649 | 99,067 || 100,785 Defense and security | 86,112 | 88,731 | 93,620 | 105,400 | 107,064 | |91,226 Publishing and information | 81,350 | 79,867 | 83,672 | 82,886 | 87,536 | |96,127 Food services | 18,277 | 18,724 | 19,164 | 20,393 | 20,847 | | 18,963 Construction | 52,051 | 52,445 | 55,686 | 59,481 | 60,828 | | 60,742 Government | 57,686 | 57,398 | 60,279 | 62,491 | 62,749 | | 60,568 Energy and mining | 88,610 | 90,357 | 87,958 | 91,692 | 93,701 | | 80,900 Education | 45,912 | 42,576 | 44,937 | 46,272 | 46,589 | | 49,322 | | | | | | | Clusters with location quotient > 1 | 70,689 | 71,949 | 72,915 | 76,727 |78,638 | | – Clusters with location quotient < 1 | 53,813 | 51,373 | 51,900 | 54,111 |53,946 | | – Average earnings (total) | 55,013 | 55,501 | 56,118 | 58,497 | 59,742 | |55,375 NOTES: Clusters are listed in order of location quotient (LQ); clusters shownare those with LQs greater than 1. Earnings are in 2017 dollars. SOURCES: Texas Workforce Commission; Bureau of Labor Statistics; authors’calculations. #### DEMOGRAPHICS: Young, Highly Skilled Talent PoolThe Austin metro area’s strength is its young and well-educated workforce—itsmedian age is 3.5 years below the U.S. median. The area ranks No. 1 in collegeeducation among the major Texas metros (Chart 2.3).##### Chart 2.3: Austin Has Most Educated Population Among Texas Major MetrosNOTE: Share of population age 25 and over. SOURCE: Census Bureau, 2016 American Community Survey 1-year estimates.Austin placed eighth on the list of the most-educated U.S. metros, accordingto a study by WalletHub.[6] Nearly 43 percent of adults (25 years and older)in the metro area have at least an undergraduate degree, compared with 28.9percent in Texas and 31.2 percent nationally in 2016. This is one reason themetro area has attracted many high-tech companies and boasted a medianhousehold income of $73,800 in 2017, significantly higher than that of thestate and nation.Hispanics make up 32.2 percent of the area’s inhabitants, less than the sharein Texas overall. Foreign-born residents constitute 14.4 percent of the metropopulation, lower than their share in Texas but slightly higher than thenational average.#### EMPLOYMENT: Strong Rebound, Unrelenting GrowthEmployment declines in Austin during the Great Recession were steep. However,the area was the first major metro to bounce back, regaining all lost jobs 26months after the beginning of the downturn. In December 2017, total nonfarmemployment was 31 percent over its previous peak in September 2008.Austin’s rapid postrecession expansion has benefited from its outsizedconcentration of high-tech jobs—both in information technology andtelecommunications and in business and financial services. From December 2009to December 2017, employment in professional, scientific and technicalservices increased 81 percent, and payrolls in information services grew 60percent.[7]Even as the Texas economy slowed through the 2015–16 oil bust, Austin’s jobgrowth remained vigorous. Austin added to its payrolls at a 3.3 percent ratein 2016 and by 2.8 percent in 2017. Unemployment in Austin was more than apercentage point below the Texas rate in 2017; it dropped to a 17-year low of2.7 percent in October 2017. The unemployment rate, which subsequently tickedup to 2.8 percent in October 2018, remains low, a testament to both thestrength of Austin’s economy and the challenges that lie ahead for businessesin finding workers to fill positions. Austin is also a hotbed ofentrepreneurial activity, ranking second among U.S. metro areas, according tothe Kauffman Startup Activity Index in 2017.[8]#### OUTLOOK: No Slowing in SightAustin’s economy is dependent on the technology industry, with 6 percent ofits 2016 gross domestic product generated from the information servicessector. Global semiconductor sales, a barometer for the technology sector, areexpected to grow strongly through 2018, according to World Semiconductor TradeStatistics.[9] This bodes well for the Greater Austin economy.Still, the region remains unable to attract significant amounts of venturecapital relative to other high-tech hubs such as San Francisco and Boston.Venture capital funding in 2017 declined 16 percent compared with 2016—frommore than $900 million to just over $760 million. This compares with a 17percent increase in national venture capital and a 56 percent fundingincrease—or $300 million—across the rest of Texas. While Austin remainsattractive to startups and tech workers, small businesses looking for capitalto expand may face challenges.Some of the area’s technology jobs are tied to the energy industry. Examplesare those in the production of high-tech instruments and computer equipmentfor hydraulic fracturing of shale formations. Employment in the area’smanufacturing industries declined in 2014 and 2015, in part due to depressedoil prices. However, with strengthening in energy activity in 2017,manufacturing employment rose 4.7 percent.UT’s presence provides stability and growth to the education, biomedical andhealth sectors. The opening of the Dell Medical School at UT should furtherexpand the capacity of medical research in the region.The U.S. Army's recent announcement that its Futures Command will beheadquartered in Austin will further boost the region's ties to the defenseand security sector. Also, the area’s vibrant and educated workforce willlikely continue to attract employers, providing new growth opportunities.Both the commercial real estate and housing markets in the metro area arehealthy, although there are some signs of softening. Conversely, strong homeprices and rent appreciation over the past several years have continued toweaken home affordability for lower-wage workers. While this trend in pricesis moderating, continued in-migration of high-wage earners will keep thepressure on living costs.—Laila Assanie and Christopher SlijkAustin–Round Rock Growth Outlook --- Drivers | Challenges * A pickup in global semiconductor demand will drive employment gains in Austin’s large technology sector. * The presence of the state government and UT provide stability to the area’s economy. * Austin’s vibrant and educated workforce will further attract employers, fueling additional growth.| * The area’s low unemployment rate will restrain job growth. * Rising rents and home prices will make living in Austin unaffordable for many low- and mid-wage employees who are part of Austin’s base clusters. * General difficulty in attracting significant venture capital may leave small startups with limited avenues for growth relative to other technology hubs. ##### Notes 1. The history of Austin has been adapted from the Texas State Historical Association’s Handbook of Texas, tshaonline.org/handbook/online/articles/hda03. 2. Detail about the largest Austin metro-area employers is provided by the Austin Chamber of Commerce, www.austinchamber.com/economic-development/austin-profile/business-industry#Region's Largest Employers. 3. The percentage shares of individual clusters do not add to 100 because some industries are counted in multiple clusters, and some industries are not counted at all based on cluster definitions. (See the appendix for more information.) 4. See note 2. 5. The information technology and telecommunications cluster includes firms categorized in North American Industry Classification System code 334, computer and electronic product manufacturers. 6. Data are from the “Most and Least Educated Cities in America” list published by WalletHub. The study ranked the 150 largest U.S. metros based on 11 metrics, including the percentage of adult residents with a high school diploma, associate degree, bachelor’s degree and graduate or professional degree; quality of public schools and universities; and students per capita enrolled in the top universities in the U.S. See wallethub.com/edu/most-and-least-educated-cities/6656. 7. Employment data are from the Texas Workforce Commission and are early benchmarked and are seasonally adjusted by the Federal Reserve Bank of Dallas. 8. Data are from the 2017 Kauffman Startup Activity Index, which is based on three indicators: the rate of new entrepreneurs starting businesses, opportunity share (a measure of the percentage of new entrepreneurs not coming out of unemployment) and startup density. 9. The “World Semiconductor Trade Statistics” August 2018 release projects that the worldwide semiconductor market will grow by 15.7 percent to $477 billion in 2018 following a 21.6 percent increase in 2017. See wsts.org/76/Recent-News-Release.