WHAT THE FUTURE HOLDS
Local business leaders rely on Bill Gilmer to dig in to the data and lay out trends on the economy
Don’t call economist Bill Gilmer a fortune teller. His forecasts are based on loads of data.
When Bill Gilmer stepped up to the lectern on Nov. 20, 2014, for his popular semiannual Houston regional economic forecast, he told the crowd of nearly 1,000 that he had originally planned to focus his talk on labor shortages that could hamper the region’s booming economy in the coming year.
Gilmer, the director of the Institute for Regional Forecasting at the University of Houston’s Bauer College of Business, spent months preparing his presentation, only to change it several weeks before he addressed the crowd as oil prices plummeted and caught him and other economists off guard.
“Things have changed in Houston,” Gilmer told the crowd.
Gilmer is the regional economic forecaster for Houston. Scholarly and soft-spoken, he came to the position in 2012 after serving 23 years with the Federal Reserve Bank of Dallas, where he retired as a senior economist and vice president. He spent most of those years in Houston and in his hometown of El Paso, but since joining the Fed he’s always had his eye on Houston’s economy.
Gilmer has a national following, and his economic analysis is frequently quoted in publications such as Forbes, The Wall Street Journal and The Economist.
Houston business leaders rely on Gilmer’s forecasts to plan everything from hiring staff to building apartment complexes.
“Bill helps us unpack the Houston economy, and that gives us confidence in making investments,” said Bryan Sanchez, chief investment officer of Lionstone Investments, a Houston-based real estate investment firm.
Lionstone owns assets in Houston such as the 800,000 square foot 712 Main office tower, a 37story Art Deco skyscraper that once served as the headquarters for Gulf Oil Co. and is the current Houston banking headquarters for JPMorgan Chase & Co. Its typical investment is from $100 million to $400 million.
“When we make these investments, we are very focused on this recovery, and when we want to understand that, Bill is the one we call,” Sanchez said. “He’s phenomenal. He’s smart, does his work with passion and very little ego.”
The big picture
To create his forecasts, Gilmer relies on scientific modeling and stacks of federal data from the Internal Revenue Service, the Federal Reserve, the Labor Department and other agencies to apply his decades of experience to judge what story the data are telling.
As the regional economist, “a lot of people don’t understand what you do. I’m not sure my mother to her dying day understood what I did for a living,” Gilmer said in a recent interview in his cramped office at the Uni-
versity of Houston.
Relying on federal agency data at the local or regional level is difficult, as a lot of assumptions need to be made.
“If you’re looking at global data or the national economy, you’ve got agencies constantly dredging data up. They do a really great job at the national level, but not so good at the regional level, so the data sets tend to get much weaker as you work your way down to even a major metro are like Houston,” Gilmer said.
In turn, Gilmer must rely on “a lot of ad hoc analysis” to use to read between the lines.
At his presentation in November of 2014, Gilmer didn’t preach doom and gloom. In fact, he remained optimistic. He saw no looming recession but foretold a cooling of a white-hot Houston economy that had added 300,000 jobs in the previous three years. He predicted that in 2015 and 2016, Houston’s economy would slow but be adequately fueled by both a hot U.S. economy and a $50 billion construction boom in petrochemical plants in the Houston Ship Channel.
“From day one, I knew those things would be working for us,” Gilmer said. But he said he didn’t expect the downturn to go as deep as it did, and he didn’t expect to see zero job growth locally.
What economists, including Gilmer, couldn’t foresee was the plunging price of oil, which was caused when Saudi Arabia had begun to support lower oil prices to squeeze out the fracking boom. Prices fell from $106 per barrel in July of that year to $75 in late November.
By February 2015, oil prices bottomed out at $27 per barrel, and by the end of the downturn, the Houston area would lose nearly 80,000 high-paying energy jobs.
Gilmer was right about Houston’s economy, which sailed along slowly but smoothly, despite the low oil prices. He missed the mark on the number of jobs created — estimating 40,000 or more, when the region lost 2,500 jobs that year — but economists say that’s not the point.
“When we issue forecasts, everybody focuses on the number,” said Patrick Jankowski, an economist and senior vice president of research for the Greater Houston Partnership. “What they need to focus on is all the narrative that goes along with that number.”
That narrative is what economists commonly refer to as their “story,” which needs to be tailored for specific audiences.
“It’s just an effort to put the very best data together to provide an understanding of the Houston economy and why it might be relevant to you,” Gilmer said. “Some sectors are more dependent on population growth, others on employment growth, so you try to put them together so you’re not just looking at one variable, but things that go together. There’s a whole story that comes together out of all those pieces.”
For Gilmer, those pieces include everything from job growth, payroll and unemployment rates to political risk, commodity markets, inflation, mortgage rates, retail sales, office vacancies and warehousing.
“It’s absolutely grueling,” said Jankowski, describing the process of creating a regional forecast, which he himself presents annually for the partnership. “Bill does an excellent job of that. I’ve got Bill’s forecasts he’s done for 20 years to see whether I can apply anything he’s done over that time to today.”
A born economist
Gilmer has a diverse background that he said helps him fill in the blanks for his stories at times when the data falls short.
Gilmer was born in Amarillo in 1946, where his father worked for the Federal Aviation Administration maintaining radar and instrument landing systems. He grew up mainly in El Paso but attended high school in the Caribbean while his father worked to revive a failing aircraft control system.
His father never attended college but learned his trade as a navigator and radio operator aboard bombers in World War II.
“My father wanted me to be an engineer in the worst way possible,” Gilmer said.
Gilmer “got hooked on economics” while getting his undergrad at Texas Western College in El Paso, which is now known as University of Texas El Paso, or UTEP.
“It’s a big picture on the world,” Gilmer said of what drew him to economics.
A professor at UTEP was impressed by Gilmer’s grasp of economics and asked him if he’d be interested in pursuing an advanced degree at the University of Texas in Austin. Gilmer was accepted into the program but conceded he had little awareness of it when he arrived in Austin that fall.
“You know how much I knew about it? I didn’t realize it was a Ph.D. program,” Gilmer said. “I got there and actually got to the end of the first year and took these oral exams, and they said: ‘Congratulations, you’re in the Ph.D. program now. You had a good first year.’ And I thought it was a master’s degree.”
Gilmer’s dissertation in the early 1970s made him stand out at the launch of his career.
The dissertation was an economic study related to the first so-called Robin Hood case, which looked at distributing money to poor school districts by having rich school districts assessed higher taxes to make up for any shortfalls. The dissertation was used as guide by the state through the various levels of school district and state tax bases. The case went all the way to the U.S. Supreme Court.
One of Gilmer’s first jobs was as an analyst at the Institute for Defense Analysis in Arlington, Va., a nonprofit corporation that provides analysis of national security issues.
While at IDA, Gilmer worked on a project for the Pentagon to determine in part the optimum size of teams that should provide analysis of spy photos.
“And it turns out the smaller teams worked out much better,” Gilmer said. “As soon as the projects got big, they didn’t turn out nearly as much work. There was economics involved in that. It was a return-to-scale kind of problem.”
Gilmer worked as chief forecaster for about five years for the Tennessee Valley Authority in the 1980s, where he helped determine the number of nuclear reactors that should be built to manage the future power needs for the seven-state region.
“That’s where I learned regional economics,” Gilmer said.
While at the TVA, the Dallas Fed was looking for a Houstonbased energy economist with an interest in regional economy. To this day, it’s the only job Gilmer has gotten by submitting an application.
A front row seat to history
Gilmer was soon placed as the officer in charge of the El Paso branch of the Federal Reserve, while still acting as the Houston economist.
There, Gilmer saw the collapse of the apparel business. The El Paso apparel industry employed thousands of workers manufacturing mainly men’s slacks. Cheaper foreign manufacturers crippled the industry, but the 1994 North American Free Trade Agreement dealt the final blow.
“It was sad,” Gilmer recalled. “When I was growing up there, it was the largest pants manufacturer in North America.
“I hope they understand that I’m not a medium, and I’m not a fortune teller, for sure.” Bill Gilmer
“Billy the Kid, Farah, Levi Strauss. Huge football fields filled with women on sewing machines and supervisors on roller skates.
“It was sad in the sense that the people who lost these jobs to trade are supposed to be compensated. I never felt that they were fairly compensated.”
Gilmer was also witness to the stark contrast presented by chairs of the Federal Reserve, particularly Alan Greenspan and Ben Bernanke.
“He wanted to come to El Paso. He’d never been there,” Gilmer said of Bernanke. “The contrast was pretty dramatic between him and Greenspan. Greenspan, he never came to El Paso. He came to Houston once, but he refused to come to the branch. He just wanted somebody to pick him up in a car.”
When Greenspan came to visit in Dallas for a board of directors meeting, employees were instructed “do not approach him, do not talk to him. If he sits on the couch, don’t sit on the same couch. Just leave him alone and don’t bother him,” Gilmer said. “That’s the way he likes it. And Bernanke, in contrast, was the most down-to-earth, approachable person ever. He was interested in everybody, talked to everybody, has a great sense of humor.”
When Bernanke came to El Paso after flying from Washington, the commanding general from Fort Bliss asked him at a reception whether he’d like to visit some troops coming home from Afghanistan.
Gilmer said Bernanke “had to borrow a coat from an economist, and at 2 a.m. he went out to shake hands and talk to all of these troops. He did his duty. He went back to Fort Bliss the next day and met with the general staff there. They had set up a session to talk to a number of the families about finances. He had a roundtable that afternoon. He was looking really dragged out by the end of the day, but he had lunch with the chamber of commerce, and he talked to everybody.”
Natural replacement
Gilmer became the director of the UH Institute for Regional Forecasting in 2012, replacing outgoing director Barton Smith, who created the institute.
Smith started the forecasting symposiums in 1984. But his first forecast did not go smoothly.
Smith focused his early forecasts largely on the Houston real estate market to help developers plan their projects for the upcoming year. In his inaugural forecast, he accurately and famously predicted an approaching housing bust.
Developers did not like what they were hearing.
“It was bad news,” recalled Smith, who took pride in providing the city with an independent forecast that was beholden to no one.
“We came to the conclusion that there were almost a quarter of a million vacant housing units. The developers did not receive it well.”
In fact, several had called the university demanding his ouster.
But shortly after the forecast, the Houston housing market crashed, proving Smith was right.
“Within six months, the attitude had turned around completely, and I was being asked by the same guys that hated me to address them and their investors,” Smith said.
When Smith retired in 2011, Gilmer was his natural replacement. The two had for several years presented at the same forums while Gilmer was at the Fed. They also had very different approaches to forecasting: Gilmer at the Fed took on more of a macro approach to the region, while Smith was at the micro level and breaking down the economics as close in as the Houston region’s neighborhoods.
“Because of this difference, we complemented each other and were almost always in agreement,” Smith said.
In 2011, the city was still recovering from the recession, and the university didn’t have a lot of money to hire an urban economist.
“We looked for someone who had the credentials and the savvy to handle the region,” Smith said. “And he was a natural because of his economic focus and his understanding.”
Good news, bad news
Gilmer, like Smith, enjoys the independence of his job.
“You’re not approaching it from a chamber of commerce perspective or from a company that has a vested interest. And here at a university, there’s even more flexibility to deliver bad news” than at the Fed” Gilmer said. “It’s not that you can’t get some pushback, but there are no ground rules.”
Gilmer will still get the occasional call from a real estate developer who doesn’t like his forecast.
“They’re raising capital. They don’t want bad news. They don’t like bad news. But they all will show up to hear the facts at our symposia, though,” Smith said. “You get people who are sometimes upset about the story.”
What Gilmer hopes is that attendees “get a good economics lesson.”
“I hope it’s useful in the sense of a road map about trying to understand where the Houston economy is going as best as we can understand it,” Gilmer said, adding, “I hope they understand that I’m not a medium, and I’m not a fortune teller, for sure.”
In his most recent regional forecast, Gilmer told the crowd he believes the Houston area’s growth is back on a strong path for 2019. Houston is much more closely aligned with the U.S. economy than in years past and is now less reliant on oil prices, and that helped carry it through the 2014 downturn.
Meantime, Gilmer thinks about possibilities and how his stories could change for future forecasts.
“There’s another test awaiting, though, and that’s what happens when the U.S. economy goes down and oil prices collapse,” Gilmer said.
Developers and others aren’t eager to find out.