2014: The Year of the Rebound

 

Takeaway

  • Real GDP is growing at a rate of about 2.2 percent, and it could return to the healthy benchmark of 3 percent by 2016.
  • Advancements in early-stage innovation and biotechnology are driving economic success
  • A glut of startups in Central Texas could cause many new businesses to fail in 2014, but venture investment is expected to hold relatively steady

The U.S. economy is improving at a modest but positive pace, and business experts expect that trend to continue into next year and beyond. This was a theme echoed by several speakers Oct. 3 at a McCombs event called “The Economy in 2014: The Year of the Rebound?”

McCombs Finance Professor Jay Hartzell joined three Austin CEOs to take a look ahead at not just the national economy as a whole, but also at the state of entrepreneurship and the technology industry here in Texas.

“It’s still a very slow ramp-up to get back to what many would call ‘normal,’” Hartzell said. “We’re coming out of the crisis, but we’re not there yet.”

Gradual Return to Economic Stability

The country’s real GDP is currently growing at a rate of about 2.2 percent, and Hartzell says it is not likely to reach the healthy benchmark of 3 percent by next year. However, the Federal Reserve estimates the growth rate could return to that mark by 2016.

Hartzell also gave an update on another key measure of economic health: unemployment. Economists consider the “natural” unemployment rate to be about 6 percent. It has hovered just above 7.5 percent so far this year, but forecasters suggest it will come down to 6.1 percent by 2016.

“It won’t be until 2015 or 2016 that we get back into that more healthy state, but the trend is in the right direction,” Hartzell said.

Business investment has slowed nationally but remains comparatively strong in Central Texas. “There have been moderate profit prospects,” Hartzell said.

Government debt has become a centerpiece issue in forecasting the economy. Any future solution to the problem is likely to have financial consequences.

“There are roughly three ways to get out of the debt problem: You grow your way out, you tax your way out, or you print money,” Hartzell said. “The growth forecast is not very strong for the next few years. It’s not clear we have the political will to tax our way out of it. So that leaves inflation, which many people have concerns about.”

Some sectors of the economy, such as energy and healthcare, are very profitable at the moment, but Hartzell said much of the wealth in the U.S. is being redistributed rather than newly created.

“In some cases, what is making some people very successful is making others pay more at the gas pump or pay more for energy costs or for healthcare costs,” Hartzell says. “This leads to an economy that’s probably more about redistributing wealth among people rather than pure creation of wealth.”

The Federal Reserve has indicated that it plans to hold off on raising interest rates until 2015 or 2016, which Hartzell said is further evidence “that we’re in for positive, modest growth and continued improvement in the employment picture.”

Big Opportunities in Smart Technology

Tyson Tuttle, CEO of Silicon Labs, said a surge in investment in connected smart devices is driving a transformation of the tech industry. He expects low-cost, low-power devices to enable home and industrial automation, development of efficient smart grid and mobile technologies, and the advent of “big data.”

“All of this is going to be enabled by new types of devices, chips and applications that people haven’t even thought of before,” Tuttle said. “This is going to create a lot of opportunities for startups, software creators, infrastructure providers, and certainly in our world.”     

Outlook for Entrepreneurs

McCombs alum Daniel Nelson, founder of Datical, gave an overview of Austin’s startup climate and offered predictions about where it’s heading. He said the local talent pool of entrepreneurs and engineers has established the region as a fertile ground for new businesses to take root.

There are now more startups than there used to be, thanks in large part to the availability of resources to help them get going, including tech incubators as well as angel and venture capital investment activity.

Nelson said Central Texas entrepreneurs need to challenge themselves to develop marketable ideas that they can scale into something bigger.

“One of things we need to do as a community is continue to differentiate,” he said.

Many entrepreneurs these days are falling into the trap of “trying to solve the same problems” — coming up with ideas they hope will go viral despite not being very original.

“Founders now tend to be less experienced, and they are focused on solving market problems rather than on hard business,” Nelson said. “There are lots of people in my generation trying to be the next MySpace.”

Austin has a deep pool of young, skilled tech workers, but demand for that talent is soaring through the roof, he said. Startups are competing for the same people and capital as huge companies such as Apple, Facebook, and Google — all of which are hiring locally. As a result, Nelson predicts the region could soon experience a talent crunch that would restrict startup growth.

However, he expects venture investment to remain about the same or decline slightly — which is different from the national trend, which is in steeper decline.

Meanwhile, he says, there will be a high volume of small deals that simply won’t work out. But that’s not necessarily as bad as it might seem.

“By the end of 2014, there will be a glut of failed startups — and this is a really good thing, because they’re supposed to fail. The real question is, after those startups fail, what do those founders do?” Nelson said. “The virtuous cycle of entrepreneurism starts with failure. It starts with failing, learning, and trying again — and then failing, learning, and trying again.

“Those entrepreneurs eventually gain enough experience to become the operators. They’re the people who become the executives, the CEOs, the management teams of other startups that end up rising up with youth and vigor, and all of that. But right now there’s a gap in that life cycle. And I think it remains to be seen whether Austin will be able to keep attracting and retaining that entrepreneurial talent.”

Boom in Biotech

Dennis McWilliams, CEO and founder of Apollo Endosurgery, discussed how Texas’ thriving biotechnology industry has established the state as a hub for early-stage innovation.

In 2009, biotech companies had a statewide economic impact of $75 billion, and Texas emerged as the No. 2 state in the country for clinical drug development.

“No other state, even California and New York, can compare to the resources we have in Texas for early-stage investment in new technologies,” McWilliams said. “We really are becoming a global economy of healthcare, and innovation that’s happening here in Texas is moving around the world.”

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Mentioned in this Article

Jay Hartzell

Professor, Finance Department Chair McCombs School of Business

Jay Hartzell is the chair of the Department of Finance at the McCombs School of Business. He also serves as executive director of the Real Estate...

About the Author

Rob Heidrick

Writer, McCombs School of Business

Born and raised in Austin, writer Rob Heidrick has spent several years as a contributor and editor at local magazines and community newspapers. He...