As economic uncertainty lingers, industry experts say Austin tech sector remains strong

After a pandemic-era surge of companies and tech workers moving into Central Texas, Austin’s tech sector has had to navigate a more troubled national industry landscape marked by waves of layoffs and cost cutting in recent years at many companies.

But despite a rocky 2023, industry experts say Austin is still strong heading into 2024, even as economic uncertainty remains. While less money is flowing in certain sectors, others, such as manufacturing, are expected to see growth.

Ed Latson, CEO of Opportunity Austin, a Central Texas economic development organization, said while 2023 saw a bit of a retraction from the record growth Austin saw in 2021 and 2022, the region’s tech industry remains strong.

“Without a doubt, Austin still is regarded as a top tier tech hub, and we've raised our profile over the last several years. I expect that to continue,” Latson said. “Nationally, and internationally, our horizons keep growing, and our renown is trending upwards.”

It’s a sentiment Thom Singer, CEO of the Austin Technology Council agrees with. Austin is going to continue to recruit employers, he predicted.

“Austin is still an attractive place for companies to open an office and I think we’ll continue to see that,” Singer said, adding that Austin has developed a diverse tech ecosystem, which has helped shield it from some of the worst impacts of economic issues.

“We're not just semiconductors. We're not just big social media, big tech. We're not just software. We're not just fintech. I think the diversity that we have in our community helps us,” Singer said.

Economic uncertainty remains

Singer also credits the diversity for likely helping Austin dodge the worst of the national tech layoffs.

The industry slashed jobs and cut costs in recent years, including companies with significant Central Texas presences, such as Meta, Accenture, Google and Round Rock-based Dell Technologies.

While it has been hard to track just how large the impact has been, with many companies not disclosing local cuts or filing Worker Adjustment and Retraining Notification letters, industry experts have said it’s certain Central Texas has been affected. Out of WARN notices that were filed, 3,927 positions have been cut so far this year across all industries in Central Texas compared with just 472 positions cut last year.

“I don’t think we got hit as hard as we thought we would,” Singer said. “We certainly had layoffs, but I don’t think as a community it was like 2008 or anywhere even close.”

Singer said recessionary concerns have been top of mind this year, something that will likely remain going into 2024.

“In 2023, we were really worried about a big recession hitting this year, whether it was in the summer or the fall, and that impacted hiring, it impacted the layoffs, it impacted planning the companies were doing, and we didn't actually see a giant dip," Singer said. "We've had issues in the economy, but the bottom didn’t fall out.”

Roger Kay, an analyst with Endpoint Technologies Associates, said economic uncertainty is likely to continue into next year.

"The economy is pretty weird right now," Kay said. "We’ve been talking about the soft landing for a while, and, so far, it seems pretty soft."

Kay said it’s likely the tech market will see slower growth going forward, something he does not see as a big problem after years of rapid tech growth.

The uncertain economy is making it more difficult to predict what trends might take off in Austin and nationally, Kay said. For example, while some are betting big on artificial intelligence, Kay predicted some of the hype will settle down.

“Going on into the year beyond. It's hard to see where the excitement is exactly,” Kay said.

Dan Ives, an industry analyst with Wedbush Securities agreed a soft landing is likely on the horizon, and he said, as a result, a new technical market will start to emerge in 2024. Trends such as cloud, cybersecurity and AI will likely be big players in the tech industry moving into next year, as well as electric vehicles continuing to shift the auto industry, he said.

Ives predicted as part of that there will be a lot of private and public companies employing more resources toward Austin and towards emerging industries such as AI.

“Even though in the last few years, there have been a lot of starts and stops from companies like Google and Facebook, I think other companies are going to benefit given the massive engineering talent,” Ives said.

He acknowledged that while some of Austin’s features, such as cost of living and overall costs, have become less affordable in recent years, he still believes it will continue to be a destination for young tech talent.

Startups see less funding

Headwinds still remain for the startup industry going into next year. Nationally, Ives said startups are finding it harder to raise capital.

“I think it's caused a lot of consolidation in tech,” Ives said. “The strong will get stronger.”

Singer said lingering financial concerns remain, with startups seeing tighter funding, and companies trying to keep costs lower than in the past.

“It’s still harder to get funded right now,” Singer said, adding the potential for a recession remains going into next year for many companies, and the companies that are receiving funding are seeing less of it.

“They're having to make choices that can get them through until they can get their next round,” Singer said.

According to Opportunity Austin’s startup database, which tracks deal flow in Central Texas, startup funding has dropped in 2023, with companies raising about $2.9 billion so far, compared with $5.5 billion in 2022 and $6.2 billion in 2021. However, 2023 is on track with 2020, when companies raised about $2.5 billion, and 2019 when companies raised $2.6 billion.

Manufacturing has 'considerable momentum'

Other industries within the tech sector, including manufacturing, have seen less of a slowdown. Latson, who until recently served as head of the Austin Regional Manufacturing Association, said the manufacturing industry has “considerable momentum.”

He added that the semiconductor industry has seen some dips compared with 2021, but the sector is fairly cyclical, and it’s expected to come back up next year.

Latson said the electric vehicle industry, anchored by Tesla, and the semiconductor industry will continue to be major forces for the region.

“We still see a lot of suppliers moving in to support those two big and major clusters,” Latson said.

The Central Texas region already has a notable ecosystem for tech manufacturing, with semiconductors making up about a quarter of all manufacturing output in the region, according to the Austin Regional Manufacturers Association. The region has also been poised to see big expansions to its manufacturing capacity, including by Samsung, which already had two fabs in Austin and is building a $17 billion chip factory in Taylor that’s expected to be completed in 2024.

“As Samsung gets nearer to completion of their project, you're going to see more and more financial impact to the region, and that includes investment and hiring, and all the activity that goes with that project at a scale that we've never seen before in this region,” Latson said.

Austin is expected to see big benefits from federal legislation, the CHIPS Act, passed last year that is designed to boost the U.S. semiconductor industry. Companies are waiting to hear whether their projects will be funded by the legislation, which sets aside more than $52 billion in funding for companies that manufacture computer chips, billions more in tax credits to encourage investment in chip manufacturing, and tens of billions of dollars to fund scientific research and related technology innovation.

Kay said the CHIPS Act marks an important development for the domestic semiconductor industry and that Austin is likely to benefit from it.

“Given that these days, Austin is intimately wired into the network of U.S. companies that are working on leading-edge developments, inevitably money from the CHIPS Act is going to flow through the region,” he said.

Kay said once that money does start flowing, it will have ripple impacts on the local market with hiring, real estate prices, office space leasing and more.

“My sense is that (CHIPS funding) is going to be probably one of the more important stimuluses for next year,” Kay said.

Latson said a new state economic development incentive program passed by the Legislature this year could lead to even more projects being announced. The program is designed to allow school districts to again offer tax breaks to companies and replace the state's now-expired Chapter 313 program.

“I expect that to accelerate some of these bigger projects that have been holding off to see what might be available from an incentive perspective,” Latson said. “That could be a catalyst to drive more investment next year.”

Singer said as the Austin tech community looks to grow in 2024, maintaining and training a strong tech workforce will remain top of mind.

While some companies have done a good job investing in this, he added, there’s still lots of room to grow.

“One of the things we need to do as a city is start upscaling training for people to be able to come into tech jobs because tech companies want to hire people who are ready, and we need more of them," Singer said. “Staying competitive to keep the employees that they have for some of these smaller, midsized companies is also definitely a concern."

This article originally appeared on Austin American-Statesman: Economic outlook for tech industry in Austin