March 2008

The Texas Economy Cools

The Texas economy continues to slow. Economic growth is still moderate, but there is more evidence that some business leaders are expecting further weakness and engaging in reinforcing actions, such as cutting capital spending, paring down inventories and reducing or freezing employment.

Texas job growth has been cooling since posting a 3.3 percent increase in 2006. Employment increased 2.9 percent in 2007 and growth is likely to end 2008 at just under 2 percent (Chart 1).

Despite the slowdown, the state continues to grow much more strongly than the nation, with nearly all sectors of the economy adding workers at a faster pace than the rest of the country over the past three years. In 2007, one-third of nongovernment jobs employment created in the U.S. were in Texas, pushing the state’s job growth up three times as fast as the nation (Chart 2). The relative strength of the Texas construction sector is particularly notable. The state’s construction workforce rose 5.6 percent last year, while U.S. construction jobs declined 3 percent.

A number of recent indicators point to softer growth. Beige Book, the Dallas Fed’s survey of anecdotal conditions, has been reporting decelerating growth for over a year. In the March Beige Book, business executives expressed a great deal of uncertainty about the outlook for growth, and some said they are preparing for the possibility of an economic downturn by freezing hiring, reducing inventories and/or capital spending.

Home sales are slowing in all Texas major metropolitan areas, but the overall decline has been less than in the U.S. The state’s home sales continued to rise for a year after the nation began to slow. Credit standards tightened in fall 2007, however, and since then the drop has been as precipitous in Texas as in the rest of the country. (Chart 3)

Texas exports fell 3.9 percent in the fourth quarter, with declines in computer and electronics, transportation equipment and industrial machinery. The Texas Manufacturing Outlook Survey has weakened over the past few months. Indexes for production, the volume of new orders and the volume of shipments have decelerated since mid-2007. Most indicators for current conditions remained soft in March. Manufacturers report a worse perception of general business conditions than their own company outlook (Chart 4).

The West South Central consumer confidence index dipped sharply in February, falling from 122.8 to 106.2. The drop was the largest since right after Hurricane Katrina in September 2005 (Chart 5). The West South Central region is dominated by Texas.

While there are signs of weakness in the Texas economy, there are also signs of strength. The March Beige Book reported some improvement in the service sector, including a pick-up in activity for temporary services. Energy activity remains at high levels.

Construction activity continues to soften, but Texas real estate markets have not deteriorated over the winter and are in better shape than in the nation. Home sales have slowed, but Texas home inventories remain relatively stable around 6 months, while the U.S. months in inventory remain near 10 months. Sharp cutbacks in home construction have helped keep Texas inventories from rising. The relative health of Texas home inventories and decline in building has kept large price declines at bay.

The Texas unemployment rate of 4.1 percent remains well below the U.S. rate of 4.8 percent in February (Chart 6). The Texas unemployment rate is typically above the nation's, but current conditions are similar to the relative strength of the labor market that occurred in the state during the energy boom in the early 1980s. There continue to be anecdotal reports from firms having difficulty finding workers.

The Dallas Fed’s Texas Leading Index fell in December and remained weak in January. Movements in the index over the past several months point to slower growth but not recession. The index declined just over 1 percent between November and January, driven by weakness in the Texas Stock Index and Help Wanted Index. The Texas Leading Index, created by Dallas Fed economist Keith Phillips, has a strong reputation as a useful forecasting tool for state job growth.

—Fiona Sigalla

About the Author Sigalla is an economist in the Research Department at the Federal Reserve Bank of Dallas.