September 2008

The Texas economy continues to expand, but growth is decelerating due to a slowdown in the national economy, elevated commodity prices and the ongoing credit crunch.

Job Creation Weakens
Texas employment grew at a tepid 1.4 percent annualized rate in August, adding 12,400 jobs. Private employment growth was also sluggish, with a slowdown in both goods and services sectors (Chart 1). Of the goods-producing industries, manufacturing—which accounts for about half of the sector's employment—continues to shed jobs and is nearly offsetting job gains in the mining and construction industries.

The Texas unemployment rate rose from 4.7 percent in July to 5 percent in August. The most recent Dallas Beige Book reports that some firms are laying off employees, reducing employee hours or cutting overtime. Despite the softening labor market, skilled workers continue to be scarce in the oil and gas industry.

Price Pressures Remain Prevalent
The August Texas Manufacturing Outlook Survey reported continuing price pressures. Nearly 60 percent of the respondents reported rising raw materials prices, about 30 percent noted higher prices for finished goods, and 20 percent indicated increased wages and benefits costs.

In a similar vein, the August Dallas Beige Book reported elevated energy and commodity prices—although these had edged down somewhat—and several companies have fielded requests for wage hikes from employees.

Venture Capital Investment Soft
Texas venture capital funding declined in the second quarter of 2008. Thirty-six companies received a total of $257 million during the quarter, down 35 percent from the first quarter and 17 percent below second quarter 2007.

Despite the softness in the second quarter, Texas venture capital investment activity remains solid overall (Chart 2). Year-to-date, Texas firms have raised $654 million in venture financing. This strength in investment is driven by the state's expanding energy sector.

Housing Contraction Ongoing
Residential real estate and construction continue to falter. The pullback in single-family construction has not let up, and both permits and starts were down 32 percent in July compared with year-ago levels. New and existing home sales remain sluggish. Existing home sales declined 0.7 percent in July and are down 15.7 percent year-over-year.

On a positive note, home prices continue to hold up in Texas. The Office of Federal Housing Enterprise Oversight house price index for second quarter 2008 shows that Texas continues to see home price appreciation, although the rate of increase has moderated (Chart 3). Texas home prices rose 3.6 percent year-over-year and 0.7 percent in the second quarter.

Exports Rising
The export sector is one of the bright spots for the Texas economy. Boosted by the dollar's decline, real exports went up more than 5 percent in the second quarter. The second quarter rise in exports was broad-based across Texas' major trading partners. Exports to Latin America were up more than 17 percent, and exports to China were up 8 percent in the second quarter. Exports to the EU, Canada and Mexico also increased, albeit at lower rates (Chart 4).

Energy Activity Robust
Although both oil and gas prices have eased from their July highs, prices are still robust enough to support healthy energy activity in the region. The Texas rig count stood at 958 at the end of August, the highest since December 1982, and demand is strong for workers in the oil and gas industry (Chart 5).

Summary
Overall, the Texas economy continues to slow but is still doing better than the nation. Year-to-date, Texas has added 149,200 jobs, at a 2.1 percent annualized rate. A strong energy sector and healthy export growth are keeping Texas going. Movements in the Dallas Fed's Texas Leading Index over the past several months point to positive but below trend employment growth of 1.5 to 2 percent for 2008.

—Michael Nicholson

About the Author Nicholson is a research assistant in the Research Department at the Federal Reserve Bank of Dallas.