November 16, 2009

Regional Economy Still Weak, but Outlook Positive

Regional economic conditions are weak but improving. Employment fell again in September, and a benchmark revision of Texas jobs data for the first half of the year resulted in additional payroll declines of 63,500 since December 2008. State GDP and personal income data, however, suggest that economic activity may have bottomed out in the second quarter. Stimulus measures, transfer payments and public sector growth are making up for some of the private-sector weakness. Forward-looking measures remain more positive than coincident data, suggesting the outlook is for continued improvement.

Economic Activity May Have Hit Bottom
Dallas Fed estimates of Texas GDP suggest output declines slowed along with the U.S. in the second quarter. Real state GDP was down 1.2 percent quarter-over-quarter versus 0.7 percent for the nation (Chart 1). This compared with declines of 10.6 percent for Texas and 6.4 percent for the nation in the first quarter. U.S. GDP rose 3.5 percent in the third quarter; the Dallas Fed estimate for third quarter state GDP is not yet available.

Consistent with the quarterly GDP estimates, real personal income also fell at a slower rate in the second quarter—a 1.1 percent quarter-over-quarter decline in Texas and 0.7 percent in the U.S. Subtracting government transfer payments, personal income in Texas declined sharply in the second quarter (Chart 2).

Employment Now Falling Faster in Texas
Texas private sector employment fell 3.8 percent in the third quarter, a decline that far exceeded the national decrease of 2.2 percent (Chart 3). During the same period, Texas total employment declined by 2.9 percent compared with 2.0 percent for the nation. Year to date, Texas employment is off 4.2 percent. The state unemployment rate edged up to 8.2 percent in September.

Texas job losses have been large and broad-based. With the exception of the government and education and health services sectors, every sector posted quarter-over-quarter job losses in the third quarter. On a brighter note, employment losses shrank relative to the second quarter in all sectors but leisure and hospitality.

Retail Sales and Consumer Sentiment
Economic recovery calls for consumption growth. Improvements in consumer sentiment since late spring have not yet spilled over into higher retail sales, which remain sluggish according to Dallas Fed estimates (Chart 4).

Commercial Real Estate and Bank Woes
Commercial real estate woes have intensified as a result of the recession and ongoing credit crunch, and banks are increasingly impacted. Overall, Eleventh District banks are doing relatively well; they have a much lower share of noncurrent loans—2 percent in the second quarter versus 4.3 percent for the rest of the nation.

However, Eleventh District banks have a higher exposure to commercial real estate than banks in the rest of the nation. Noncurrent loans are growing as a share of gross loans, mostly due to problems in commercial real estate markets. About two-thirds of noncurrent loans in the Eleventh District are commercial, compared with one-third nationwide (Chart 5).

Some Positive Signs in Housing, Construction and Energy
Boosted by the government’s first-time-homebuyer tax credit, home sales picked up in September. Texas home prices and inventories are stable, and delinquencies and foreclosures remain lower in Texas than in the rest of the nation.

Construction activity may have bottomed out in Texas. Residential and nonresidential contract values continued to rise in September, although they remain at depressed levels.

Year-to-date, building projects related to health and education have driven up nonresidential contract values. Commercial building activity, including warehouses, office and bank buildings, stores and restaurants, has declined significantly.

Energy is another bright spot in the regional economy. Oil prices have risen in recent months, and natural gas prices have doubled from a record low reached in early September. On Nov. 9, the WTI crude oil spot price was $79.40 per barrel, and natural gas prices were $4.67 per MMBtu. The Texas rig count has risen from 320 in June to 407 for the week ending Nov. 6.

Texas Headline Prices Falling
The Dallas Fed Beige Book, an anecdotal report on current economic conditions, suggests overall prices were flat in October. The Texas consumer price index (CPI) is not as timely but points to a rising discrepancy between headline prices and core prices (Chart 6). The 12-month change in total prices was negative in August, while Texas prices less energy and food items were about 3 percent higher than a year ago. The discrepancy suggests that falling energy and food prices are pulling headline inflation down. Core CPI is higher than in the nation partly because Texas has not experienced much house price deflation.

Regional Outlook
The Dallas Fed leading index rose slightly in September. This uptick was primarily the result of increases in the U.S. leading index and rebounds in the stock market. Dallas Fed forecasts mirror expectations for the nation, and state employment should be growing again by first quarter 2010.

—Michael Nicholson and Pia Orrenius

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About the Authors Nicholson is a research analyst and Orrenius is a senior economist and research officer in the Research Department at the Federal Reserve Bank of Dallas.