December 22, 2009

Regional Economy Continues to Show Signs of Improvement

Summary
The regional economy experienced broad-based improvement in recent weeks. Most notably, labor markets appear to be stabilizing. This is consistent with the regional economy being at a turning point, with output at low levels but growing.

Labor Markets
Texas employment edged up 0.5 percent in November after rising 1.7 percent in October (Chart 1). The October increase was the first such uptick since July. The public sector is leading job growth. Private employment rose at a slower pace, 0.1 percent, in November after contracting 1.8 percent in October. In comparison, total U.S. employment fell 0.1 percent in November, while private employment fell 0.2 percent.

Year to date, both Texas and U.S. employment have declined 3 percent (not annualized). Texas has lost 314,100 jobs.

Texas unemployment rates are falling in line with the nation (Chart 2). From October to November, Texas’ unemployment rate dropped from 8.3 to 8, and the nation’s fell from 10.2 to 10.

Several forward-looking indicators suggest that further labor market stabilization is under way. Texas’ payroll survey showed that weekly hours worked in manufacturing rose in both October and November. They reached 40.8 in November after dipping to 40.1 hours in September. The November Texas Manufacturing Outlook Survey also reported a sharp increase in the share of employers increasing labor hours.

Initial jobless claims also fell in both October and November. They were at 80,346 in November versus 96,928 in September, a 17 percent decline. Similarly, U.S. jobless claims are down 14.5 percent since September.

Construction and Residential Real Estate
Residential construction bottomed out earlier this year in Texas and continues to improve. Moving averages of total real contract values and residential building permits both increased in October, although housing starts fell slightly.

The rise in building permits is due to the recovery in single-family homes. The five-month moving average for single-family home permits rose 2.9 percent in October, while the average for multifamily permits continued to fall (Chart 3). The 30-year mortgage rate is back to historical lows (below 5 percent) seen at the beginning of the summer.

Residential housing markets are being sustained by a number of government programs, most notably the new homebuyer tax credit. U.S. home inventories fell to 6.7 months of supply in October, below Texas inventories, which stood at 6.9 months.

Improvements in Texas housing markets have boosted home prices incrementally. The Federal Housing Finance Agency price index, which is for repeat sales of homes financed with conventional mortgages, was up 0.4 percent in both the second and third quarters in Texas (Chart 4). U.S. home prices also appreciated in the third quarter.

The weak economy, high unemployment and reduced home values have led to record increases in mortgage delinquencies and foreclosures (Chart 5). In the third quarter, the national foreclosure rate held steady at 1.44 percent of mortgages, while the Texas foreclosure rate rose from 0.8 to 0.9 percent. Delinquency-rate increases remain on a steep trajectory.

Energy
Energy prices remain low due to weak U.S. demand and high natural gas and oil inventories.

West Texas Intermediate crude oil prices averaged $71.80 per barrel for the week ending Dec. 18, a slight increase over the previous week’s average but substantially lower than month-ago price levels.

Gas prices have ticked up slightly in recent weeks due to cold weather across the country. They reached $5.50 per MMBtu for the week of Dec. 18, up about $2.15 from a month prior.

Exports
Real Texas exports increased 6.9 percent in the third quarter (quarter-over-quarter) as the dollar fell steeply. Exports from states other than Texas rose 3.8 percent.

Third-quarter export growth was driven by trade with NAFTA partners Mexico and Canada and with Latin America and Europe (Chart 6). Increased economic activity in Mexico has led to higher demand for exports, boosting Texas trade. Exports to China slipped in the most recent quarter, while exports to the rest of Asia held steady. The lower dollar is making Texas exports cheaper abroad, while global economic recovery is raising overseas demand.

Looking at exports by industry, third-quarter growth was led by increases in petroleum and coal products, followed by chemicals and transportation equipment.

Outlook
The Texas Leading Index of key economic indicators rose in October, albeit at its slowest rate in four months. Improving labor market conditions will likely boost the leading index in coming months.

The Dallas Fed’s employment forecast suggests that Texas job growth will be between 0.5 and 1.5 percent in 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.