May 2008

Regional Economy Continues to Moderate

The Eleventh District economy slowed since January but continues to outperform the nation. While signals remain mixed, there is increased sentiment that Texas economic activity will not rebound to its trend rate of growth until 2009.  

Employment
Payroll employment rose at a 2.1 percent annual rate in February and 1.3 percent in March, below recent trends but substantially better than national payroll employment growth, which turned negative in January (Chart 1). The manufacturing sector, including high-tech manufacturing, shed jobs in February and March due to sluggish demand and high inventories. Also, growth in services employment stalled.

Some signs of weakness are creeping into labor markets. Initial claims have been on an upward trajectory for the last two months, and the unemployment rate rose to 4.3 percent in March.

However, Texas’ performance remains strong relative to the U.S. The unemployment rate fell to 4.1 percent in February, a full point below the national figure—Texas’ best relative performance in almost 25 years (Chart 2). Texas initial unemployment claims have also increased more slowly than in the nation (Chart 3).

Construction
After a strong February, Texas construction employment fell at an annual rate of 3.8 percent in March, dragging first quarter numbers into negative territory. Construction contract values continued their January swoon, falling 4.4 percent in February and 5.2 percent in March. The decline was broad-based across residential, nonresidential and nonbuilding construction (Chart 4). The construction sector has been impeded by a slumping housing market and rising building costs, such as higher prices for steel.

Real Estate
Texas existing-home sales remained strong during the initial portion of the national slowdown in 2006 but are now falling at about the same rate as the U.S. as a whole. The declines are broad-based geographically, with all major metro areas declining substantially over the last six months and all but Austin declining over the past year (Chart 5). A similar pattern holds for housing permits. Encouragingly, inventories have decreased slightly over the last six weeks, and Texas homes continue to sell more quickly than homes are selling nationally.  

Energy
The Texas energy sector remains exceptionally strong, providing what is perhaps the single most prominent sign of economic strength at this point. Energy employment and the Texas rig count continue to hover near 20-year highs as oil prices soar to new heights. In real terms, energy prices are the highest they have ever been.

Exports
Following a disappointing fourth quarter, Texas exports rose by 3.7 percent in January and 5.7 percent in February. U.S. exports also rose during these months, but at lower rates.

Consumer Confidence
Consumer confidence continues to soften in the West South Central census region, which includes Texas, declining by 9 points in March after an already-large 7-point February plunge. With Texas representing 60 percent of the region’s population and two-thirds of its economic activity, the confidence numbers are indicative of mounting consumer unease.

Prices
The Texas Manufacturing Outlook Survey suggests that regional price pressures are on the rise. Two-thirds of firms reported higher raw material prices in March, and three-fifths foresee continued increases over the next six months. This translated into a significant number of firms raising their finished-good prices. Inputs such as fuel, metals and shipping materials are areas of particular concern.

The leading index has also taken a turn for the worse, with most components negative over the past three months (Chart 6). While this does not portend an imminent recession, it does reinforce the notion that a return to trend growth is unlikely in the near term.

—Jason L. Saving and Michael Nicholson

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