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Regional Economy Growing Steadily Despite Headwinds

November 5, 2013 · Update in PDF PDF

The Texas economy has expanded at a moderate pace over the past six weeks. Employment growth was significantly slower in August than July. The real estate and energy sectors remain at high levels and continue to be the primary drivers of economic growth. However, the recently concluded government shutdown and continued fiscal uncertainty may be a drag on growth in the fourth quarter.

Employment Growth Around Long-Term Average

Job growth decelerated sharply in August, to a 0.3 percent annual rate, down from 3.6 percent in July. While monthly employment numbers have been volatile, anecdotal reports indicate a modest pickup in hiring in September. Employment grew in the first half of the year at a 2.4 percent annualized rate before declining slightly in the first two months of the third quarter to 2.1 percent (Chart 1). First-half growth was above Texas’ long-term average but slower than in 2012.

Austin and Houston have led other metros in job growth since the recession, but growth has slowed in 2013 compared with 2012 (Chart 2). The ongoing sequester seems to be partly responsible for the slowdown in San Antonio and the border region, where the share of federal government employment is twice as large as the state average.

The sequester is also a drag on government employment throughout Texas, with overall employment growing only 0.4 percent year to date through August. However, the fastest-growing sector in Texas, energy, has seen annualized employment growth of 9 percent year to date. And while most service sectors have grown at a rate of 2 percent or better year to date, manufacturing employment has been weak.

Manufacturing Activity Improves as Employment Remains Weak

Despite a stall in manufacturing employment in 2013 after robust growth in 2012, manufacturing activity remains robust. The production index of the Texas Manufacturing Outlook Survey (TMOS) points toward continued expansion, increasing in both September and October (Chart 3). The apparent disconnect between employment and activity is not new to manufacturing and reflects gains in productivity.

Real Estate Continues to Boom

The inventory of unsold homes in Texas has plummeted to just 3.8 months of supply, the lowest level since records began in 1990, with existing-home sales increasing 12 percent year to date through September (Chart 4). Growth in home sales has outstripped increases in housing construction.

The low supply of housing relative to demand has put upward pressure on prices. The Case-Shiller House Price Index for Dallas is up 6.2 percent this year through August. However, house price gains have been greater nationally because construction activity has expanded more rapidly in Texas than the U.S. As a result, several states, including Texas, show large declines in the proportion of mortgages that are underwater—in which the remaining mortgage is greater than the value of the house (Chart 5).

The real estate improvement has not been limited to the residential side. Commercial real estate activity has also been brisk. Office vacancy rates continued to improve in most major Texas cities through the second quarter, except for San Antonio, which faces headwinds from the government sequester. Industrial vacancy rates have also dropped across all Texas cities and the nation.

Retail Sales Post Mild Growth as Prices Hold Steady

The Dallas Fed’s Beige Book reports a mild increase in retail sales for September based on improving year-over-year demand. The sales index from the Texas Retail Outlook Survey (TROS) points to positive but decelerating growth in September and October.

The Beige Book indicates that prices were mostly stable. TMOS respondents expect future prices and wages to increase, but the overall trend indicates steady prices in the near term.

Energy Activity Remains Robust

The Beige Book also reports that energy activity in Texas remained strong in September and improved from a year ago, but oil and gas firms’ margins have tightened. Although rig counts have declined for the last two months, they appear more stable than in the second half of 2012.

Exports Increase in 2013

Texas exports declined 2.8 percent in August following a large 4 percent increase in July. However, Texas exports are up 6.3 percent year to date, exceeding the U.S.’s 2.1 percent increase. Texas exports are also much improved over last year, when they were down 1.6 percent for the full year.

Outlook Is for Moderate Growth

The future indexes of the Texas Business Outlook Surveys continue to be in positive territory, indicating continued moderate growth (Chart 6). Declines in future-activity indexes from TMOS and TROS may reflect recent uncertainty due to the government shutdown in October. The Texas Leading Index improved in August, and the employment forecast is for job growth to come in between 2 and 2.5 percent in 2013.

– Christina English and Anil Kumar

About the Authors

English is a research analyst and Kumar is a senior research economist and advisor in the Research Department of the Federal Reserve Bank of Dallas.

 

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