August 2017 Summary1
The impact of Hurricane Harvey and the subsequent flooding is not fully captured in the August data. The short- and long-run effects of the disaster and recovery process are considered and may result in some data revisions in future reports.
The Texas economy moved forward but displayed some noteworthy obstacles. The statewide unemployment rate fell to 4.2 percent at the expense of record-low labor force participation. Stagnant wages challenged most of the state, hindering growth in Texas per capita income. Hurricane Harvey disrupted the Houston economy, driving up initial unemployment insurance claims and stalling trade activity along the Gulf Coast. The declining value of the dollar and strong global economy should boost economic performance and assist in the hurricane recovery process. In addition, the prospect of tax reform may provide an avenue for improved growth. Potential headwinds to the Texas economy include energy price volatility and trade uncertainty, especially with Mexico.
Texas sustained positive economic growth as the Texas Business Cycle Index (a measure of current economic activity in the state) increased at a quarterly annualized rate of 5.4 percent, the largest increase since 2014. Falling unemployment drove the major metro Business Cycle Indices, albeit at a slower rate than last month. The Austin index led the pack at an annualized rate of 4.1 percent quarter-over-quarter (QOQ), despite falling to its lowest point since 2010. Dallas and Fort Worth posted 3.7 and 3.3 percent growth, respectively, while the San Antonio index ticked up to 3.8 percent. Weak job growth decelerated the Houston index for the third consecutive month to under 0.5 percent after peaking at 5.1 percent in May. Rebuilding efforts in Houston should provide a short-term economic stimulus before reverting to positive, yet modest growth until market fundamentals adjust to weak energy prospects.
Recently released 2016 gross metropolitan product (GMP) data revealed a 3.0 percent contraction in the Houston economy as the energy sector lagged. Energy industry activity stabilized in 4Q16 and into this year but has since slowed again. The less energy-dependent economies fared much better in 2016 as San Antonio and Dallas surpassed 3.1 and 3.0 percent positive growth, respectively. Furthermore, Austin GMP increased 4.8 percent, slightly above its 15-year average, led by gains in the professional and business services industry.
The Texas Leading Economic Index (a measure of future directional changes in the business cycle) flattened as a jump in initial unemployment insurance claims offset declines in the Texas value of the dollar. Consumer sentiment was positive as the Texas Consumer Confidence Index jumped to a record 147.5. Labor shortages boosted consumer sentiment as hiring and job openings remained high.
After stabilizing last month, interest rates returned to their downward trend amid weak inflation expectations. Waning confidence in tax and regulatory reform in Washington, combined with domestic and international political uncertainty, pulled the ten-year U.S. Treasury bond yield to a year-to-date (YTD) low of 2.21 percent. The Federal Home Loan Mortgage Corporation 30-year fixed-rate fell for the fourth time in five months, settling at 3.9 percent. Relatively strict lending standards and regulations continued to offset the impact of the historically low interest rates.
Texas housing sales fell 5.9 percent year-over-year (YOY) as Harvey shut down the Houston economy for nearly a week. Current residential construction activity, measured by the Residential Construction Cycle (Coincident) Index, decelerated due to slowing multifamily construction values. The Residential Construction Leading Index (RCLI) declined amid rising real interest rates, signaling a slowdown in the residential construction business cycle. (For additional housing commentary and statistics, see Texas Housing Insight at recenter.tamu.edu.)
The average West Texas intermediate crude oil spot price increased to $48.042 despite nearly 20 percent of the nation's refining capacity shutting down in the wake of the hurricane. Concerns regarding the global glut eased as U.S. stockpiles shrunk. The number of active rigs in Texas fell to 4602 and crude oil production slowed to under 1 percent growth3. Decreased demand for natural gas in Houston outweighed Gulf Coast production disruptions, holding the Henry Hub spot price below $3.00 per million BTU2 (British thermal unit).
Texas monthly nonfarm employment increased by 5,500 jobs, pushing the year's total increase above 196,000. The statewide unemployment rate fell to 4.2 percent, its lowest since 2007, amid stark declines in labor force participation. In Houston, the unemployment rate increased from 4.6 to 4.8 percent, while the rate was below 4 percent in the other major metros. The Texas labor force participation rate sunk to a record low 62.9 percent, balancing at the national rate for the first time since 2009.
Not all of the declines in unemployment were attributed to a contracting labor force. The number of initial unemployment insurance claims in Texas reached a nine-year low last month as the labor market tightened. While the underlying fundamentals remained healthy, initial unemployment insurance claims spiked 57.2 percent after Hurricane Harvey. The surge is expected to spill over into the early weeks of September and apply upward pressure to the unemployment rate. However, claims should normalize by the end of the year and reverse from the ensuing rebuilding process.
San Antonio led Texas employment growth with 7,800 new jobs, primarily in retail trade and professional and business services. In contrast, the Austin and Fort Worth labor markets posted net losses of 100 and 300 jobs, respectively, as local retail industries struggled. Dallas added 2,400 jobs, primarily in mining and manufacturing, while Houston posted slight employment growth, adding just 800 jobs.
The goods producing sector advanced, adding over 2,000 jobs in both manufacturing and construction. Texas manufacturing employment grew 5.9 percent annualized QOQ, well above the national rate of 1.7 percent. Growth rates were even higher in Fort Worth and Houston at 8.5 and 7.8 percent, respectively. Austin's manufacturing growth rate remained positive at 0.8 percent but slowed substantially since May when annualized growth approached 10 percent. In Dallas and San Antonio, manufacturing growth rates accelerated from less than 1 percent last month to 2.7 and 3.4 percent, respectively.
The Texas Manufacturing Outlook Survey indicated increased activity and demand. The production index extended its positive trend to 14 months, and over 26 percent of respondents reported improved business activity. Producer prices elevated as the raw materials and labor cost indices increased. Manufacturers highlighted skilled-labor shortages and increased competition to attract workers.
The total value of Texas construction was flat on a three-month moving average after five months of decline. A stabilization in nonresidential construction activity boosted overall values. Recent upticks in hospital construction helped stimulate 2,600 construction jobs, pushing the annualized construction employment growth rate from 0.1 to 0.7 percent.
The Texas service sector lost 300 jobs after adding a combined 48,100 in June and July. Waste management and remediation services employment contracted by 6,100 jobs but should benefit from the disaster cleanup efforts around the Gulf Coast. The FIRE (finance, insurance, and real estate) industries flattened after a five-month expansion but maintained an upward trend.
The Texas Service Sector Outlook Survey reflected continued expansion as the revenue and business activity indices remained comfortably positive. Similar to the manufacturing survey, respondents noted general labor shortages driving up input prices. Consequently, both the full- and part-time employment indices decelerated, while the hours worked index inched up.
Retail employment posted positive growth for the second consecutive month, recovering 3,800 of the 22,000 jobs lost between February and June. The Texas Retail Outlook Survey reported a strong increase in sales after a negative reading last month. The employment index contracted for the second straight month, but part-time employment, hours worked, and earnings were positive. The general outlook for retailers improved as back-to-school sales and tax-free weekend promotions boosted retail business.
Second quarter personal income per capita growth was negative for the seventh straight quarter in Texas. Per capita income lagged the national average by about $3,000, a spread that widened after the 2014 oil bust. Texas total private employee hourly earnings fell 1.9 percent and declined in every major metro. In Dallas and San Antonio, hourly earnings fell 3.1 and 0.3 percent, respectively but remained positive YTD. Austin and Houston continued to struggle with stagnant wages as hourly earnings decreased 0.1 and 0.6 percent this year, respectively. Wages also declined in Fort Worth but were relatively flat on the year.
Texas manufacturing jobs paid a 10.6 percent premium in hourly earnings relative to the national average but declined 0.3 percent YTD. Fort Worth had the highest manufacturing wages, paying 47.7 percent more than the statewide average but was down 1.4 percent YTD. Manufacturing earnings fell 0.2 percent in Houston as durable goods employment contracted for the first time this year. San Antonio was the outlier for wage growth, rising 12.7 percent YTD while remaining 20.2 percent below the Texas average.
The U.S. Consumer Price Index (CPI) ticked up 1.9 percent amid spikes in gasoline prices following Hurricane Harvey. The core inflation rate, which excludes the often-volatile energy and food sectors, increased 0.2 percent, its largest gain since February. Unsurprisingly, Houston observed even greater price pressures as the Houston CPI jumped from 1.9 to 2.2 percent. Price pressures for gasoline, food, and beverages accounted for most of the Houston price increases.
The U.S. real goods trade deficit inched down 1.4 percent to $61.8 billion as a decline in commodity imports outpaced that of exports. Total Texas commodity and manufacturing exports decreased 7.5 and 1.3 percent, respectively, after the Port of Houston's temporary shutdown during the hurricane. The combination of production disruptions and shipping obstacles pulled petroleum exports down 4.1 percent. Texas crude oil exports only fell 2.3 percent, compared to a 9.7 percent drop in national crude oil exports, remaining 2.5 times greater than prior to the 2015 lifting of the oil export ban. Strong global economic growth and the falling value of the dollar will likely support upward trending export growth throughout the next two quarters. The Texas trade-weighted value of the dollar4 has declined every month in 2017, falling 8.1 percent YTD. Mexico, Texas' largest consumer, received more than a third of July exports and continued to prosper among strong economic growth. NAFTA renegotiations continued to present a potential headwind to Texas-Mexico trade activity.
1All monthly measurements are calculated using seasonally adjusted data, and percentage changes are calculated month-over-month, unless stated otherwise.
3Crude oil production data lag this report by one month.
4The Texas trade-weighted value of the dollar is generated by the Federal Reserve Bank of Dallas. Its release typically lags the Outlook for the Texas Economy by one month.