|Outlook for the Texas Economy||Outlook for the Texas Economy||Luis Torres and Wesley Miller||2017-06-07T05:00:00Z||technical-report||Texas Economy|
April 2017 Summary1
The Texas economy advanced amid increased energy activity and a tightening labor market. The number of active rigs reached a two-year high, led by production increases in the Permian Basin. Texas posted the largest monthly employment increase in the nation, led by large gains in education and health services. Employment growth, increased labor force participation, and low levels of initial unemployment insurance claims indicate that the labor market is heating up. Potential headwinds to the Texas economy include trade uncertainty (especially with Mexico), volatile energy prices, and tax policy uncertainty.
The Texas economy appeared stagnant in 2016, with gross domestic product (GDP) inching up only 0.4 percent. However, the contractionary second quarter masked the 3.4 percent fourth quarter expansion—the largest growth of any state. Upswings in residential construction, energy activity, and manufacturing stimulated growth in the Texas economy.
The positive trend in the Texas Business Cycle Index (a measure of current economic activity in the state) suggests that this momentum continued through the first four months of 2017. The index surpassed 4.0 percent year-over-year growth for the first time since September 2015. The major metro Business Cycle Indices indicated similar year-over-year growth throughout the Texas Urban Triangle. Houston posted the largest monthly percentage increase and maintained a steep upward trend, solidifying its recent economic recovery.
The Texas Leading Economic Index (a measure of future directional changes in the business cycle) dipped slightly as the price of oil slipped but maintained positive year-over-year growth, primarily from the decline in the Texas value of the dollar. Similarly, the Consumer Confidence Index reflected a favorable, yet adjusted outlook on the future. The index remained historically high but fell 10.0 percent from March, retracting almost all its post-election gains.
Texas housing sales declined 5.9 percent (seasonally adjusted) because of shortages of homes under $200,000. The average number of days on market fell to 55 days, and the months of inventory inched up to 3.8 months. The median sale price was flat for new homes but rose 10.2 percent year-over-year in the existing home market. (For additional housing commentary and statistics, see Texas Housing Insight at recenter.tamu.edu.)
Interest rates reversed and fell to their lowest point this year amid geopolitical tensions and soft national economic data. The ten-year U.S. Treasury bond yield dropped to 2.2 percent as investors rushed to secure safer assets. The Federal Home Loan Mortgage Corporation 30-year fixed-rate fell below 4.1 percent, providing some assistance to housing affordability pressures.
The average West Texas Intermediate crude oil spot price ticked up to $51.06 but was down 6.1 percent after seasonal adjustments. The number of active rigs in Texas rose to a two-year high of 4252 and crude oil production leveled at 3.3 million bpd2,3. The Henry Hub spot price of natural gas rose to $3.10 per million BTU2 (British Thermal Unit), despite saturated inventories. Horizontal drilling technology in the U.S. has contributed to a global natural gas glut. The Energy Information Administration predicts that the U.S. will be a net exporter of natural gas by 2018—the first time in nearly 60 years. Texas remained the largest gas-producing state, accounting for 23.7 percent of national production.
Texas led the nation in monthly nonfarm employment growth, adding 30,400 new jobs, and pushed this year's net job increase above 110,300. The Dallas Federal Reserve forecasts a 289,300 job increase in 2017. The statewide unemployment rate remained unchanged at 5.0 percent, and the labor force participation rate surpassed 64 percent for the first time in two years. The unemployment rate varied from 3.6 percent in Austin to 5.7 percent in Houston, but all major metros exhibited a monthly decline. Moreover, the number of initial unemployment insurance claims in Texas remained at pre-recessionary levels, corroborating the health of the Texas labor market.
Job growth was mixed across the Texas Urban Triangle. Houston added 13,700 jobs—its largest monthly increase since 2014—in response to the continued energy sector recovery. San Antonio added 3,800 jobs, pushing this year's net increase above 6,000. Dallas lost 15,600 jobs, primarily in the professional/business services and leisure/hospitality industries but still led the state in year-over-year job growth at 3.1 percent. Employment dipped by 0.3 percent in Fort Worth, resulting from 3,200 lost jobs but maintained a 5,500 net increase for the year. Austin lost 400 jobs but maintained 3.0 percent year-over-year growth.
Goods-producing sector employment growth slowed but sustained its first-quarter gains. In response to increased energy activity, the mining and logging industry added 3,300 jobs, while manufacturing posted an 8,100 job increase. All of the Texas Manufacturing Outlook Survey's labor market indices (employment, wages, hours worked) increased, albeit at slightly decreasing rates. Manufacturers noted production and demand increases and remained optimistic for the next six months. Conversely, the construction industry lost 10,300 jobs, offsetting most of the manufacturing, mining, and logging gains.
After a stagnant first quarter, the service-providing sector added 29,300 jobs and accounted for nearly all of this month's total employment growth. Education and health services recorded the largest gains with 10,400 jobs added. Professional and business services employment increased by 7,400 jobs, followed by a 6,100 job increase in leisure and hospitality. Job losses occurred only in the information industry, which contracted by 3,500 jobs and fell 4.5 percent year-over-year.
The Texas Service Sector Outlook Survey confirmed increases in employment and work-week length. The revenue index was positive but fell 3.1 points amid rising input prices. Respondents from educational services to telecommunications commented on the need for deregulation and tax reform. Additionally, employers responded to labor shortages through wage and benefit increases.
Retailers noted similar concerns in the Texas Retail Outlook, particularly regarding border adjustment tax uncertainty. The retail sales index increased despite rising input costs and falling sales prices. An uptick in retail sales4 and the retail sales index improved retailers' expectations of future economic conditions.
Real total private employee hourly earnings in Texas jumped 2.4 percent—its largest monthly increase in over a decade—as labor market conditions appeared to tighten. Monthly wage growth occurred in all the major metros, but a stagnant trend persisted in Dallas, Fort Worth, and Houston. On the other hand, San Antonio remained on its two-year upward trend as wages rose 5.4 percent year-over-year.
Real manufacturing employee hourly earnings were flat in Texas but remained 10.6 percent higher than the national average. Manufacturing wages increased 1.0 percent in Dallas, just below the state level. Fort Worth had the highest wages, paying 65.6 percent and 49.7 percent more than the national and statewide averages, respectively. Manufacturing wage pressure softened in Houston despite large employment gains. Moreover, San Antonio manufacturing wages remained below the state average but continued their upward trend.
After dipping in March, the U.S. Consumer Price Index (CPI) increased by 0.2 percent, but the headline year-over-year rate fell to 2.2 percent. Natural gas and electricity prices generated the monthly uptick. The core inflation rate, which excludes the often-volatile energy and food sectors, rose marginally at 0.1 percent. The CPI for Houston fell below 2.1 percent, as falling communication and education prices offset utility price inflation. Despite the weak CPI numbers, the Federal Reserve remains on track to raise the federal funds rate in June.
The goods trade deficit widened to $67.6 billion as U.S. commodity exports fell 3.5 percent. Despite a decline in the Texas trade-weighted value of the dollar5, Texas commodity and manufacturing exports fell 6.7 percent and 5.5 percent, respectively—their first contractions of the year. Exports fell substantially for chemicals, computer and electronic products, and transportation equipment. However, the overall health of the North American economy should support a continued upward trend.
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 Federal Reserve Bank of Dallas seasonally adjusts Texas nominal retail sales data and the data release typically lags the Outlook for the Texas Economy by one month. The series is converted into real terms using the Consumer Price Index.
5The 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.
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