|Outlook for the Texas Economy||Outlook for the Texas Economy||Joshua Roberson, Weiling Yan, and John Shaunfield||2022-05-16T05:00:00Z||technical-report||Texas Economy|
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The Texas economy continued forward at a strong pace during January. The outlook for the state's economy is optimistic, though rising inflation is still a concern. Payroll growth remained steadfast, exceeding pre-pandemic levels for three months and counting. The service industry, accounting for the majority of the growth, reached record levels. With the robust labor demand, private hourly earnings reached historic levels, and hiring accelerated in all major metropolitan areas. Oil prices skyrocketed over previous months due to the aggravated inflation. Nevertheless, economic indexes indicated a strong economy amid people's expectations on its continued growth, showing strong confidence across the board. Containment of the pandemic is vital as additional waves of infection can weigh on consumer behavior and slow down or reverse economic progress.
Texas' economy extended its 20-month recovery in January according to the Dallas Fed's Texas Business-Cycle Index. Economic activity was up 8.6 percent over last month on a seasonally adjusted annualized rate (SAAR). Corroborating the state's index, all the major metros indexes rose as well. The largest gains in the business-cycle index came from Dallas and Austin, doubling—and tripling in Dallas' case—at 37.7 and 26.9, respectively. Meanwhile, Houston and San Antonio had increases of 11.2 and 14.8 percent, respectively. Fort Worth had the lowest growth at 6.8 percent.
Economic recovery is expected to continue as the Texas Leading Economic Index (a measure of future directional changes in the business cycle) climbed for the sixth straight month. Strong real oil prices, expectations about continued growth, and a robust Texas economy that allowed for stock-price increases of Texas-based companies, job gains over pre-pandemic levels, and increased average weekly hours worked in manufacturing, which all contributed to the favorable outlook. The Texas Consumer Confidence Index decreased compared with December amid mounting concerns regarding high inflation, which had emerged as a major headwind for the growing economy.
Market expectations are for the Federal Reserve to accelerate the tapering of assets purchases and to increase the fed funds rate in 2022 in an effort to combat rising inflation. The ten-year U.S. Treasury bond yield rose to 1.8 percent2, up 0.3 percent from the previous month. The Federal Home Loan Mortgage Corporation's 30-year fixed-rate hovered around 3.1 percent for the third consecutive month. The median mortgage rate for the typical Texas homebuyer climbed to 3.3 percent for GSE loans in December3 and rose to 3.1 percent for non-GSE loans. Refinance applications have declined on a monthly basis and were down 37.5 percent year over year (YOY). Month-over-month (MOM) purchase and refinance applications diminished 12.4 and 13.6 percent, respectively. (For more information, see Finding a Representative Interest Rate for the Typical Texas Mortgagee.)
The Texas Residential Construction Cycle (Coincident) Index, which measures current construction activity, decreased nationally and within Texas due to employment dips in the industry outweighing construction gains. The Texas Residential Construction Leading Index (RCLI) leveled out and could increase in the coming months, signaling an increase in future activity. The downward trend in the leading index was reverted by an increase in weighted building permits and residential construction start values along with the ten-year real Treasury bill continuing to fall. The major metro's leading indexes continued to decline, indicating slower activity in the coming months. Current inflationary conditions due to supply chain issues, placed downward pressure on construction activity and may impede growth in the coming months.
The West Texas Intermediate (WTI) crude oil spot price rose drastically to an average $83.22 per barrel, an $11.50 increase over the month. Texas' active rig count balanced at 253, though crude oil production reduced slightly to 4.89 million barrels per day in December4. The volatility of the natural gas market rose Henry Hub spot price by 14.2 percent to $4.38 per million British thermal unit (BTU). Energy prices, however, are expected to continuously increase given widespread sanctions imposed on Russia in response to their invasion of Ukraine.
Texas nonfarm employment added 50,900 jobs in January, expanding 5.7 percent YOY. The nonfarm payroll had exceeded the pre-pandemic payroll for the third consecutive month. The number was still increasing on account of a record employment in the service sector industry. Meanwhile, the goods-producing industry, especially the mining/logging sector, still had 67,000 jobs to recover. Within the Texas Triangle, which contains the state's five largest cities, San Antonio finally recovered all the jobs lost due to the pandemic, leaving Houston the only metro that is yet to surpass pre-pandemic levels. The state's solid employment performance pushed the Dallas Federal Reserve's annual employment forecast up to 2.9 percent for 2022, an increase of 382,200 jobs.
The unemployment rate remained at 4.8 percent, dropping 2.1 percent year to date (YTD). The percentage of unemployed workers was still above the national average of 4 percent. The state's labor pool has continuously expanded since June 2020, and the Texas labor force hit a new historical high in January with more than 14.3 million available workers. Correspondingly, the state's labor force participation rate elevated to 63.3 percent. Unemployment rates in the major metros all improved with Dallas inching down to 4.1 percent and Fort Worth and San Antonio both dropping to 4.3 percent. Joblessness remained lowest in Austin and highest in Houston, where unemployment was 3.3 and 5.4 percent, respectively.
The number of Texans filing initial unemployment insurance claims dropped 300 cases per week in January (Figure 1). However, due to spikes in COVID-19 cases in the Texas Triangle and people wanting to return to work after the holiday season, initial claims filed in these MSAs rose 17.8 percent per week. Houston had the biggest increase with 910 additional weekly claims (Figure 2). Continued unemployment insurance claims persisted with a modest increase of 0.2 percent in January despite job demand continuing to be stout and the economy being in expansion mode.
The state's blooming labor market could also be reflected in the rising wage rate. In January, the average real private hourly earnings hit historical high levels in Texas with the highest rates offered in Dallas ($34.18) and Austin ($32.13). Meanwhile, the average rate in Fort Worth ($31.67) followed closely with the national rate ($31.70). Additionally, San Antonio ($27.53) posted the largest monthly increase at 0.82 percent. After adjusting for inflation, Houston ($30.24) reported a marginal decrease as real wages subsided 1.04 percent.
Hiring across all the major metros was mixed with strong gains and some job losses. Among the 19,000 positions gained in Dallas, trade/transportation utilities, retail trade, and leisure/hospitality contributed 16,500 of them. San Antonio registered the second highest number of jobs at 9,200, with the service providing sector leading in the metro. Fort Worth gained 585 positions, a modest net increase, with the retail trade sector gaining 4,600 jobs. This was offset by the transportation sector losing 3,700 positions. Austin and Houston posted January job losses of 1,100 and 224, respectively, with mining/logging/construction and transportation/utilities sectors accounting for the majority of the decrease.
Though still below the pre-pandemic levels, momentum in Texas' goods-producing payroll accelerated in January. Energy-related payroll contributed 3,500 gained jobs, while manufacturing lost 400 workers due to the constrained supply chain. On the flip side, according to the Texas Manufactured Housing Survey (TMHS), home manufacturers were getting creative regarding building efficiency with less labor and fewer materials wasted in the face of sudden surges in COVID-19 cases pushing up employee absenteeism. The labor-supply shortage in Texas' manufactured-housing industry bumped manufacturing wages up 1.1 percent YOY after adjusting for inflation, while the national average ticked down 1.6 percent YOY. The Dallas Fed's Manufacturing Outlook Survey reported slower growing factory activities. The production index, though still above average, noted an eight-month low reading. Uncertainty escalated with the Omicron Coronavirus surge and customer demand volatility.
Despite the overall gains in the goods-producing sectors, Texas' construction sector removed 800 workers. Average hourly construction earnings tilted up to a nominal wage rate of $28.64 per hour, though the average declined 0.3 percent YOY in real terms amid inflationary pressure. Single-family construction values increased 3.4 percent MOM. Total construction values picked up 3.9 percent MOM. In January, residential values shrunk 2.2 percent as construction activities for single-family, two-family, multifamily units all decreased. Meanwhile, non-residential values expanded 29 percent as construction values for hotels shot up 798.7 percent and warehouses increased 88.5 percent.
Despite the Omicron wave, Texas' service-providing sector added 48,600 employees, rising 5.9 percent YOY. Accelerated activities in wholesale and retail trade resulted in 19,400 additional workers in the trade payroll, and the loosening pandemic policies helped expand the accommodation/food services payroll by 13,500 workers, recovering 98.6 percent of the pre-pandemic labor demand. The Dallas Fed's Service Sector Outlook Survey portrayed a less optimistic view as business executives reported a notable decrease in the revenue index. While employment corroborated continued extension in hiring and hours worked, the perception on the short-term growth rate slid due to the spread of the Omicron variant. Expectations of future conditions, however, remained stable.
In January, total employment in the Texas retail industry gained 18,800 positions. While building material/garden equipment/supply dealers, food/beverage stores, and general merchandise stores surpassed the pre-pandemic levels, adding at least 13,000 positions, employment at clothing/clothing accessory stores still depended on customer perception of the pandemic. The Omicron variant negatively impacted retail business activities. According to the Dallas Fed's Retail Outlook Survey, the sales index plunged from 12.4 in December to -8.1 in January, its weakest reading in three months. On the bright side, while the perception of broader business conditions moved to the negative territory, respondents' expectations for future activity were mixed but remained optimistic.
The U.S. Consumer Price Index (CPI) jumped 7.5 percent YOY, setting a record for the highest the index has been in decades. Costs for food/beverage, housing, transportation, medical, and city transportation rose rapidly, while other components rose at a moderate pace. Similar fluctuations in the DFW CPI resulted in an annual growth of 7.8 percent, the highest since the 1980s. The U.S. core inflation index, which excludes food and energy, climbed 6.3 percent, persisting at three times over the Fed's 2 percent target.
The Texas trade-weighted value of the dollar5 appreciated by 6.0 percent YOY in December, making domestic goods less affordable to foreign buyers. Texas' real commodity exports declined for the second month, falling 0.9 percent MOM in January. Despite elevated foreign demands in transportation equipment, manufacturing exports fell as shipment in petroleum/coal sunk by a significant 10 percent. Crude oil exports accelerated 2.6 percent from last month and remained well above the YTD average, at almost double the previous year. Strong oil prices and high demand have helped stir producers into bringing production well above pre-pandemic levels.
1 All measurements are calculated using seasonally adjusted data, and percentage changes are calculated month-over-month, unless stated otherwise.
2 Bond and mortgage interest rates are nonseasonally adjusted. Loan-to-value ratios, debt-to-income ratios, and the credit score component are also nonseasonally adjusted.
3 The release of Texas mortgage rate data typically lags the Outlook for the Texas Economy by one month.
4 The release of crude oil production typically lags the Outlook for the Texas Economy by one month.
5 The release of the Texas trade-weighted value of the dollar typically lags the Outlook for the Texas Economy by one month.
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