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Outlook for the Texas EconomyOutlook for the Texas EconomyLuis Torres, Wesley Miller, Paige Silva, and Griffin Carter2020-10-22T05:00:00Ztechnical-report
Texas Economy

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Summ​​​ary1

Economic activity in Texas continued to recover in August after plummeting during the second quarter. The jobless rate decreased to 6.8 percent while labor force participation inched up. Almost all of the state's nonfarm hiring was concentrated in the service-providing sector, but both overall and service-providing payrolls were more than 5 percent below year-end levels. Increased construction employment supported the goods-producing industry amid ongoing energy-related layoffs despite modest improvements in oil prices. The Real Estate Center's Texas weekly leading economic activity index rose in September, although the pace of the recovery continues to be hindered by the ongoing pandemic and its impact on business operations.

Recently released data revealed Texas' gross state product plunged 29 percent on a seasonally adjusted annualized rate (SAAR) during the second quarter on top of a downward revision to 1Q2020 data. Texas ranked 14th in terms of national growth, which decreased 31.4 percent. Every industry except finance and insurance contributed to Texas' sharp decline, with major hits occurring in health care/social assistance, transportation/warehousing, wholesale trade, accommodation/food services, mining/quarrying/oil and gas extraction, and durable goods manufacturing.

As the economy continued to reopen in August, the Dallas Fed's Texas Business-Cycle Index improved 11.6 percent SAAR. The rate of recovery slowed, however, in every major metropolitan statistical area (MSA) except for Austin, where accelerated hiring pushed the index up 39.6 percent. The Fort Worth and San Antonio indexes decelerated to 56.7 and 32.3 percent SAAR growth, respectively. Meanwhile, economic activity rose just 16.8 percent in Dallas and 6.9 percent in Houston.

The Texas Leading Economic Index (a measure of future directional changes in the business cycle) increased for the fourth straight month, recouping almost half of the plummet since January. As the number of new COVID-19 cases descended in August after spiking the previous month, the Texas Consumer Confidence Index jumped six points but remained only slightly above April levels.

Low inflation expectations and persistent economic uncertainty surrounding the pandemic, pulling growth forecasts downward, kept interest rates at historically low levels. The ten-year U.S. Treasury bond yield inched up slightly but stayed below 0.7 percent2, while the Federal Home Loan Mortgage Corporation's 30-year fixed-rate was less than 3 percent for the first time in series history (starting in 1971). Mortgage rates extended a year-and-a-half-long slide within Texas during July, falling to 3.18 and 3.21 percent for non-GSE and GSE loans, respectively. (For more information, see Finding a Representative Interest Rate for the Typical Texas Mortgagee.)

Total Texas housing sales declined 4.1 percent in August from an all-time high the previous month as pent-up demand from the economic shutdown normalized. Nevertheless, sales were up 3.1 percent YTD compared with activity during the first eight months of 2019. The Texas Residential Construction Cycle (Coincident) Index, which measures current construction levels, increased for the third consecutive month as industry employment, wages, and construction values inched up. The Residential Construction Leading Index also accelerated amid rising permit issuance, suggesting ongoing activity in the coming months. A modest uptick in the real rate of the ten-year Treasury bill also pulled down the leading indexes. (For additional housing commentary and statistics, see Texas Housing Insight.)

The West Texas intermediate (WTI) crude oil spot price moved above $43 as OPEC production cuts put downward pressure on global inventories. Texas' active rig count flattened at 105, but crude oil production ticked up to 4.8 million barrels per day in July3, although levels remained down one-tenth YTD. On the natural gas front, the Henry Hub spot price rose to its highest reading since September 2019 at $2.37 per million British Thermal Units (BTU) as demand increased after reduced output this summer when storage is typically built up.

Hiring in nonfarm employment picked back up in August, adding 106,800 jobs. Less than half of the positions lost in March and April, however, have been recovered in the past four months. On the bright side, the Dallas Fed revised its annual employment projection upward from a 5.2 percent to 4.8 percent contraction. Continuous job growth pulled the unemployment rate down from the peak-pandemic level of 13.5 percent in April to 6.8 percent. Joblessness was lowest in Austin at 5.3 percent, followed by North Texas at 6.2 and 6.3 percent in Dallas and Fort Worth, respectively. San Antonio was not far behind with the metric falling to 6.4 percent. The Houston unemployment rate persisted above the state average at 8 percent but still registered more than a full percentage point decline.

The number of Texans filing initial unemployment insurance claims fell by nearly one-third to 256,200 in August despite weekly fluctuations (Figures 1 and 2). Average weekly continued unemployment insurance claims ticked down except for the last week of August, ending the month at 1.05 million. Claims, however, remained four and six times greater than pre-pandemic levels in February on an initial and continued basis, respectively. The labor force participation rate in Texas inched up to its highest reading since 2014 at 64.4 percent compared with 61.7 percent nationwide.

Texas' real income per capita increased 8.1 percent year over year (YOY) in 2Q2020, slightly less than the national rate of 9.2 percent. An escalation of transfer receipts by a factor of ten via government stimulus checks accounted for all of the improvement as the two other components, net earnings and dividends, interest, and rent, declined. Mining/quarrying/ oil and gas extraction, accommodation/food services, and health care/social assistance registered the largest quarterly contractions in earnings. Positive contributions were limited to the finance/insurance, professional/scientific/technical services, and government sectors.

Although aggregate earnings fell, Texas' average real private hourly earnings rose YOY for the seventh straight month, accelerating 3.4 percent. Austin remained the highest-paying major metro with a nominal wage of $30.75, jumping 4.5 percent in real terms. Fort Worth earnings ($28.07) recorded the greatest inflation-adjusted YOY improvement at 9 percent. The Dallas metric ($30.38) also exceeded the state average, increasing 3.9 percent. Houston ($28.38) and San Antonio ($24.96) real wages registered slower growth of 2.2 and 0.9 percent, respectively.

In Austin and Dallas, where metropolitan employment increased the most in percentage terms at 2.2 and 1.2 percent, respectively, the professional/business services and government sectors were the largest contributors to growth. A total 23,300 positions were recovered in Austin and 31,800 in Dallas. Hiring in Houston and San Antonio added 11,000 and 9,900 jobs, respectively, with government adding the greatest number of workers in each metro, followed by other services in the former and transportation/utilities in the latter. Employment growth in Fort Worth remained sluggish, gaining only 2,200 employees as leisure/hospitality losses nearly offset improvements in education/health services and other services.

Texas' goods-producing payrolls recovered a mere 1,600 jobs in August after laying off more than 150,000 workers since the onset of the pandemic. Energy-related employment contracted for the sixth consecutive month, shedding 2,900 positions amid ongoing uncertainty in the industry. In the manufacturing sector, nondurable goods hiring slowed but still added 1,100 employees. The decrease in durable-goods jobs flattened, but YTD losses were 34,600 jobs. The good news was  average hourly manufacturing earnings accelerated 7.2 percent YOY after accounting for inflation. San Antonio's industry wages ended a year-and-a-half-long fall, skyrocketing 26.6 percent in real terms. North Texas real earnings posted positive annual growth, but the Houston metric continued to plummet as the energy sector struggled. The Dallas Fed's Manufacturing Outlook Survey corroborated labor-market data with both the employment and wage indexes increasing. All other business indicators except for finished goods inventories were positive as outlook uncertainty lessened slightly as demand for goods rallied after COVID-19 declines. The pandemic and the upcoming presidential election, however, are prominent concerns.

The construction industry increased employment by 3,300 workers, but the expansion fell short of the 7,100 layoffs the prior month. The jobs added were unlikely higher-paying positions though, as average hourly construction earnings fell on a monthly and yearly basis after adjusting for inflation. Despite additional hiring, total construction values flattened as residential activity waned after three straight monthly improvements. Most of the decline was attributed to a pullback in San Antonio's single-family and multifamily investment. The latter, however, continued a steep upward trend, while single-family values exceeded their two-year average. Only Houston residential construction fell behind last year's pace, with the other metros posting steady YTD growth relative to the same period in 2019. The more volatile nonresidential sector posted a moderate increase after a steep decrease the previous month as school and hospital construction in Austin and Houston, respectively, picked up. Nonetheless, YTD nonresidential values fell 5.3 percent compared with values during the first eight months of last year as attention shifted to the residential sector. The movement is supported by uncertainty in the commercial sector due to the pandemic promoting the adoption of remote work and online shopping.

Hiring in the service-providing industry accelerated, adding 105,200 employees after a weak 39,000 the prior month. Professional/business services led, gaining 33,200 positions, followed by a 25,000-expansion in government employment. Three-quarters of those jobs were in the federal sector, likely Census-related. Other services and administration/waste management/remediation services also posted sizeable contributions of 14,300 and 17,400, respectively. The leisure/hospitality recovery, however, was still sluggish, recouping only 1,300 jobs after a 22,600-loss in July. The Dallas Fed's Service Sector Outlook Survey suggested still weak labor-market conditions with the number of respondents decreasing full-time and part-time employment, and hours worked offsetting the number increasing the same indicators. On the bright side, the wages and benefits metric rose for the third consecutive month. The revenue index inched back into positive growth territory as outlook uncertainty declined.

After faltering the previous month, Texas' retail sector expanded payrolls by 20,800 jobs. General merchandisers added 8,400 workers, exceeding pre-pandemic levels. Employment in building material/garden equipment/supplies dealers also trended upward, climbing for four straight months. Retail sales, however, fell 2.6 percent YOY after accounting for inflation. The Dallas Fed's Retail Outlook Survey corroborated additional hiring but also confirmed subdued sales with more than one-third of respondents reporting decreased revenues. Nevertheless, company outlook improved, and perceptions of future activity were overall positive.

The U.S. Consumer Price Index (CPI) rose 1.3 percent annually as transportation costs slowed their descent, decreasing only 4.1 percent YOY. Core inflation accelerated 1.6 percent but hovered below the Fed's 2 percent target. On the other hand, the local CPI in Houston fell YOY for the fifth straight month as gasoline prices persisted one-fifth below year-ago levels.

After the Texas trade-weighted value of the dollar4 inched up 2.2 percent in July, Texas' real commodity exports jumped 5.3 percent, but the rate of growth decelerated. Manufacturing exports ticked up just 1.4 percent as a decline in computer/electronic products and transportation equipment nearly outweighed accelerated petroleum/coal products and chemical shipments. Crude oil exports rebounded 15.1 percent amid increased deliveries to Taiwan and Singapore.

Total exports to North America contributed little to the Lone Star State's overall monthly improvement, ticking up just 3.2 percent in Canada and flattening in Mexico. Manufacturing commodities accounted for most of the deceleration, but the implementation of the United States-Mexico-Canada Agreement should reaffirm North American trade relationships in the long-term. Exports to China rose 5.6 percent, but expectations for a phase-two trade deal with China have dampened in the midst of tensions surrounding the pandemic.

The Center created a Texas weekly leading index to predict turning points in the Texas economy. (For more information, see COVID-19 Impact Projections on Texas Economy.) The index increased the last three weeks of September (Figure 3), but the pace of the recovery continues to be hindered by the incomplete reopening of the economy and future uncertainty regarding the pandemic. Initial unemployment claims trended downward on a weekly basis, although the number of new business applications normalized after reaching unprecedented highs in July. The real WTI oil price and the real rate for the ten-year Treasury bill fluctuated, their effects offsetting each other for much of the month. Further waves of infections can reverse improved mobility and spending, affecting the path to recovery.




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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 crude oil production typically lags the Outlook for the Texas Economy by one month.

4 The release of the Texas trade-weighted value of the dollar data typically lags the Outlook for the Texas Economy by one month. 


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Digital and Print2046https://www.recenter.tamu.edu/articles/technical-report/outlook-for-the-texas-economy https://assets.recenter.tamu.edu/Documents/Articles/2046.pdf

 

 

Outlook for the Texas EconomyOutlook for the Texas EconomyTexas Economy
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