|Outlook for the Texas Economy||Outlook for the Texas Economy||Luis B. Torres, Wesley Miller, and Paige Woodson||2018-07-10T05:00:00Z||technical-report||Texas Economy|
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May 2018 Summary1
Texas economic expansion continued amid increased energy and manufacturing activity. Low unemployment pulled workers back into the workforce, but wages remained suppressed. Despite stagnant earnings, inflationary pressures grew on multiple fronts due to transportation and housing costs. At the regional level, energy-driven metropolitan areas (e.g. Houston, Midland, and Odessa) benefitted from higher oil prices and prolific production. Crude exports remain elevated but stepped back slightly this month. In general, the Texas export boom continued, fueled by petroleum and transportation equipment. Retaliatory trade barriers on U.S. goods, however, pose a serious threat to Texas' current rate of growth.
Spurred by widespread employment gains, the Dallas Fed's Business-Cycle Index ticked up 5.5 percent on a quarterly seasonally adjusted annualized rate (SAAR) to its highest level since 2014. Growth in the energy industry pushed the Houston economy up 6.2 percent SAAR despite fading hurricane-related reconstruction stimuli. Austin's booming technology industry supported 6.2 percent growth, slightly above its two-year average. North Texas maintained a more modest expansion at 5.4 and 3.8 percent growth in Dallas and Fort Worth, respectively, while the San Antonio economy grew just 2.0 percent amid weak hiring activity.
The Texas Leading Economic Index (a measure of future directional changes in the business cycle) trended positive but decelerated to 5.7 percent growth year over year (YOY). The minor slowdown led to downward revisions from 3.6 to 3.3 percent growth in the Dallas Fed's 2018 statewide employment forecast. Gains in the Texas trade-weighted value of the dollar offset higher oil prices, low unemployment, and growth in the national economy. Despite favorable economic data, the Texas Consumer Confidence Index dipped for the third consecutive month amid rising trade tensions and NAFTA uncertainty. International commerce is a critical component to the Texas economy, supporting over 900,000 jobs in primarily higher-wage manufacturing subsectors.
Robust economic data and rising inflation expectations lifted interest rates to multiyear highs. The ten-year U.S. Treasury bond yield jumped 11 basis points to 2.98 percent as investors' confidence in the global economy outweighed trade concerns. The last time the ten-year yield surpassed 3 percent was in 2011. The Federal Home Loan Mortgage Corporation's 30-year fixed-rate posted a similar double-digit basis point increase to 4.59 percent. Despite remaining historically low, rising mortgage rates threaten to augment housing affordability issues, particularly for first-time buyers.
Pronounced shortages for homes priced less than $300,000 held Texas housing sales to just half a percent growth this month, but demand remained strong. Current residential construction activity, measured by the Residential Construction Cycle (Coincident) Index, reached its highest level since 2008 as industry employment and construction values remained elevated. This momentum should continue through the summer months as the Texas Residential Construction Leading Index (RCLI) extended its upward climb despite increased interest rates and fewer multifamily housing starts. (For additional housing commentary and statistics, see Texas Housing Insight at recenter.tamu.edu.)
The average West Texas intermediate crude oil spot price rose to $69.982 per barrel, up 44.4 percent YOY, as the United States renewed sanctions on Iranian oil. Prices cooled later in the month after Saudi Arabia and Russia agreed to relax OPEC production cuts after more than a year of compliance. The number of active rigs in Texas jumped to 5242, the most since the oil downturn in 2015, while crude oil production surpassed two million barrels per day2. Insufficient pipeline capacity out of the Permian Basin hindered additional growth and could force producers to slow drilling activity in coming months. An excess of natural gas byproducts from oil drilling contributed to pipeline bottlenecks. The Henry Hub natural gas spot price held at $2.8 per million BTU2 (British thermal units), down 11.1 percent YOY, and could drop further as producers rush to free energy transportation capacity.
Texas added 34,700 nonfarm jobs this month, marking 23 consecutive months of employment growth and pushing this year's total to 190,000. Job creation rose across all industries in each of the past three months except in the financial activities and information sectors. Improved job opportunities continued to lure Texans into the workforce, elevating the labor force participation rate to a three-year high at 63.9 percent. The increase in job seekers held the state's unemployment rate at 4.1 percent, slightly above the national rate of 3.8 percent. Initial unemployment insurance claims in Texas remained near a decade-low at 58,928. Labor markets in the major metros were even tighter, and unemployment rates fell across the board. In Austin and San Antonio, the local unemployment rate dipped to 3.0 and 3.4 percent, respectively, while the DFW rate fell to 3.6 percent. Houston was the exception with unemployment at 4.4 percent but remained well below its 5.7 long-run average.
Despite apparent tightness in the labor market, real private hourly earnings in Texas fell 1.3 percent YTD, lagging the national average by more than 50 cents. The historically low labor force participation rate represents hidden slack in the market and is preventing substantial wage increases despite low headline unemployment. Employers are also competing through nonwage benefits such as seasonal bonuses or increased paid leave. Workers in Dallas and Houston had worse wage environments, with YTD declines of 3.0 and 2.2 percent, respectively. Fort Worth wages extended a ten-month stagnation, falling 0.2 percent on the year. Austin and San Antonio faced similar conditions with real private hourly earnings down 0.8 and 0.1 percent YTD, respectively, despite maintaining some of the lowest unemployment rates in the state.
At the metropolitan level, Houston generated the largest employment growth in both absolute and percentage terms with 9,800 new jobs, pushing SAAR growth up 4.7 percent. Large gains occurred in the mining/logging and professional/business services industries. Data revisions revealed a spring slowdown in Austin's job creation, but upticks in leisure and hospitality led to 4,300 new jobs in May. San Antonio added 1,600 job, but SAAR growth decelerated to 0.6 percent as leisure, hospitality, and retail trade employment contracted. On the other hand, booming retail trade in Dallas lifted growth above 4 percent for the first time this year, generating 6,700 new jobs. Momentum in the goods-producing sector supported 3.3 percent growth in Fort Worth, establishing 3,100 new jobs this month.
Momentum continued in Texas' goods-producing sector as YTD job creation surpassed 63,000. The industry added a total of 51,900 jobs in 2017. The expansion stretched across multiple subsectors. Increased energy-sector activity pushed mining/logging and manufacturing employment up by 4,100 and 3,400 jobs, respectively.
Manufacturing employment boomed 9 percent SAAR in Houston, adding 5,500 jobs over the past two months but remained well below its 2014 peak. San Antonio posted solid growth at 6 percent, leading to 1,400 manufacturing jobs this year alone. In Dallas, manufacturing employment fell back slightly but maintained 3 percent growth. Fort Worth broke through a three-month stagnation, raising SAAR growth to 2.2 percent, primarily in the durable-goods subsector. Growth slowed to half a percent in Austin but showed signs of picking up in the summer.
Sluggish wages plagued Texas' manufacturing industry. Fort Worth paid the highest hourly manufacturing wages (Austin data are unavailable) at an average of $34.09 compared to $21.39 and $23.49 in the U.S. and Texas, respectively. The metro, however, topped out in 2016 despite improvements in today's global manufacturing environment. In real terms, Fort Worth's hourly manufacturing earnings declined 8 percent in two years, while the statewide average fell 2.8 percent. Industry wages also trended downward in Dallas after accounting for inflation, falling 1.5 percent over the same period. In contrast, Houston's real manufacturing wages rose 3.4 percent since 2016 and are trending upward. In San Antonio, wages spiked 13.2 percent last year but have since leveled off to more typical growth patterns, remaining 19 percent below the state average.
Weak earnings data contrast the Dallas Fed's Manufacturing Outlook Survey, in which a quarter of respondents increased wages and benefits. In addition, 50 percent paid higher prices for raw materials, suggesting inflationary pressure on multiple fronts. Overall, the industry was optimistic as the production index increased for the 23rd consecutive month, and 35 percent reported an improved outlook. Respondents, however, expressed concerns of retaliatory trade measures leading to spikes in input prices and barriers to foreign markets.
The construction industry added 5,800 jobs, the most since October following Hurricane Harvey, pushing this year's total above 22,000. The total value of construction ticked up after falling 3.4 percent on a three-month moving average last month. Investment continued to pour into the multifamily residential sector, primarily in DFW. The nonresidential construction slide paused amid school projects in San Antonio and DFW and hotel investment in north Austin. While construction activity has flattened over the past year, real hourly earnings in the industry jumped 6.1 percent since last May, reaching pre-recessionary levels.
The upward trend extended in Texas' service-providing sector, adding 21,400 jobs this month to a YTD total of 126,900. Education and health services led the way with 26,800 additional positions. Employment expanded at a slower pace in the professional/business services and trade/transportation/utilities industries. Hiring also slowed in the public sector, which accounts for 16 percent of Texas employment.
The Dallas Fed's Service Sector Outlook Survey corroborated solid job growth in the industry with a quarter of respondents noting full-time hiring increases, and 26 percent offering higher wages/benefits. Business optimism increased amid a YTD peak in the revenue index, but rising input prices moderated profits. Despite comments regarding global trade conditions, the outlook uncertainty index fell with 67 percent reporting no change from last month.
On the retail side, sales surged as more than half of the participants in the Dallas Fed's Retail Outlook Survey reported monthly increases. The survey indicated further evidence of inflationary pressure as over a third of retailers faced higher input costs and, as a result, lifted selling prices. Retailers have added 11,000 jobs so far this year, and more than a quarter paid higher wages and benefits according to the survey. Those near the southern border, however, struggled with a weaker peso weighing on Mexican demand.
Strong economic growth pushed the U.S. Consumer Price Index (CPI) up 2.8 percent YOY. The core inflation rate, which excludes the often volatile energy and food sectors, also surpassed the 2 percent benchmark. In Dallas, surging transportation and housing prices lifted the local CPI up 3.9 percent YOY, its largest increase since 2011. Gasoline prices in DFW generated most of the hike in prices, averaging above the other major metros throughout the month.
After accounting for inflation, Texas' total commodity and manufacturing exports increased 19.8 and 8.2 percent YOY, respectively. Some of this spark may be attributed to a rush of orders before retaliatory tariffs and quotas are implemented this summer. This month's growth, however, hardly represents a deviation from its year-long trend. Petroleum and transportation equipment fueled the export boom. Crude oil exports, however, dropped 5.4 percent YTD after unprecedented gains last year. The Texas trade-weighted value of the dollar3 maintained a year-long downward trend but showed signs of strengthening, a potential obstacle to export growth.
Mexico and Canada received 45 percent of this year's exports from Texas, remaining the state's primary trade partners. This trilateral relationship highlights the importance of a successful NAFTA renegotiation. China is the state's next largest trade partner, receiving 7 percent of exports from Texas. Escalating trade tensions and growing uncertainty present a serious headwind to the Texas economy.
All monthly measurements are calculated using seasonally adjusted data, and percentage changes are calculated month-over-month, unless stated otherwise.
The 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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