Outlook for the Texas EconomyOutlook for the Texas EconomyLuis Torres and Wayne Day2016-09-19T05:00:00Ztechnical-report
Texas Economy

July 2016 Summary

The Texas economy exhibited steady although mixed signals in July. The number of jobs in the state increased by 23,600 for the month. Employment grew due to the services sector. Manufacturing and mining and logging employment in Texas declined while overall services continued a positive trend. Texas housing sales decreased across the state as building permits cooled.

The Dallas Fed's Texas Leading Index, which signals future directional changes in the business cycle, increased during the month. The index was positively affected by the U.S. leading index, oil prices, stock prices of Texas companies, and average weekly hours worked. The index was negatively affected by the appreciating Texas value of the dollar, decreasing well permits, new unemployment claims, and a slowdown in the amount of new workers sought after. The Texas Business Cycle Index that measures current economic activity continued to grow but decelerated.

Texas housing demand took a hit during July after a long stretch of positive activity. Statewide housing sales decreased 7.9 percent year-over-year on a seasonally adjusted basis (negative 7.6 percent not seasonally adjusted), while continuing a monthly slowdown that began in April. Austin (negative 4.5%), Dallas-Fort Worth (negative 7.3%), Houston (negative 8.8%), and San Antonio (negative 1.3%) all decreased annually. Most other Texas metros declined on a monthly basis as well. (Preliminary data for August show that July was not representative of a new trend as housing sales rebounded in August.)

On the supply side, the number of building permits issued for new single-family homes decreased. In recent months, Texas' building permits showed signs of slowing compared with the increasing trend in prior years. Dallas-Fort Worth was the only major metro to post gains year-over-year. Despite the decline, Houston (2,939) and Dallas-Fort Worth (2,666) still led the nation in the number of single-family permits issued, followed by Atlanta (1,842), Phoenix (1,382), and Charlotte (1,247).

Months of inventory of Texas houses for sale remained low at 3.7 months compared with 4.4 for the nation, seasonally adjusted (around 6.5 months of inventory is considered a balanced housing market).  Overall, supply has been restricted due to limited lot inventory and construction labor shortages.

Rising Texas home prices reflect the low inventories resulting from constrained supply.  Since 2011, Texas home prices have increased more rapidly than the rate of increase for the U.S. In 2Q2016, the U.S. and Texas FHFA Purchase-Only Housing Price Indexes increased from the year prior by 5.6 percent and 7.0 percent, respectively.

West Texas Intermediate crude oil prices averaged $44.90 per barrel compared with $51.17 a year earlier. Oil prices started an upward trend in February 2016 and have stabilized in recent months. High oil output and large inventories have been constraining oil price increases. The number of operating rigs in Texas ticked up for the second straight month from a previous negative trend, while oil production maintained recent production levels.  

Texas employment continued to register a positive annual growth rate at 1.5 percent seasonally adjusted, gaining 23,600 jobs over the month prior. After the employment growth rates in the United States and Texas converged in 3Q2015, Texas has continued below the seasonally adjusted annual employment growth rate for the U.S. 

Most of the annual employment growth occurred in the services sectors – primarily trade, transportation and utilities, financial activities, professional services, education and health services, and leisure and hospitality – while the information sector continues to decline over the prior year. Of the goods-producing industries, construction is the only to add jobs. According to the Dallas Fed's Texas Retail Sector Survey, retailer's perceptions of economic conditions in the retail sector increased after showing negative sentiment in prior months. The continued expansion in the services sectors follows the favorable expectations presented by the Dallas Fed's month of July Texas Service Outlook Survey.

The major monthly losses in employment occurred in manufacturing, mining and logging, information and financial services. Manufacturing employment, with a negative 3.7 percent year-over-year change, continued a year-over-year decline that started in April 2015. Concurrent with manufacturing employment contracting, the Dallas Fed's Manufacturing Outlook Survey remained in negative territory, suggesting continued weakness in the manufacturing sector.  Mining and logging employment continues to fall after reaching a peak in December 2014. The information sector has consistently down sized over that past decade and maintains that trend.

Houston continued to register a more drastic slowdown in overall employment versus the other major metros in the state. Surprisingly, even in the presence of dramatically lower oil prices and drilling activity, total jobs in Houston were still 0.2 percent greater than July 2015.

Job growth in Texas helped to keep the unemployment rate below the national average. Texas' seasonally adjusted unemployment rate equaled to 4.6 percent from 4.5 in June and compared with a July 4.9 percent rate for the United States. Unemployed insurance claims, which measure initial applications for unemployment insurance, were down 0.8 percent year-over-year in Texas and have flattened out. Labor force participation edged down after increasing in prior months, in accordance with the long-run trend in the U.S. and Texas labor markets of workers leaving the job market.

Real total private employee hourly earnings fell 0.4 percent year-over-year, registering a lower growth rate than the nation since August 2015. Real earnings in Texas have not consistently remained above January 2007 levels on a seasonally adjusted basis because of the fall in the energy industry and loss of energy related jobs. Additionally, nominal earnings have not kept pace with inflation. Real earnings for Austin increased above January 2007 levels while Dallas, Fort Worth, and San Antonio have not. Houston real earnings have decreased over the past year as a response to the energy decline.

Increases in the Consumer Price Index have been suppressed and remain low in the U.S. as a consequence of low oil prices and a strong dollar that has made imports cheaper. The Consumer Price Index for Dallas continued to post a positive value of 1.3 percent year-over-year after registering negative rates in the majority of 2015. The Consumer Price Index for Houston year-over-year change was 1.6 percent in June.

Because of weakening global demand, lower oil prices, and a stronger dollar, U.S. and Texas exports of all commodities and manufactured goods fell in July year-over-year with Texas exports falling for the fourth straight month. Both the U.S. and Texas traded value of the U.S. dollar appreciated in July and June, respectively. The dollar value reflects the appreciation of the U.S. dollar with respect to world currencies, making U.S. and Texas exports more expensive to foreign buyers.

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