|Outlook for the Texas Economy||Outlook for the Texas Economy||Luis Torres, Wesley Miller, and Bailey Cuadra||2017-09-07T05:00:00Z||technical-report||Texas Economy|
July 2017 Summary1
This review does not account for the impacts of Hurricane Harvey and the ensuing recovery process but reflects the economy through July.
The Texas economic expansion continued amid favorable labor market conditions. Employment growth surpassed 188,000 new jobs for 2017, just 5,300 short of the 2016 total. The statewide unemployment rate posted the largest decline in the country, falling 0.3 points to 4.3 percent. As a result, Texas wages increased more than twice the rate of national wage growth. However, wage growth struggled to match home price appreciation, augmenting housing affordability concerns. Potential headwinds to the Texas economy include energy price volatility and trade uncertainty, especially with Mexico.
Texas sustained this strong economic growth as the Texas Business Cycle Index (a measure of current economic activity in the state) increased at a quarterly annualized rate of 5.3 percent. The major metro Business Cycle Indices indicated increased economic activity throughout the Texas Urban Triangle. Austin and Dallas posted quarterly annualized growth above 4 percent, while Fort Worth reached 5.2 percent growth. The Houston index slowed to 1.3 percent amid its first employment decline since August 2016.
The Texas Leading Economic Index (a measure of future directional changes in the business cycle) advanced as permits increased and the Texas value of the dollar depreciated. Declines in the number of initial unemployment insurance claims also pushed the index forward. Consumer sentiment was positive as the Texas Consumer Confidence Index jumped 8.5 points to 140.3, its second highest reading since 2007. The strength of the job market and overall health of the Texas economy comforted Texas consumers.
Despite weak inflation, interest rates rebounded after falling to year-to-date (YTD) lows in June. While overall prices were flat, the uptick in oil prices and strong corporate earnings pushed the ten-year U.S. Treasury bond yield to a monthly average of 2.32 percent. The Federal Home Loan Mortgage Corporation 30-year fixed-rate inched up to 3.97 after a three-month decline. However, relatively strict lending standards and regulations continued to offset the impact of the historically low interest rates.
Texas housing sales decreased 5.1 percent using seasonally adjusted data amid persistent supply constraints. Current residential construction activity, measured by the Residential Construction Cycle (Coincident) Index, inched forward due to favorable employment trends in the industry. However, the Residential Construction Leading Index (RCLI) dipped as multifamily construction declined, signaling a slowdown in the residential construction business cycle. (For additional housing commentary and statistics, see Texas Housing Insight at recenter.tamu.edu.)
The average West Texas intermediate crude oil spot price increased to $46.63 (nonseasonally adjusted) after falling to a nine-month low in June. Concerns regarding the global glut waned despite increased U.S. and OPEC crude oil production. The number of active rigs in Texas reached 4642—up 49.7 percent this year—and crude oil production increased 2.8 percent3. The natural gas market remained saturated, holding the Henry Hub spot price below $3 per million BTU2 (British thermal unit). Increased oil drilling, which produces natural gas as a byproduct, 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 remains the largest gas-producing state, accounting for 24.1 percent of national production.
Texas monthly nonfarm employment increased by 19,600 jobs, pushing the year's total increase above 188,000. The statewide unemployment rate fell 0.3 points to 4.3 percent, the largest decrease in the nation, while initial unemployment insurance claims fell to their lowest level since May 2008. Economic growth certainly contributed to the unemployment decline, but the labor force contraction also played a substantial role. After spiking above 64 percent this spring, the statewide labor force participation rate fell to 63.1 percent. Labor force participation peaked at 69.3 percent in 1995 and currently hovers around 1976 levels.
Every major Texas MSA observed a falling unemployment rate for the fourth consecutive month. Austin boasted the lowest rate at 3.0 percent followed by San Antonio at 3.3 percent. Dallas and Fort Worth both were 3.5 percent, while Houston recorded a 4-point drop to 4.6 percent.
Dallas and Fort Worth led employment growth, adding 5,300 and 5,500 jobs, respectively. Revised numbers indicate that employment stalled in Austin, posting less than 0.1 percent monthly growth since May. San Antonio added 2,000 jobs as goods-producing and government employment increased. Employment staggered in Houston for the first time this year—losing 6,500 jobs in July—but maintained the largest YTD growth in the Texas Urban Triangle at 1.7 percent. Most of the job loss occurred in construction, where workers adjusted after the completion of large-scale nonresidential projects (i.e. Houston Methodist The Woodlands Hospital).
Texas service sector employment remained robust, adding 15,500 jobs on top of the 31,800 gained the previous month (revised). The FIRE (finance, insurance, and real estate) industries expanded for the fifth consecutive month, adding 20,000 jobs YTD. Leisure and hospitality led employment growth with 7,000 new jobs, followed by a 5,600 job-increase in accommodation and food services.
The Texas Service Sector Outlook Survey reflected continued expansion, corroborating strong employment numbers. The employment, hours worked, and wage indices rose, albeit at a slower pace than the prior month, amid increased business activity. The revenue index ticked upward as sale prices outpaced wage growth. Respondents expressed significant concern regarding political uncertainty, particularly regarding immigration, health care, and tax reform.
Retail employment halted its five-month slide, recovering 1,300 of the 22,000 jobs lost between January and June. Dallas and Fort Worth added 412 and 335 retail jobs, respectively, while Houston gained 1,389. Retailers continued to express frustration in the Texas Retail Outlook Survey as the sales index fell below zero for the first time this year. The general business activity and future outlook indices decelerated, reflecting decreased confidence in the retail environment.
The goods-producing sector continued to advance, adding 4,100 jobs. Texas manufacturing employment grew 5.4 percent annualized quarter over quarter, well above the national rate of 0.6 percent. Growth rates were even higher in Houston and Fort Worth at 10.3 and 5.9 percent, respectively. Austin's manufacturing growth rate remained positive at 2.4 percent but decelerated substantially from last month's 8.0 percent increase. Growth rates returned to positive territory in Dallas and San Antonio but remained under half a percent.
The Texas Manufacturing Outlook Survey confirmed employment growth and longer work weeks, and indicated a deceleration in employee wages and benefits. Revenue growth outpaced input price increases, contributing to improved business sentiment. The future outlook index reflected strong optimism but certain industries had hardships. Multiple respondents in the fabricated metals industry noted soft demand, while foreign competition presented stark challenges to electrical equipment, appliance, and component manufacturing respondents.
Total construction activity contracted amid declines in multifamily residential and office building construction. The construction industry lost 900 jobs, holding the annualized employment growth rate below a quarter of a percent. The total value of construction fell 3.5 percent, continuing its downward trend.
Texas total private employee hourly earnings rose 3.1 percent year over year, suggesting a tightening labor market. Hourly earnings in Dallas jumped 5.2 percent year over year, while Austin observed a 3 percent increase. San Antonio wages maintained their upward trend, rising 2.5 percent year over year. In Houston, wages were flat despite the continued economic recovery from the oil bust.
Texas manufacturing jobs paid a 9.8 percent premium in hourly earnings relative to the national average but declined 0.2 percent YTD. Fort Worth had the highest manufacturing wages, paying 49.2 percent more than the statewide average but is down 0.3 percent YTD. Manufacturing earnings rose half a percent in Houston for the second consecutive month, stemming from solid job growth in durable goods manufacturing. San Antonio was the outlier for wage growth, rising 13.3 percent this year while remaining 19.9 percent below the Texas average.
The U.S. Consumer Price Index (CPI) ticked up 1.7 percent—still below the Fed's 2 percent target. The core inflation rate, which excludes the often volatile energy and food sectors, rose marginally (0.1 percent). The Dallas CPI fell to 1.8 percent but exceeded the national CPI in each of the previous three months as housing and apartment rents increased.
The U.S. real goods trade deficit increased 1.3 percent as exports slipped in automobiles and parts, consumer goods, and industrial supplies and materials. Total Texas commodity and manufacturing exports decreased 6.4 percent and 6.5 percent, respectively, led by a sharp drop in computer and electronic product exports. Texas crude oil exports fell 13.5 percent but remained nearly three times greater than prior to the 2015 lifting of the oil export ban. Strong global economic growth and the falling value of the dollar will likely support upward trending export growth throughout the next two quarters. The Texas trade-weighted value of the dollar4 continued its downward trend, falling 1.9 percent month over month and 8.4 percent since January. Mexico, Texas' largest consumer, received more than a third of July exports and continued to prosper among strong economic growth. Upcoming NAFTA renegotiations present a potential headwind to Texas-Mexico trade activity.
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 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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