|Outlook for the Texas Economy||Outlook for the Texas Economy||Luis Torres and Wesley Miller||2017-04-11T05:00:00Z||technical-report||Texas Economy|
February 2017 Summary*
The Texas economy remained strong as the energy sector performed well. Oil prices rose and stimulated production. Manufacturing employment benefited from the increased energy activity, adding 3,900 jobs. Texas wages continued to lag inflation, thereby reducing consumers' purchasing power. However, consumers remained optimistic regarding future economic conditions. Housing prices in Texas appreciated as supply continued to fall short of growing demand. Recent domestic migration patterns highlight the strength of the Texas economy and expectations remain optimistic; Dallas (1st), Austin (5th), and Houston (9th) led the nation in domestic in-migration last year. Potential headwinds to the Texas economy include trade uncertainty (especially with Mexico), volatile energy prices, and tax policy uncertainty.
The Texas Business Cycle Index, which measures current economic activity in the state, continued its upward trend. The Dallas Fed's Texas Leading Index, which signals future directional changes in the business cycle, rose marginally at 0.2 percent. The index was positively affected by higher oil prices, increased well permits, and declining initial unemployment insurance claims. The index was negatively affected by the decline in help-wanted advertising and the number of average weekly hours worked by employees. The major metro Business Cycle Indices indicated that economic activity slowed throughout the Texas Urban Triangle; the Dallas index fell quarter-over-quarter below zero for the second consecutive month. The Texas Consumer Confidence Index reached record levels, but monthly consumption remained weak.
Interest rates were flat after declining in January. The ten-year U.S. Treasury bond held at 2.4 percent, and the Federal Home Loan Mortgage Corporation's 30-year fixed-rate settled at a 4.2 percent average for the third consecutive month. Interest rates are expected to rise during the year as the Federal Reserve plans to raise the federal funds rate; monetary policy remains on a normalizing path as the economy moves forward.
Texas housing demand was steady as the average number of days on market settled at 57, but sales declined because of tight supply. The supply of homes for sale remained constrained as the statewide months of inventory fell to 3.5 months—the lowest since May 2015. A combination of restricted supply and persistent demand in the Texas housing market caused prices to appreciate. House price appreciation has been spurred by the state's economic and population growth over the past decade. Since 2007, employment and population have increased over 10 percent more in Texas than the nation. (For additional housing commentary and statistics, see Texas Housing Insight at recenter.tamu.edu)
Crude oil prices continued to rise following OPEC's November output restrictions. West Texas Intermediate crude oil prices averaged $53.47 per barrel1 during February—a year-over-year increase of 79.1 percent. Consequently, the number of operating rigs in Texas increased to 374, the most since August 2015. The monthly production of crude oil in Texas has hovered at 96 million barrels per month since June 2016 but may increase if the price of oil continues to appreciate. The Henry Hub spot price of natural gas fell below $3 per million BTUs (British thermal units) as U.S. output expanded. The Energy Information Administration predicts that the U.S. will be a net exporter of natural gas by 2018 for the first time in almost 60 years. Texas remained the largest gas-producing state, accounting for 25 percent of national production.
Texas monthly nonfarm employment was stagnant, adding only 6,700 jobs, and the unemployment rate increased 0.1 percent. The increase in unemployment is attributed to the rising labor force participation rate, which ticked up for the second straight month to 63.8 percent. The monthly number of initial unemployment insurance claims fell 3.9 percent to their lowest value since 2008. Employment was relatively flat throughout most major metros, but Houston added 5,200 jobs because of the energy sector activity.
The goods-producing sector advanced, adding 8,300 jobs during February. The mining and logging industries added 3,400 jobs as energy activity advanced, while construction increased by 1,000 jobs primarily because of increased housing activity. Manufacturing added 3,900 jobs, two-thirds of which came from durable goods. The Texas Manufacturing Outlook Survey reported increased factory activity and output levels, resulting in increased employment, hours, and wages. The future business activity expectations index trended positive for the tenth consecutive month, but some unease emerged regarding the effect of global politics on exports.
The service-providing sector remained stagnant, losing 1,600 jobs or less than a 0.1 percent decrease. Five of the eight subsectors suffered employment decreases, including 5,600 government jobs. The trade, transportation, and utilities industries lost 10,700 jobs primarily from declining retail trade. Much of the service sector job losses were offset by education and health services, adding 11,700 jobs.
The Texas Retail Outlook Survey reported mixed signals; 28.0 percent of respondents reported increased sales but decreased employment. Retailers' outlook on future economic conditions were less optimistic, as respondents noted uncertainty regarding a potential border tax. Texas retail sales continue to lag retailer confidence measures. . Year-over-year retail sales remained positive, but slowed for the second straight month. The Texas Service Sector Outlook Survey indicated slowing growth as the revenue index dropped, which was negatively affected by tax refund delays. Respondents remained hopeful for deregulation and tax reform.
Per capita income, stagnant last year, picked up slightly during the fourth quarter. Texas income per capita remains approximately $1,950 lower than the national average. Real total private employee hourly earnings in Texas was flat and fell further below the national average. Texas hourly wages approached the national level in 2014 but currently exhibit a $0.50 wage gap. Wages in Texas struggled to remain above January 2007 levels because of the decline in the energy industry and the loss of high-paying energy-related jobs. While the job market remained tight, employment shifted toward lower paying industries, such as leisure and hospitality. Nationally, average hourly wages in the mining industry exceed leisure and hospitality jobs by 2.1 times.
All of the major metros reported hourly earnings above the state average. Austin offers the highest wages, where earnings were 12.9 percent and 8.6 percent higher than Texas and the nation, respectively. Earnings in Houston and Dallas also exceed than the national average. Real manufacturing employee hourly earnings were 10.6 percent higher in Texas than across the country. Fort Worth had the highest manufacturing wages, paying 55.9 percent higher than the statewide average.
Inflation ticked up as energy and housing prices appreciated; the consumer Price Index for both the U.S. and Houston increased 0.3 percent. The transportation component of the Houston index, which accounts for gasoline prices, rose 6.0 percent**, while the Houston housing component rose 1.9 percent**. (For additional housing commentary and statistics, see Texas Housing Insight at recenter.tamu.edu)
Texas export growth decelerated by 5.6 percent after a strong January but maintained a year-over-year growth of 9.2 percent. Real manufacturing exports were modest, increasing only 1.5 percent. The Texas trade-weighted value of the dollar continued to appreciate in February2, while the trade weighted value of the U.S. dollar declined 1.4 percent. Texas exports to China accounted for 6.2 percent of total exports, up from 4.7 percent in 2016. The proportional increase was balanced by exports to Mexico falling from 39.8 percent to 36.6 percent of total Texas exports. Overall, exports have remained stable, in both Texas and the U.S., despite exchange rate and currency market obstacles.
*All monthly measurements are calculated using seasonally adjusted data, and percentage changes are calculated month-over-month, unless stated otherwise.
2The 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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