Outlook for the Texas EconomyOutlook for the Texas EconomyLuis Torres and Wayne Day2016-10-13T05:00:00Ztechnical-report
Texas Economy

August 2016 Summary

​The Texas economy marched forward in August. The number of jobs in the state increased by 10,400 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. The energy sector appears to be improving with sustained production and increased rig operation. Texas housing sales increased, although metro sales were mixed. State building permits increased but at a slower rate than in years prior.  

Real GDP numbers for the metros during 2015 were recently released by the Bureau of Economic Analysis (BEA). The major metros remained at healthy rates of annual growth, although real GDP for Texas during 1Q2016 showed a deceleration, which will likely bear out for the metros, especially Houston, when the data becomes available. Personal consumption expenditures for Texas, also recently released by the BEA, increased during 2015 over the prior year but at a lower rate primarily due to declining gasoline prices.

The Dallas Fed's Texas Leading Index, which signals future directional changes in the business cycle, edged down during August. The index was positively affected by the U.S. leading index, oil prices, new unemployment claims, 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, 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 at a decelerated pace.

Texas housing demand was relatively robust after a hiccup during July but fairly mixed at the metro level. Statewide housing sales increased 7.4 percent year-over-year on a seasonally-adjusted basis (positive 7.2 percent not seasonally adjusted), while continuing a monthly cooling that began in early spring. Austin (positive 4.7 percent), Dallas-Fort Worth (positive 5.2 percent), Houston (positive 8.3 percent), and San Antonio (positive 12.1 percent) all increased annually. Dallas-Fort Worth has exhibited a slowdown the past few months following rapid expansion the past couple of years. On a year-to-date basis, Houston is ahead of the same period during 2015 by 1.1 percent while Dallas-Fort Worth is up by 4.8 percent (nonseasonally adjusted).

On the supply side, the number of building permits issued for new single-family homes increased both on an annual and monthly basis. In recent months, Texas' building permits showed signs of slowing compared with the increasing trend in prior years—from 2011 through 2014. All major metros posted gains year-over-year. Houston (3,234) and Dallas-Fort Worth (2,939) still led the nation in the number of single-family permits issued, followed by Atlanta (2,167), Phoenix (1,637), and Charlotte (1,444).

Months of Inventory of Texas houses for sale remained low at 3.7 months compared with 4.3 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 $44.75 per barrel in August compared with $42.77 a year earlier. Oil prices started an upward trend in February 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 continued to climb slowly for the fourth straight month from a previous negative trend. Oil production maintained recent production levels after dropping in previous months from its peak in March 2015.

Texas employment continued to register a positive annual growth rate at 1.6 percent seasonally adjusted, gaining 10,400 jobs over the month prior. Texas' employment growth appeared to gain some momentum in the second quarter. During August, Texas' employment surpassed the U.S. growth rate.

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 remained stagnant. Of the goods-producing industries, construction was the only sector to add jobs over a year ago. According to the Dallas Fed's Texas Retail Sector Survey, retailer's perceptions of economic conditions in the retail sector dipped into negative territory during August from a positive reading during July. The continued expansion in the services sectors follows the favorable expectations presented by the Dallas Fed's month of August Texas Service Outlook Survey.

The major monthly losses in employment occurred in manufacturing, mining and logging, trade, transportation and utilities, educational services and leisure and hospitality—of these, only manufacturing and mining and logging show longer term trends of job losses. Manufacturing employment continued with its decline that started in March 2015 but at a slower rate. The Dallas Fed's Manufacturing Outlook Survey jumped into expansion territory during August, registering two months of positive growth. Both indicators signal that the manufacturing sector losses have probably tapered off. Mining and logging employment continued to fall after reaching a peak in December 2014 but does show signs of reaching a trough and the worst of the oil downturn may be behind. The information sector down-sized during the past decade and maintains those employment levels.

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 0.4 percent greater than August 2015.

Job growth in Texas helped to keep the unemployment rate below the national average. Texas' seasonally-adjusted unemployment rate equaled to 4.7 percent from 4.6 in July with Houston pushing the rate higher over recent months. The other major metros unemployment rate rested between 3 and 4 percent compared with 4.9 percent rate for the United States. Unemployed insurance claims, which measure initial applications for unemployment insurance, were down 5.2 percent year-over-year in Texas for the month. Labor force participation remained at 63.4 percent after edging down the past few 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 1.7 percent year-over-year, registering a lower growth rate than the nation since October 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 has 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 in July 2016 of 1.3 percent year-over-year. The Consumer Price Index for Houston year-over-year change was 0.9 percent in August.

Because of weakening global demand, lower oil prices, and a stronger dollar, U.S. and Texas real exports of all commodities and manufactured goods fell year-over-year. Both the U.S. and Texas trade-weighted value of the U.S. dollar depreciated in August and July. As the dollar appreciates (depreciates) with respect to world currencies, exports are more (less) expensive to foreign buyers.

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