|Outlook for the Texas Economy||Outlook for the Texas Economy||Luis B. Torres, Wesley Miller, and Paige Woodson||2018-06-08T05:00:00Z||technical-report||Texas Economy|
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April 2018 Summary1
Increased activity in the energy and manufacturing industries advanced the Texas economy. Improved employment opportunities expanded the workforce, translating into accelerated economic activity. Texas led the nation in job creation this month with 39,600 new jobs, and initial unemployment insurance claims relative to the size of the workforce reached a record low. Real earnings, however, remain suppressed and present a growing challenge to Texas as well as the nation. Upward momentum in goods-producing and technology-based industries should eventually stimulate wages. Threats of 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 jumped above 5.5 percent on a quarterly seasonally adjusted annualized rate (SAAR), its largest increase since 2014. Growth in the energy industry pushed the Houston economy up 7.6 percent SAAR despite fading hurricane-related reconstruction stimuli. Austin's booming technology industry supported 7 percent growth through the first four months of the year. North Texas' expansion was more modest at 5.4 and 3.9 percent growth in Dallas and Fort Worth, respectively, while the San Antonio economy grew just 2.6 percent amid weak hiring activity.
The economic expansion should continue as the Texas Leading Economic Index (a measure of future directional changes in the business cycle) rose 5.7 percent year over year (YOY) to a new cycle high. Higher oil prices, low unemployment, and growth in the national economy signal favorable economic conditions as the year progresses. Despite favorable economic data, the Texas Consumer Confidence Index dipped for the second straight 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 supported higher interest rates. The ten-year U.S. Treasury bond yield reached 2.87 percent for the first time since 2013, while the Federal Home Loan Mortgage Corporation's 30-year fixed-rate jumped to 4.47 percent. The Federal Reserve Board is on track to gradually increase the federal funds rate as business-cycle expansion continues.
Economic growth kept the national foreclosure inventory below 1.2 percent during the first quarter, the lowest level since 2006. While considerably lower in Texas, the foreclosure inventory ticked up to 0.7 percent as lenders phased out post-hurricane grace periods on mortgage payments. Stricter lending standards following the Great Recession (GR) contributed to the low number of foreclosures.
Despite pronounced shortages for homes priced less than $300,000, Texas housing sales picked up 3.4 percent after dropping 2.3 percent in the first quarter. Current residential construction activity, measured by the Residential Construction Cycle (Coincident) Index, reached its highest level since 2008 as industry employment and construction values accelerated. This momentum should continue through the summer months as the Texas Residential Construction Leading Index (RCLI) extended its upward climb. Increases in multifamily building permits and housing starts offset the slacking single-family market, pushing the RCLI up almost a quarter of a percent YOY. (For additional housing commentary and statistics, see Texas Housing Insight at recenter.tamu.edu.)
The average West Texas intermediate crude oil spot price jumped $3.53 to $66.252 per barrel, up 29.8 percent YOY. Geopolitical tension in the Middle East, extended OPEC output cuts, and strong global demand supported higher prices despite prolific production in Texas. Accelerated drilling activity in the Permian and Eagle Ford Basin lifted Texas' active rig count to 5052, up 19 percent YOY. Texas crude oil production accounted for 40 percent of national output at 4.1 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 below $3 per million BTU2 (British thermal units) and could drop further as producers rush to free energy transportation capacity.
Texas added 39,600 nonfarm jobs this month, marking 22 consecutive months of employment growth and pushing this year's total above 155,000. Improved job opportunities pulled more Texans into the workforce, elevating the labor force participation rate to 63.8 percent. The increase in job seekers lifted the state's unemployment rate to 4.1 percent, but initial unemployment insurance claims dropped below 58,000 for the first time in over a decade. After accounting for changes in the labor force, initial claims dropped to an all-time low of 4.2 per thousand participants. Labor markets in the major metros were even tighter. In Austin and San Antonio, the local unemployment rate held firm at 3.1 and 3.5 percent, respectively, while the DFW rate stayed at 3.7 percent. Houston was the exception with unemployment at 4.6 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 1.4 percent YOY, its fourth consecutive contraction. The historically low labor force participation rate represents hidden slack in the market and is preventing substantial wage increases despite low headline unemployment. Sluggish productivity growth also weighed on earnings potential. Workers suffered worse wage environments in the major metros. Real earnings fell 3.4 and 3.3 percent YOY in Dallas and Houston, respectively, and 2.7 percent in San Antonio. Fort Worth wages extended a nine-month slide, dropping 1.6 percent YOY. Austin remained the exception with a 1.1 percent YOY increase in real earnings. The metro paid the highest wages in the state at $29.70 per hour, resulting from its ultra-tight labor market and high concentration of technology-related jobs.
Houston led the state in both absolute and percentage terms with 12,000 new jobs, pushing SAAR growth up 4.3 percent. Manufacturing and leisure/hospitality generated more than half of the monthly increase. Austin's leisure/hospitality industry added more than 2,000 jobs, but losses in manufacturing slowed growth from 5.2 to 4.1 percent. Dallas and Fort Worth created 9,000 and 4,500 jobs, respectively, pushing employment growth above 3 percent in North Texas. Gains in mining/logging, leisure/hospitality, and professional/business services accounted for most of the regional growth. San Antonio regained about half of the 2,100 jobs shed last month, but SAAR growth decelerated to just 1.5 percent. The slowdown occurred primarily in the financial and professional/business sector, which employs a fifth of the region's workforce.
Momentum continued in Texas' goods-producing sector as YTD job creation approached 50,000. 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 4,900 and 8,600 jobs, respectively.
Houston added more than 6,000 manufacturing jobs, lifting growth above 7 percent SAAR. San Antonio posted similar growth at 6.8 percent, leading to 1,300 new jobs this year alone. The creation of 900 industry jobs lifted Dallas' growth rate above 4.1 percent. Despite the relatively high concentration of manufacturing in Fort Worth, employment stagnated for the third consecutive month. The sector also struggled in Austin, shedding 1,300 jobs and slowing to 1.2 percent growth.
Fort Worth paid the highest hourly manufacturing wages (Austin data are unavailable) at an average of $34.10 this year compared to $21.37 and $23.36 in the U.S. and Texas, respectively. The metro, however, topped out in 2016 despite improvements in today's global manufacturing environment (e.g. decreased value of the dollar and strong global demand). In real terms, hourly manufacturing earnings in Texas extended a two-year steady decline, falling 1.9 percent since April 2016. Dallas and Fort Worth experienced a starker drop at 4.0 and 3.2 percent, respectively, over the same period. In contrast, Houston's real manufacturing wages jumped 5.7 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. Manufacturing wages in San Antonio remained 22 percent below the state average.
Weak wage data contrasts the Dallas Fed's Manufacturing Outlook Survey, which indicated 30 percent 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 22nd consecutive month, and 33 percent reported an improved outlook. Respondents expressed growing concerns regarding steel and aluminum tariffs leading to a trade war.
The construction industry added more than 4,000 jobs for the third straight month despite normalization after last year's hurricane-induced boost. The total value of construction returned to its downward trend, falling 5.3 on a three-month moving average amid declines in both residential and nonresidential activity. On the residential side, single-family housing construction dropped in every major metro but Houston, but multifamily activity remained healthy. Declines in hospital construction in DFW and Houston accounted for most of the nonresidential slump. Despite decreased building, real hourly construction earnings in Texas extended a year-long climb, rising 8.9 percent YOY. Recent growth compensated for massive declines during the GR. Industry wages are now 1.8 percent higher relative to 2007.
The service-providing sector posted another strong hiring month with 22,000 new jobs after revisions improved March numbers from 21,400 to 25,400. Professional and business services, which often support energy and manufacturing operations, accounted for nearly a third of the growth with 7,500 positions added. On the other hand, contractions in the information sector persisted as the industry shed 4,800 jobs over the past year.
The Dallas Fed's Service Sector Outlook Survey corroborated solid job growth in the industry. More than 22 percent of respondents noted full-time hiring increases, and 27 percent paid higher wages and benefits. Part-time employment and the number of hours worked also increased. Businesses bolstered their operations amid solid sales numbers, with 31 percent reporting rising revenue. Recent tax reforms fueled the industry's expansion. Respondents identified burdensome regulations, skilled labor shortages, and increased business uncertainty as the largest challenges to the service sector.
On the retail side, employment increased for the third consecutive month, pushing this year's gains to 9,000 jobs. Retailers added just 4,900 jobs in 2017. The health of the Texas economy supported more than 5 percent sales growth YOY in March3, but the Dallas Fed's Retail Outlook Survey indicated a minor slowdown this month. In response to rising input prices and wage pressures, a third of those surveyed raised selling prices.
Overall, economic growth pushed the U.S. Consumer Price Index (CPI) up 2.5 percent YOY. The core inflation rate, which excludes the often-volatile energy and food sectors, held firm at 2.1 percent YOY. Reductions in transportation prices (particularly for passenger airline tickets) coupled with lower medical costs to ease price pressures in Houston, pulling the metro's CPI down to 2.4 percent YOY.
Texas' total commodity exports increased 20.6 percent YOY to a record $20.3 billion. Some of this spark may be attributed to a rush of orders before tariffs and quotas are implemented. This month's growth, however, hardly represents a deviation from its year-long trend. Manufacturing exports posted a similar 14.1 percent YOY spike as trade in petroleum, computers, and electronics continued to flourish. Texas real crude oil exports plateaued amid pipeline bottlenecks in the Permian Basin. Crude exports fell 6.9 percent YTD but maintained 148 percent YOY growth, accounting for 87 percent of the national total. The Texas trade-weighted value of the dollar4 extended its year-long downward trend, falling 5.5 percent YOY, thereby boosting the attractiveness of Texas goods and services to foreign consumers.
Mexico and Canada received nearly half 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. The potential of increased tariffs and global trade conflicts present a serious headwind to Texas trade activity and its economy in general.
All monthly measurements are calculated using seasonally adjusted data, and percentage changes are calculated month-over-month, unless stated otherwise.
Retail sales data is compiled by the Texas Comptroller of Public Accounts. Its release typically lags the Outlook for the Texas Economy
by one month.
4 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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