Outlook for the Texas EconomyOutlook for the Texas EconomyLuis Torres, Wesley Miller, and Bailey Cuadra2017-08-08T05:00:00Ztechnical-report
Texas Economy

June 2017 Su​mmary1

The Texas economic expansion advanced, leading the country in first quarter GDP and employment growth. Despite volatile energy prices, oil and gas production boomed amid Texas technological advantages. ​A weakened dollar stimulated Texas exports. Texas crude oil exports nearly tripled relative to 2015 as a result of the lifting of the oil export ban. Potential headwinds to the Texas economy include further decreases in energy prices and trade uncertainty, especially with Mexico.​

Recently released first quarter gross domestic product (GDP) data revealed Texas' continued expansion. Texas led the nation in real GDP growth at 3.9 percent quarter-over-quarter annualized, doubling the U.S. aggregate rate of 1.4 percent. Energy industry output jumped 28.8 percent, accounting for over half of Texas' growth. Manufacturing output increased 8.6 percent, split evenly between durable and nondurable goods industries.

Texas sustained this strong economic growth as the Texas Business Cycle Index (a measure of current economic activity in the state) increased at an annualized rate of 5.1 percent in the second quarter. The major metro Business Cycle Indices indicated increased economic activity throughout the Texas Urban Triangle. Dallas, Fort Worth, and Houston posted quarterly annualized growth above 3.0 percent, while Austin reached 5.3 percent growth.

The Texas Leading Economic Index (a measure of future directional changes in the business cycle) jumped to a two-year high amid increased well permits and the depreciation of the Texas value of the dollar. Consumer sentiment was positive as the Texas Consumer Confidence Index stabilized after dropping 15.8 percent from March to May. The positive path of the Texas economy outweighed consumers' frustrations regarding tax reform and deregulation.

Interest rates reached annual lows amid softening inflation. Low oil prices dragged down the ten-year U.S. Treasury bond yield to a monthly average of 2.19 percent. The Federal Home Loan Mortgage Corporation 30-year fixed-rate fell below 4.0 percent for the first time this year, despite the Fed's third straight quarterly hike in the federal funds rate. Low interest rates could ease housing affordability constraints and stimulate residential construction.

Texas housing sales decreased 2.1 percent (seasonally adjusted) and housing affordability worsened. Current construction activity, measured by the Residential Business Cycle (Coincident) Index, was steady despite lagging residential construction values. The Residential Construction Leading Index (RCLI) flattened, projecting only marginal improvements in housing demand and supply imbalances into the third quarter. (For additional housing commentary and statistics, see Texas Housing Insight at recenter.tamu.edu.)

The average West Texas Intermediate crude oil spot price fell to $45.18 nonseasonally adjusted, the lowest since September 2016. Booming U.S. production and failing OPEC output cuts increased the global oil glut. The number of active rigs in Texas rose to 4612—up 48.7 percent this year—and crude oil production rose above 3.4 million bpd2,3. The Henry Hub spot price of natural gas fell below $3 per million BTU2 (British Thermal Unit) amid saturated inventories. 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 remained the largest gas-producing state, accounting for 24.0 percent of national production.

Texas led the nation in monthly nonfarm employment growth at 40,200 new jobs in June, pushing the year's total increase above 168,000. The statewide unemployment rate fell to 4.6 percent, down from 5.0 percent in March, while the number of initial unemployment insurance claims decreased 9.2 percent year-to-date. After spiking above 64.0 percent this spring, the statewide labor force participation rate fell to 63.5 percent. Labor force participation peaked at 69.3 percent in 1995 and currently hovers around 1976 levels.

The unemployment rate fell in every major Texas MSA for the third consecutive month. Austin boasted the lowest rate at 3.2 percent followed by San Antonio at 3.6 percent. Dallas and Fort Worth both settled at 3.8 percent, while Houston experienced a 4 point drop to 5.0 percent. This downward trend, concurrent with recent employment growth, indicates labor force expansions throughout the major metros.

In June, Dallas and Houston led employment growth, adding 5,700 and 6,100 jobs, respectively. San Antonio recovered 1,900 of the 2,000 jobs lost last month, while Austin added 1,400 jobs. Fort Worth posted the largest monthly percentage increase at 0.3 percent, adding 2,600 jobs and pushing this year's total to 12,500. Professional and business services as well as leisure and hospitality employment generated most of the growth.

After flattening last month, the Texas service sector added 30,500 jobs, accounting for 76 percent of total nonfarm employment growth. Health care and social assistance led the growth, adding 9,500 new jobs, followed by a 7,200 employment increase in accommodations and food services. The FIRE industries (finance, insurance, and real estate) expanded for the fourth consecutive month, pushing job growth up to 15,000 year-to-date.

The Texas Service Sector Outlook Survey reflected continued expansion, corroborating strong employment numbers. The employment, hours worked, and wage indices rose amid increased business activity. Input and selling prices deflated slightly but may reverse as the labor market continues to tighten.

Retail employment contracted for the fifth straight month, dropping 22,800 jobs since February. Fort Worth, Houston, and San Antonio individually lost over 1,000 retail jobs in June, accounting for a majority of the month's decline. The health of the Texas economy pushed retail sales4 up 3.8 percent up to May 2017, after rising a little over half of a percent in 2016. The Texas Retail Outlook Survey reflected this progress, as the indices for business activity and company outlook posted 12-point gains.

The goods-producing sector continued to advance, adding 9,700 jobs. Texas manufacturing employment grew 6.0 percent annualized quarter-over-quarter, well above the national rate of 0.5 percent. Growth rates were even higher in Houston (12.8 percent) and Austin (9.2 percent), followed by solid growth in Fort Worth (3.0 percent). Employment growth was concentrated in durable goods industries, comprising 80 percent of the 30,500 manufacturing jobs created this year. The Texas Manufacturing Outlook Survey confirmed employment growth and longer workweeks, but overall activity decelerated. Production, utilization, and new orders slowed but remained positive. Respondents noted a shortage of skilled workers driving up wages, contradicting the hard data where Texas manufacturing earnings decreased. Claims of wage pressures may be isolated to certain sectors or geographic regions within Texas.

Construction activity pulled back as single-family residential construction declined, slowing industry employment growth to under 0.1 percent month-over-month. Statewide total construction values fell 1.0 percent on a three-month moving average (3MMA) despite a steady increase in nonresidential construction. Hotel and motel construction exhibited the starkest upward trend, increasing for the fifth straight month on a 3MMA.

Revised data revealed total private employee hourly earnings in Texas fell last month, the first decline this year. Hourly earnings decreased marginally in June, pulling year-to-date growth down under half a percent. Wages flattened across the state, decreasing more than half a percent year-to-date in Austin, Houston, and San Antonio, and falling 0.1 percent in Fort Worth. However, Dallas wages grew 2.3 percent and 2.9 percent year-to-date and year-over-year, respectively.

Texas manufacturing jobs paid a 9.9 percent premium in hourly earnings relative to the national average but declined 0.7 percent year-to-date. Fort Worth had the highest manufacturing wages, paying 50.6 percent more than the statewide average but fell 0.7 percent year-over-year. Manufacturing earnings continued to depress in Houston—down 4.3 percent year-to-date—despite adding over 11,000 jobs. San Antonio was the outlier for wage growth, rising 15.6 percent this year but remaining 18.8 percent below the Texas average.

The U.S. Consumer Price Index (CPI) fell to 1.6 percent, its lowest year-over-year growth since September 2016, solidifying the current deflationary trend. The core inflation rate, which excludes the often-volatile energy and food sectors, rose marginally by 0.1 percent. The CPI for Houston also fell to 1.6 percent as decreased energy prices offset increases in transportation and medical care costs. Stubbornly slow inflation appears to be more than transitory despite advancements toward full employment.

The real goods trade deficit decreased 2.9 percent as U.S. exports hit a two-year high. Total Texas commodity and manufacturing exports increased 3.7 percent and 3.9 percent, respectively, led by petroleum and coal products. Texas crude oil exports have nearly tripled since the oil export ban was lifted in 2015, rising an additional 13.0 percent this month. The falling value of the dollar and global economic acceleration spurred overall export growth. The Texas trade-weighted value of the dollar5 decreased for the fifth consecutive month, falling 5.4 percent year-to-date. Mexico remained Texas' main trading partner, accounting for over a third of exports this year.

1All monthly measurements are calculated using seasonally adjusted data, and percentage changes are calculated month-over-month, unless stated otherwise.

2Non-seasonally adjusted.

3Crude oil production data lag this report by one month.

4The Federal Reserve Bank of Dallas seasonally adjusts Texas nominal retail sales data and the data release typically lags the Outlook for the Texas Economy by one month. The series is converted into real terms using the Consumer Price Index.

5The 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.

Digital and Print2046https://www.recenter.tamu.edu/articles/technical-report/outlook-for-the-texas-economy https://assets.recenter.tamu.edu/Documents/Articles/2046.pdf



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