Outlook for the Texas EconomyOutlook for the Texas EconomyLuis Torres and Wesley Miller2017-02-13T06:00:00Ztechnical-report
Texas Economy

December 2016 Summary

​The Texas economy advanced from November as the number of jobs increased by over 6,100 (seasonally adjusted). The service-providing sector carried December's employment growth, mainly in the health, education, and leisure industries, as well as the government sector. The energy sector continued to improve as crude oil and natural gas prices reached their highest levels since 2014. A recovering energy industry may result in more goods-producing jobs in early 2017. The manufacturing industry in Texas performed well for the month; manufacturers reported increased factory activity and employment demands despite a strong U.S. dollar. Additionally, the strong dollar held inflation to a monthly increase of about 2 percent. Housing sales in Texas and its major metros were modest. Housing supply remained constricted, but an increase in statewide building permits hints at supply increases. Overall, the economy appears solid, and expectations are optimistic for 2017. Potential headwinds to the Texas economy include trade uncertainty, volatile energy prices, and national political uncertainty.

The Dallas Fed's Texas Leading Index, which signals future directional changes in the business cycle, improved modestly. The index remained relatively stable throughout 2016, after volatile movements over the past few years. In December, the index was positively affected by improved oil prices, increased well permits, and stock price appreciation of Texas companies. The index was negatively affected by the appreciation of the Texas value of the dollar and the number of average weekly hours worked by employees. The Texas Business Cycle Index, which measures current economic activity in the state, continued to grow at a slightly faster pace during the second half of the year.

Texas housing demand returned to normal levels following a strong November. Statewide housing sales increased 0.6 percent year-over-year on a seasonally adjusted basis. The major metros also returned to typical sales levels. In November, homebuyers may have expedited purchases prior to interest rate increases; therefore, sales normally occurring in December could have been pulled into the prior month. Despite the federal funds rate increase on December 14, demand for houses remained strong as a result of increased consumer confidence.

On the supply side, the number of vacant developed lots in Dallas, Houston, and San Antonio increased in the fourth quarter for homes valued over $200,000. However, the total supply of lots continued to lag behind the demand for new housing. Months of Inventory of Texas houses settled at 3.6 months (seasonally adjusted); further indicating strong housing demand and tight supply. The nation rested at 4.3 months (around 6.5 months of inventory is considered a balanced housing market). Seasonally adjusted months of inventory in San Antonio (3.4) and Houston (3.6) remained near the state level; but Austin (2.5), Dallas (2.1), and Fort Worth (2.1) exhibited even tighter supply.

Building permits issued for new single-family homes increased during December, both on an annual and monthly basis, and hinted at supply expansion. Austin and Dallas-Fort Worth continued to grow at an accelerated pace, issuing 1,340 and 2,104 permits (seasonally adjusted), respectively. San Antonio also finished the year strong, as 625 permits (seasonally adjusted) were issued, marking the most in the metropolitan area since October 2015. Houston still led the nation in nonadjusted monthly single-family building permits issued (2,568) but has not yet returned to its peak in late 2014; Dallas-Fort Worth (2,327) and Austin (1,144) ranked second and sixth nationally. Given building permit trends in December, Dallas could soon surpass Houston as the nation's leader.

A combination of restricted supply and persistent demand in the Texas housing market caused prices to appreciate for the month. Texas home prices have accelerated faster than housing prices nationally. Since 2011, the average sales price for new and existing Texas homes rose 33 percent and 52 percent, respectively. Nationally, the average sales price for new and existing homes rose 27 percent and 37 percent. House price appreciation in Texas is a direct result of 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.)

Natural gas and crude oil prices continued to rise out of the early 2016 trough. In December, the seasonally adjusted Henry Hub spot price of natural gas rose 86 percent year-over-year, to $3.65 per million BTU (British Thermal Unit), reaching its highest point since December 2014. West Texas Intermediate crude oil prices averaged $57.23 per barrel during December, also surpassing December 2014 prices. Consequently, the number of operating rigs increased 11.7 percent (seasonally adjusted) relative to November and 16 percent annually. Oil price expectations remain positive as OPEC looks to restrict output, but global oil inventories remain saturated. The Energy Information Administration projects the oil supply glut to diminish as 2017 progresses. In December, total production of crude oil in Texas remained just under 100 million barrels (seasonally adjusted) but may be driven up in 2017 if the price of oil continues to appreciate.

Texas employment continued to grow steadily at 1.8 percent seasonally adjusted year-over-year, and the state unemployment rate remained below 5 percent. Unemployed insurance claims, which measure initial applications for unemployment insurance, fell 8.7 percent annually. The drop in initial claims hints at an even lower unemployment rate in the coming months. In December, the labor force participation rate inched up, both nationally and in Texas, to 62.7 and 63.6 percent, respectively.

Texas job growth in December occurred mainly in the service-providing industry, where employment increased 5,300 (seasonally adjusted month-over-month). Most of the job creation was in the public sector or the health and education industries. Leisure and entertainment services continued to contribute to labor increases. This employment growth was accompanied by favorable expectations captured by the Dallas Fed's December Texas Service Outlook Survey, in which Texas executives in service sector businesses noted increases in revenue and in general business activity. According to the survey, business condition expectations were at their highest level since July 2014. The retail sector also contributed to employment growth. In the Dallas Fed's Texas Retail Outlook Survey, the employment index elevated 8 points from November. The number of hours worked increased nearly 7 points, suggesting longer work weeks during December. Over 38 percent of businesses surveyed reported sales increases, which likely drove employment growth.

Employment in the goods-producing sector of the Texas economy fell 2.5 percent seasonally adjusted year-over-year. Mining jobs declined by 10.7 percent, sinking to their lowest number since March 2011. Construction job growth remained positive as employment increased 5.6 percent (seasonally adjusted) annually. Furthermore, manufacturing jobs decreased 1.7 percent annually (seasonally adjusted) but picked up month-over-month. Despite a strong dollar and weak global demand, the Dallas Fed's Texas Manufacturing Outlook Survey reported manufacturing activity expansion. Manufacturing business leaders also responded with increased optimism regarding business conditions in 2017.

Dallas was the job growth leader in Texas during December, reporting 5,500 more seasonally adjusted jobs than in November. San Antonio and Austin recorded a 3,000 and 2,200 seasonally adjusted monthly job increase, respectively. Fort Worth and Houston lost 1,100 and 2,300 jobs but maintained year-over-year growth of 2.1 percent and 0.5 percent, respectively. Houston was the only major metro with an unemployment rate (5.5 percent) above the state level (4.6 percent).

Real total private employee hourly earnings in Texas decreased 0.3 percent annually (seasonally adjusted), lagging further behind national levels, which continue to rise. Hourly wages climbed in Texas in 2012 until stagnating in 2015. Real earnings in Texas have struggled to remain above January 2007 levels on a seasonally adjusted basis because of the decline in the energy industry and loss of high-paying energy-related jobs. While the job market remained tight, the mix of jobs shifted toward lower paying jobs, such as in the leisure and hospitality sector. Nationally, average hourly wages were 2.1 times higher in the mining industry relative to leisure and hospitality jobs.

Inflation edged higher reflecting the stabilization in energy prices. Cheaper imports, resulting from a strong U.S. dollar, continued to relax inflationary pressures. The Consumer Price Index for the U.S. and Houston measured 2.1 and 2.3 percent year-over-year changes during December, respectively. The Consumer Price Index's annual change for prices in Dallas was 2.4 percent in November.[1]

U.S. and Texas real exports rose 4.4 percent and 2.1 percent (seasonally adjusted year-over-year), respectively, despite a strong U.S. dollar. Real manufacturing exports increased nationally by 2.9 percent annually and fell by 1.6 percent in Texas. The Texas trade-weighted value of the dollar accelerated faster than the U.S. counterpart. Exports have remained stable, both in Texas and nationally, despite exchange rate and currency market obstacles.

​​​[1] Consumer price indices for Houston and Dallas are published every other month on an alternating schedule. 

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