Outlook for the Texas Economy
May 2017 Summary1
The Texas economy advanced amid increased energy activity and a strong labor market. Oil production and the number of active rigs in Texas increased, stimulating 6,600 new mining and logging jobs despite the price of oil falling to its lowest point this year. Single-family housing and nonresidential construction across the state supported higher construction values and created 3,400 construction jobs. These gains dragged down the statewide unemployment rate and sparked hourly wage increases. Overall the Texas economy remained robust, but trade uncertainty (especially with Mexico), volatile energy prices, and tax policy uncertainty present potential headwinds.
The Texas Business Cycle Index (a measure of current economic activity in the state) increased 3.7 percent year-over-year, indicating continued economic expansion. The major metro Business Cycle Indices indicated similar year-over-year growth throughout the Texas Urban Triangle. Economic activity accelerated for the fifth straight month in Houston, solidifying its recent economic recovery. The Dallas and Fort Worth indices posted the strongest growth, increasing at a quarterly annualized rate of 3.7 percent and 3.3 percent, respectively.
The Texas Leading Economic Index (a measure of future directional changes in the business cycle) flattened but maintained positive year-over-year growth. The overall health of the Texas economy balanced the index against falling oil prices. The Texas Consumer Confidence Index declined by over 8.0 percent for the second consecutive month, eliminating all of its post-election gains. Stagnant wages weighed on Texans’ confidence, but have hardly impacted consumption spending.
Multiple components generated interest rate fluctuations in May. In the beginning of the month, European political anxiety waned, elevating the ten-year U.S. Treasury bond yield to a peak of 2.42 percent. However, tensions in Washington offset this increase and dragged the yield to a monthly average of 2.3 percent. The Federal Home Loan Mortgage Corporation 30-year fixed-rate fell to 4.0 percent, despite the Fed’s 25-basis-point increase in the federal funds rate. Lower interest rates could ignite stronger demand and simultaneously stimulate residential construction.
Texas housing sales increased 8.7 percent (seasonally adjusted) after dipping last month. Current construction activity, measured by the Residential Business Cycle (Coincident) Index, was steady as construction worker wages and employment increased. The Residential Construction Leading Index (RCLI) flattened after large increases earlier this year, indicating a stabilization at the current level of activity. (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 a nonseasonally adjusted six-month low of $48.48 despite OPEC’s extended production cuts. Booming U.S. production continued to offset OPEC’s market rebalancing measures. The number of active rigs in Texas increased 153.1 percent year-over-year to 4532 and crude oil productionrose above 3.3 million bpd23. The Henry Hub spot price of natural gas rose to $3.2 per million BTU2 (British Thermal Unit) despite 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 23.7 percent of national production.
Texas monthly nonfarm employment added 14,800 jobs and kept pace to reach the Dallas Fed’s 2017 forecast of 289,300 new jobs. The statewide unemployment rate fell from 5.0 percent to 4.8 percent, but at the expense of a labor force contraction. The statewide labor force participation rate fell for the first time this year, dropping to 63.9 percent, but maintained positive year-over-year growth. Despite this blip, the number of initial unemployment insurance claimsremained at pre-recessionary levels, reinforcing the labor market’s strength.
The unemployment rate fell in every major Texas MSA for the second straight month. Austin boasted the lowest rate at 3.4 percent, followed by San Antonio at 3.9 percent. Dallas and Fort Worth both settled at 4.0 percent, while Houston experienced a 3 point drop to 5.4 percent. This downward trend, concurrent with recent employment growth, indicates labor force expansions throughout the major metros.
Dallas and Fort Worth led employment growth, adding 13,700 and 5,200 jobs, respectively. The number of jobs was unchanged in Austin and fell by 100 in San Antonio. Houston employment growth rose for the ninth consecutive month, supported primarily by an upswing in manufacturing and leisure/hospitality industries. Houston added over 37,000 jobs year-to-date, more than doubling the 2016 annual increase.
The goods-producing sector accounted for 80 percent of Texas nonfarm employment growth. The mining and logging subsector led the charge with 6,600 new jobs, while manufacturing posted a 1,800 job increase. The manufacturing employment percentage surged in Houston and Austin, reaching double-digit annualized growth quarter-over-quarter. The Texas Manufacturing Outlook Survey’s corroborated the industry expansion, as the production index hit a 3-year high. The hours worked and wage indices jumped 9.8 percent and 5.5 percent, respectively, and expectations soared even higher.
Construction activity accelerated, generating nearly a quarter of May’s nonfarm employment growth. Statewide construction values rose 11.5 percent on a three-month moving average (3MMA) as single-family and non-residential construction advanced. Population growth stimulated construction activity as new hospitals in Austin, Dallas, and San Antonio drove up construction values. Dallas benefitted from major investments in two-family housing and steady growth in single-family residential construction. In Houston, major increases in retail, warehouses and office buildings elevated construction values.
In Texas, the services-providing sector returned to flat growth, ticking up less than a tenth of a percent. The financial sector added 3,000 jobs, led by gains in Houston and Austin, but statewide declines in education and health care negated most of the growth. In contrast, the Texas Service Sector Outlook Survey was increasingly optimistic. Increased sales activity elevated the employment and wage indices, but respondents noted frustrations regarding burdensome taxes and regulations impeding potential growth.
Retailers expressed less optimism in Texas Retail Outlook as the retail sales and business activity indices decelerated. The employment and hours worked indices dipped below 0 and part-time employment increased, suggesting business could be slowing. The hard data confirm retail labor market struggles, where over 18,000 jobs were lost statewide since February. However, decreased optimism contradicts the steady upward trend in actual retail sales4.
Despite low levels of unemployment, Texas real personal income per capita contracted 0.4 percent year-over-year, falling further behind the national level. However, recent increases in wages and salaries, particularly in energy related industries, suggest a possible convergence. Total private employee hourly earnings in Texas rose 2.9 percent year-to-date and showed no signs of slowing. Wage growth was apparent in San Antonio, where hourly earnings increased 2.0 percent from last year, while Austin posted 1.0 percent year-over-year growth. Only recently have earnings picked up in Dallas, where the hourly rate increased 2.8 percent since February. Despite strong employment growth, falling wages continued to plague the Houston and Fort Worth economies, where hourly earnings declined 1.8 percent and 2.2 percent year-over-year, respectively.
Texas manufacturing jobs paid an 11.2 percent premium in hourly earnings relative to the national average. Fort Worth had the highest manufacturing wages, paying 65.6 percent and 49.0 percent more than the national and statewide averages, respectively. Manufacturing earnings surged in San Antonio, where the hourly wage increased 18.0 percent from last year, but remained 8.4 percent below the Texas average.
The U.S. Consumer Price Index (CPI) fell below the Fed’s 2.0 percent benchmark amid a 6.4 percent drop in gasoline prices. The core inflation rate, which excludes the often-volatile energy and food sectors, rose marginally at 0.1 percent. The CPI for Dallas fell to 2.1 percent as food, beverage, and apparel prices offset transportation and housing price inflation. The Federal Reserve considered falling prices to be transitory and remained on track to further raise the federal funds rate.
The real goods trade deficit decreased 1.6 percent as U.S. commodity export growth outpaced import growth by $1.0 billion. Total Texas commodity and manufacturing exports increased 2.5 percent and 4.0 percent, respectively, led by computer and electronic product sales. The Texas trade-weighted value of the dollar5 fell 5.1 percent year-to-date, providing favorable export conditions. Mexico remained Texas’ main trading partner, accounting for 36.4 percent of Texas exports year-to-date.
1All monthly measurements are calculated using seasonally adjusted data, and percentage changes are calculated month-over-month, unless stated otherwise.
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.