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Regional Update
Texas Economy Holding Stable
June 2005

Raghav Virmani reviews recent economic conditions in Texas.

Economic recovery in Texas continues to tread forward as the state nears the second half of 2005. While the nation has grown at 1.6 percent annualized year-to-date through May, Texas is slightly behind at 1.2 percent annualized—equivalent to 47,500 jobs added.

Growth Broad-Based Across Sectors
From mid-2004 onward, employment growth has been relatively broad-based across sectors (Chart 1). Barring a slight dip in May, the professional and business services sector has grown at 3 percent throughout this period. Within this sector, temporary employment services have burgeoned at 8 percent annualized so far this year. The other leader of the pack is the educational and health services sector, being the most consistently growing sector throughout the recession and recovery. At 1.1 million workers each, these two sectors account for nearly a fourth of total Texas employment. Rising energy prices have had dissimilar—if not opposite—impacts on some sectors. For instance, the natural resources and mining sector has grown fairly rapidly throughout, mostly due to the incentive from rising energy prices, while the same increased costs have softened growth in the trade, transportation and utilities sector.

… and Across Metros
In addition to sectors, growth has also been broad-based across major metropolitan areas in Texas (Chart 2). The 2001 recession had its deepest impact on Austin and Dallas, cities with a commanding share of high-tech industries that fell by the wayside. Austin recovered quicker and has posted robust growth so far this year. Dallas, with a greater share of the hardest-hit telecommunications industry and the airline industry dented by 9/11, has grown at a slug’s pace this year and is well below other metros in reaching prerecession employment levels. El Paso is the metro that has grown the fastest this year. Buoyed by booming manufacturing and government sectors and also by a strong maquiladora sector, El Paso has grown at 3.4 percent annualized year-to-date through May. This compares favorably with the 2.1 percent growth posted over the same time last year. The expansion of the Fort Bliss military base to house an additional 4,000 troops has also helped El Paso employment, particulartly in its construction sector.

Energy Prices Still High, but Activity on the Up
With oil nearing $60 a barrel, there is much talk about record highs. Although this may be true in nominal terms, it is not the case when prices are adjusted for inflation. We are not paying unprecedented amounts of money to fill up our gas tanks. Chart 3 shows that inflation-adjusted oil prices today are less than three-fourths those seen in the early '80s. In 1981 (in today’s dollars), oil topped $80 a barrel as drivers paid over $3 per gallon for gasoline, while today we are seeing oil at $60 a barrel and paying close to $2.16 per gallon. Natural gas, however, is a different story because prices are high, even in real terms.

Because of its large energy industry, Texas experiences disparate responses to rising energy prices. As Chart 4 shows, high and increasing oil prices have spurred energy activity in the region, measured both in terms of the rig count and energy employment. Year-to-date, the U.S. rig count has increased by 116, and a whopping 75—or two-thirds—of that comes from Texas. Employment in support services for the oil and gas sector has also seen vast gains at 7.5 percent growth through May. Anecdotal reports from local energy firms reveal that oil service firms are increasing capital spending in areas lacking capacity, such as fracturing and rigs.

Construction and Real Estate
After a weak mid-2004, the construction and real estate sector has bounced back. Single-family housing is growing strong as ever, and the office market is rebounding. Weakness persists, however, in the multifamily housing market.

More good news comes from Chart 5, as it provides evidence that Texans need not worry about a looming housing bubble. The Housing Price Index—repeat sales or refinancing of conforming loans—from the Office of Federal Housing Enterprise Oversight shows that Texas experienced only 3.8 percent housing price appreciation in the first quarter, the lowest in the country, with Dallas and Austin being two of the lowest among U.S. metros. The chart shows that as a percentage of personal income, house prices are flat.

SOURCE: Office of Federal Housing Enterprise Oversight

Texas office markets also seem to be healing for the first time since the recession (Chart 6). Anecdotal reports from business contacts show encouraging signs, such as office leasing activity picking up. In addition, Dallas can finally boast of not having the “emptiest offices” in the nation; in terms of vacant office space (through first quarter 2005), Dallas now ranks fifth, commiserating with Columbus, Detroit, Atlanta and Kansas City, in that order.

Sluggish High Tech
After bouncing back from negative growth in April and posting impressive additions, high-tech manufacturing is once again in the red (Chart 7). The sector added 600 jobs in April but lost nearly 700 in the following month. Such has been the case ever since high tech finally turned positive in early 2004—job losses alternating with job gains—making it difficult to establish a clear improvement trend. While computer manufacturing is showing some gains, semiconductor and telecommunications equipment manufacturing continues to haunt high-tech manufacturing.

On the other hand, the Beige Book, the Federal Reserve’s business conditions survey, reports increased high-tech manufacturing orders in the Eleventh District. Reports from the semiconductor industry suggest increasing capital spending geared toward improving productivity and lowering unit labor costs.

The high-tech services sector provides some more cushioning, as it seems to have bottomed out and is on the rise. The sector has grown 3.4 percent so far this year, and despite some job losses in May, it has added nearly 3,000 jobs overall.

Growth to Be Positive but Slow
In sum, the Texas economy is showing modest yet broad-based growth. The Texas leading index (Chart 8) fell in May, however, implying a growth slowdown in the near future. As the chart shows, a significant portion of the slower growth is due to the effects from a slower U.S. economy.

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