February 2006

Outlook Favorable for 2006

A number of factors make for a favorable Eleventh District outlook in 2006. Texas job growth is the fastest it has been in five years. Moreover, growth is broad-based, extending into the goods-producing sector. In-migration into the state appears to have picked up, and the housing market accelerated in the second half of the year. Across the border, the situation also looks good. The maquiladoras that border Texas are growing faster, and the Mexican peso has strengthened. A strong peso bodes well for border retail sales. In response to improving fundamentals, the Dallas Fed's Texas Leading Index moved up sharply in the fourth quarter, suggesting robust job growth in the near term.

A Look Back at 2005
2005 turned in the best growth performance in Texas since 2000. Current data suggest employment grew 2.1 percent December-over-December (2.5 percent for private sector) (Chart 1). This compares with U.S. growth at 1.5 percent (1.6 for private sector). This Texas "growth premium" is the result of many factors, but the booming energy sector and post-hurricane stimulus are important reasons underlying our current strength.[1]

Job growth was broad-based in 2005. Strengthening job growth in the goods-producing sector in 2005 set the year apart from 2004. While service-sector growth remained unchanged in 2004 and 2005 (2.1 percent), goods-producing job growth more than doubled, from 1 percent in 2004 to 2.6 percent in 2005 (Chart 2). The goods-producing sector includes natural resources and mining, construction and manufacturing.

Among the factors contributing positively to the goods-producing sector is demand for Texas exports, which has been robust. While Texas exports declined in September, this was likely due to hurricane disruptions, and state exports resumed their expansion in October and November (Chart 3).

Texas output growth also did well in 2005, at least according to the data available through the third quarter. Dallas Fed estimates of real gross state product (GSP) indicate 5.6 percent growth year-to-date (at an annualized rate) compared with 3.75 percent for the nation. If fourth quarter activity holds up, Texas output growth will have had its best year since 1997 (Chart 4).

Other Indicators
Housing. The U.S. housing market has begun to slow, but this does not appear to be the case for Texas. As 2005 drew to a close, the Texas housing market accelerated. Median prices of existing homes jumped 8.7 percent in real terms between May and November as inventories fell to a 3½ year low of five months. For comparison, U.S. price appreciation for existing homes slowed to 6.8 percent over this period. New home construction gives us an idea what to expect in 2006, and forecasts are bright. In Texas, single-family permits rose 26 percent in the last six months of the year; this compares with a 6 percent rise for the United States.

Energy. Natural gas prices had a brief run-up in mid-December, sparked by cold weather, but have since fallen precipitously (from $14.51 per MMBtu the week ending December 16 to $8.01 on February 3). Unseasonably warm weather has lowered demand, and inventories have built up. The price drop benefits consumers, manufacturers and the region’s petrochemical producers and should not hurt drilling activity. Both oil and gas prices are robust enough that drilling activity will continue to expand as capacity rises. Beige Book contacts express the sentiment that they are currently only constrained by available resources, and this type of volatility in energy prices will not slow their activity. The Texas rig count is currently around 680—the highest number of operating rigs in 20 years.

Maquiladoras. The region also benefits from growth along the Texas–Mexico border. While overall maquiladora employment has been relatively flat since July, border maquiladoras have had positive job growth (Chart 5). In fact, employment in maquiladoras along the Texas–Mexico border grew at an annualized rate of 17 percent in the third quarter (quarter-over-quarter) and at a 14 percent rate between September and November.

Outlook for 2006
Over the fourth quarter, the Texas Leading Index rose 3.08 points (Chart 6); positive contributors included a rising U.S. leading index, falling initial unemployment claims and increases in the help-wanted index. The Dallas Fed employment growth forecast is for 2006 December-over-December employment growth to be between 2.5 and 2.9 percent. This compares with a consensus forecast of about 1.5 percent job growth for the United States.

—Pia M. Orrenius

Notes The Texas growth premium of 0.5 percentage point over the nation is roughly equal to the jobs added as a result the Dallas Fed’s early benchmarking process, which revises the payroll data using more comprehensive administrative data as they become available. Data revisions through third quarter 2005 have added about 102,800 jobs for the year (as compared with nonbenchmarked data).