April 2006

Near-Term Outlook for Texas Economy Good

Following recent revisions, data now show that Texas payroll employment grew more rapidly in 2005 than at any time since the tech bust. Jobs increased by 2.7 percent—half a percentage point stronger than the Dallas Fed’s early benchmark and 1.2 percentage points stronger than initially estimated by the Bureau of Labor Statistics (Chart 1).

Initial estimates of employment for January and February 2006 show growth moderating to 2 percent. However, anecdotal evidence from Beige Book suggests job growth is actually picking up in Texas. Recent Manpower surveys of hiring intentions also suggest a strengthening labor market, with employers in most major Texas cities far more willing to hire than the nation as a whole (Chart 2).

Additionally, unemployment rates are flat or declining in all major metro areas even as formerly discouraged workers are re-entering the labor market (Chart 3). Taken together, the evidence suggests Texas labor-market conditions are not moderating at this time.

Evidence from the housing market is consistent with the notion that virtually all areas of Texas are growing. According to the most recent survey from the National Association of Realtors, housing markets are in expansion mode in the state as a whole and in Texas’ largest cities. This is consistent with Beige Book reports of strong demand both for new and existing homes. Permits and contract values remain at high levels, although their rates of growth slowed in January—consistent with reports of “optimistic trepidation” in that sector as the national housing market slows (Chart 4).

The high-tech sector continues to be mixed. Venture capital in Austin was down 31 percent last year to $403 million, leading some to conclude that Texas is losing its high-tech edge. But venture capital spending was up 28 percent to $443 million in Dallas and up a whopping 79 percent to $163 million in Houston, suggesting there may be a greater dispersion of high-tech activity as newer subsectors such as biotech come to the fore. Importantly, recently available data show Texas has not lost ground relative to high-tech leader California despite anecdotal reports of a retrenchment back to the coasts (Chart 5).

Texas exports rose at a 7.9 percent annual rate in fourth quarter 2005, more than offsetting a hurricane-related decline in the third quarter (Chart 6). Exports to almost all of Texas’ major trading partners rose, including a 4 percent increase to Mexico and a 16.3 percent increase to the European Union. Because different countries demand different compositions of goods, the broad-based nature of the export gain provides additional confirmation that Texas’ current expansion encompasses many sectors rather than only a few. One of the few countries to which exports fell was China, but its trade volume with Texas is sufficiently small that the decline had only a modest effect on overall exports.

Natural gas prices seem to have stabilized after several months of decline—good news for Texas, though perhaps not as good for the nation (Chart 7). The fact that prices remain at relatively high levels (at least by recent standards) will likely preserve current growth rates for natural-gas drilling in the Barnett Shale field, which rose 20 percent in 2005 and now encompasses almost 10 percent of state drilling activity. Moreover, with oil now a less competitive input than natural gas, our gas-fueled petrochemical plants along the Gulf have redoubled their efforts to get production back to pre-Rita levels.

The near-term outlook for the Texas economy is favorable. Consumer confidence in the West South Central census region (of which Texas residents make up 68 percent) remains higher than consumer confidence in the nation as a whole (Chart 8).

Additionally, the Dallas Fed’s leading index soared in the most recent three-month period, with the labor-market component especially strong (Chart 9). Taken together, this suggests good times are ahead for Texas.

—Jason Saving