June 2006

Outlook Positive Despite Recent Slowdown

Although the growth of the Texas economy has slowed slightly in recent months, it remains strong and broad-based. Overall, the risk of price acceleration has increased more than the risk of a sharp slowdown in economic activity.

As shown in Chart 1, job growth has slowed more this year in Texas than in the United States. This is somewhat surprising given the positive reports of the Dallas Beige Book and the Texas Manufacturing Outlook Survey and the relative positive impact that energy price increases have on Texas versus the nation. However, given the strength indicated by business surveys and because Texas employment growth in the five quarters ending in fourth quarter 2005 has been revised up an average of 1.2 percentage points, there is a good chance that job growth will be revised up when it is benchmarked later this year.

Energy-Price- and Interest-Rate-Sensitive Industries Show Only Mild Signs of Slowing
While real retail sales are only available through fourth quarter 2005, Chart 2 shows that real retail tax rebates through April suggest continued healthy retail growth this year. Manufacturing also remains strong. The May Texas Manufacturing Outlook Survey reported increases in index values for production, capacity utilization, new orders and growth rate of new orders

While mortgage rates have inched up, single-family housing permits have only recently shown some sign of easing back from very high levels, and the decline has been more than offset by the increase in multifamily permits (Chart 3).

Energy Resources Help Offset Negative Impact on Consumers
The state’s position as a producer of oil and natural gas helps offset some of the real income shock to consumers as energy prices increase. Increased royalty payments to the owners of mineral rights, more jobs in oil and gas extraction, and increased taxes from oil and gas will help compensate for some of the real income loss to Texans from higher energy prices. For example, natural gas taxes collected so far this fiscal year (ending in August) are up 57.7 percent to $1.7 billion. Oil tax revenue is up 26.3 percent to $548.2 million. As shown in Chart 4, the levels have grown significantly, although the shares of revenue remain much smaller than in the early 1980s.

Inflation Risks Increasing
While core CPI inflation remained lower in Texas than in the nation through April (Chart 5), the June Dallas Beige Book reported that respondents in retail, manufacturing and service firms increased selling prices. The recent report also cited worker shortages and the need to increase wages to retain employees. The May Manufacturing Survey reported that a net 29 percent of respondents increased their product price versus 15 percent in the previous survey and 17.6 percent for the first four months of the year.

Lower costs for shelter have suppressed core CPI growth in Texas, but recent increases in land and home values may cause inflationary pressures in the future (Chart 6).

Outlook
Overall, the outlook for the Texas economy remains positive. While higher energy prices are likely to slow consumer spending in the second half of the year and the recent rise in mortgages rates may dampen single-family construction, economic growth appears solid and broad-based. After growing 3.1 percent last year, job growth is likely to slow to about 2.5 to 3 percent this year, and the risk of a Texas recession remains very low.

—Keith R. Phillips and Jose Joaquin López