August 2006

Texas Economy Stays on Track

The Texas economy remains on track for a solid showing in 2006. So far this year, economic activity has closely matched the strong performance seen in 2005. Most indicators point to an economy on an expansionary path, with broad-based growth across sectors.

The Texas Economy Remains Strong and Is Outpacing That of the U.S.
Texas job growth remains robust in 2006. Year-to-date annualized employment growth matches the strong pace recorded in 2005—3.2 percent. While the tempo slowed in second quarter 2006, that figure is still subject to revision and will likely be revised upward later this year (Chart 1). Recent revisions put first quarter growth at an annualized 4.4 percent, up from the original estimate of 2.6 percent. Texas employment growth has exceeded that of the U.S. by more than a full percentage point year-to-date.

SOURCES: Bureau of Labor Statistics, Federal Reserve Bank of Dallas

Anecdotal reports suggest continued strength in the Texas labor market, with increased signs of tightness. In the most recent Beige Book survey, business contacts noted increased difficulty finding skilled and semiskilled workers across industries.

The Dallas Fed’s Texas Business-Cycle-Index, which measures the underlying economic trend, also suggests an expanding economy. Year-to-date, the index has risen at a 3.2 percent annualized rate, following somewhat stronger growth of 3.9 percent in 2005 (Chart 2).

SOURCE: Federal Reserve Bank of Dallas

Higher Energy Prices and Interest Rates Have Dampened Consumer Spending a Bit
The July Beige Book reported that although sales to stores in Texas were stronger than in the country as a whole, higher energy costs were taking a larger share of consumers’ paychecks. In addition, contacts said auto sales were soft, and high gasoline prices continued to reduce demand for SUVs and other low-gas-mileage vehicles.

Texas housing markets are faring better than most but show some signs of cooling. Builders interviewed for the most recent Beige Book said new home sales remain strong across Texas and relocation buyers are picking up. In addition, existing home sales in Texas are rising, despite a decline at the national level (Chart 3).

SOURCES: National Association of Realtors, Real Estate Center at Texas A&M University, Federal Reserve Bank of Dallas

Nevertheless, builders and realtors say the Texas housing sector is becoming more of a buyer's market. While demand remains strong overall, buyers are taking longer to look and make decisions, and builders have upped incentives. While still above last year’s levels, single-family permits have edged down recently in response to cooling demand, especially for lower-priced homes.

Business Activity Is Mostly Strong
Exports continue to be a source of strength for Texas manufacturers. Monthly data suggest real Texas exports continued to grow rapidly through May (Chart 4). Additionally, Beige Book respondents in the trucking and cargo industries said international demand continued to grow strongly.

SOURCES: Census, World Institute for Strategic Economic Research (WISER)

Indicative of growing business activity, nonresidential construction is picking up (Chart 5). Healthy employment growth in the sectors of the Texas economy associated with demand for office space (including financial activities and professional and business services) has helped bring vacancy rates down in the major Texas metros. The dwindling of large blocks of office space in certain submarkets has boosted construction activity. With rents moving up, business contacts are beginning to characterize office markets as “landlords’ markets.”

In addition, despite the negative consumer impact, elevated energy prices are still a net positive for Texas, although not at the national level. The state's energy sector continues to expand as high energy prices boost drilling activity (Chart 6).

SOURCES: Wall Street Journal, Henry Hub, Hughes Tool Company

The Texas Economic Outlook Is Positive but Cautious
Despite some signals of slowing consumer demand, most indicators suggest the Texas economy continues to expand solidly. The Dallas Fed’s Leading Index suggests employment growth will fall between 2.5 and 3 percent in 2006, near last year’s pace.

—D'Ann Petersen