September 2006

Texas Economy Continues to Best National Growth

The Texas economy remains strong and continues to grow at a stronger pace than the national economy, although there are some pockets of weakness. Year-to-date employment growth through August was 2.7 percent, an increase of 177,300 jobs. Although employment increased a modest 1.7 percent in August, slower than July’s pace of 2.7 percent, private employment growth picked up to 2.3 percent compared with 0.2 percent in July. Compared with the nation, Texas employment was more than twice the national rate, year-to-date (Chart 1). Growth was broad-based across industries, with all sectors adding jobs. Employment gains were most robust in the energy and construction sectors (Chart 2).

The Dallas Fed Beige Book also reported strong growth but more pockets of softness than last time. These pockets were blamed on weakness in national housing markets and high gasoline and electricity costs.

Manufacturing Strong with Some Pockets of Softness
One sector that has performed appreciably better than its national counterpart is manufacturing. Texas manufacturing employment growth was 3 percent in August and 1.5 percent year-to-date, compared with 0.2 percent year-to-date nationwide. The Dallas Beige Book reported that manufacturing activity remained quite strong but there was some slowing in demand for construction-related and high-tech products.

The Texas Manufacturing Outlook Survey signaled continued expansion in September but at lower levels than in August.

Housing Still Strong but Seeing Some Deceleration
Construction employment continues to grow strongly in the state. After a torrid 11.5 percent increase in the first quarter, the pace slowed to 3.4 percent in the second quarter. However, it picked up again in the third quarter with 9.4 percent growth in July and August. In contrast, U.S. construction employment was relatively flat at 0.1 percent in the second quarter, following a 4.3 percent increase in the first. Growth in the first two months of the third quarter was 1.8 percent nationwide.

There is a slight drop-off in the residential construction sector, although it is still at high levels. Signs of softness include increased builders’ incentives and increased reports of cancellations.

The existing home market is healthy, with modest price gains and increasing sales, but business contacts continue to report slowing at lower price points. Chart 3 shows that compared with the nation, existing home sales continue to hold up in Texas.

The most recent Office of Federal Housing Enterprise Oversight index for repeat sales showed the largest deceleration in U.S. house prices in three decades. House price appreciation in the nation slowed to 10.1 percent from 12.8 percent from first to second quarter, compared with a year ago. Although housing price appreciation in Texas was much lower than the national average, house prices improved relative to the nation because house price appreciation in Texas rose to 6.5 percent from 6.3 percent in the first quarter (Chart 4).

A sign of weakness in the housing market is residential mortgage delinquency rates, which are higher in Texas than in the rest of the nation. As can be seen in Chart 5, mortgage loans 90 days past due have ratcheted up in Texas to near 2 percent. FHA loans—which are loans up to $200,000, with smaller down payments, made to lower income households—have even a higher percentage 90 days past due, at 4.3 percent.

Exports Continue to Be a Source of Strength
Texas export growth continued strongly in the second quarter, thanks to the economic health of our trading partners (Chart 6). Exports were up near 4 percent in the second quarter, following a 5 percent increase in the first quarter. Exports to China were especially strong, up 15 percent in both the first and second quarters.

The maquiladora industry along the Texas border also posted strong employment growth, rising 11.8 percent in June and 4.2 percent year-to-date. Employment gains were widespread across industries, with the strongest growth coming from the electronic and transportation industries.