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October 2006
The Texas Economy: Cooling but Still
Strong
Despite a few signs of cooling,
the Texas economy continues to expand strongly, propelled
by robust energy and construction industries. Texas’
job growth has been twice as fast as the nation’s
for slightly over a year. Most major sectors of the
state’s economy are adding workers, including
manufacturing. So far this year, Texas employment has
increased an annualized 3.2 percent (Chart 1).
Job growth may have been even
stronger than current readings indicate. Third-quarter
data have yet to be benchmarked to the Covered Employment
Series.[1] This procedure has resulted
in upward revisions in each of the previous seven quarters.
Recent data point to a continued
tightening in the labor market. In September, Texas’
unemployment rate fell to 4.8 percent, the lowest since
May 2001. Seasonally adjusted initial claims for unemployment
insurance declined to 55,900 in September, a level not
seen since January 1982 (Chart 2).
Anecdotal reports suggest job
growth is being restrained by a shortage of workers.
For more than a year, the Beige Book has noted shortages
of skilled and, in some areas, unskilled workers.
Hearty Export Growth
Texas exports more than any
other state, and those shipments reached a record $12.1
billion in August. (Chart 3) Year-to-date,
the state’s overseas sales are up 21 percent,
the strongest growth since 1999 (all numbers are annualized).
The export surge has been driven primarily by the energy
industry, led by increases in shipments of chemicals
and oil and gas extraction equipment.
Exports to the European Union
were up 45 percent in the first half of 2006. Shipments
to Latin America, excluding Mexico, rose 44 percent.
Exports to Mexico, our largest trading partner, increased
11 percent. While still relatively small, sales to China
continued to swell, rising more than 75 percent. Exports
to other Asian countries were up 17 percent.
Vigorous Construction
Texas’ construction
sector was slow to join the nation’s building
boom, but it is now outperforming the rest of the country
(Chart 4). In the first eight months of this
year, construction employment increased 7.3 percent
in Texas, while U.S. construction job growth rose 1.5
percent. In the past two years, as the Texas boom accelerated,
the state’s residential contract values increased
from 8 percent to 10 percent of U.S. residential contract
values.
The homebuilding
boom boosted U.S. and Texas residential contract values
to record levels. Residential construction has been
a growing share of output for both since the early 1990s,
nearly reaching levels of the 1970s and 1980s booms.
While still strong, Texas homebuilding
has cooled in recent weeks in response to growing supply
and weaker sales of existing homes in many markets.
The state’s home inventories remain low by historical
standards but inched up over the summer (Chart 5).
The rise in inventories suggests the supply of homes
for sale is exceeding demand, although the increase
has not been as rapid as in the rest of the country.
Nonresidential building strengthened
over the past year, and it should boost the economy
well into next year. Divided by output, U.S. and Texas
residential and nonresidential building tended to grow
at similar rates in the late 1980s and early 1990s.
The series diverged in 2000, as spending per dollar
of output increased for residential construction and
decreased for nonresidential spending (Chart 6).
Solid but Slightly Cooler Growth
Going Forward
Amid the strong growth, there
are signs of cooling. The housing market has lost some
of its zip. High energy costs and slowing home building
have reduced business for some Texas manufacturers.
Lumber producers say the fall-off in sales has been
substantial and unprecedented, due largely to sagging
demand from homebuilders outside the state.
Texas’ economy will continue
to get a boost from a robust energy industry, which
reports a backlog of orders for services and equipment
from drilling activity around the world. Still, heavy
inventories of natural gas and the recent dip in prices
caused the state’s drilling activity to pause
in September. The industry’s growth will likely
slow in coming months if energy prices continue to decline.
Lower energy costs are a boon
for business and consumers, but for Texas the news is
mixed because the drop in energy prices results in lower
royalty payments and a negative income effect for well
owners.
After declining since March, the
Texas Leading Index bounced back in August and September.
The index suggests slower job growth through the remainder
of the year, although the probability of Texas recession
remains less than 8 percent.
—Fiona Sigalla
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