January 2007

The Texas Economy Shifts into Lower Gear

Texas employment data and anecdotal reports suggest activity is cooling but is still quite strong. Jobs increased an annualized 2.7 percent in December, while the unemployment rate dipped to 4.5 percent, the lowest level since March 2001.

• Estimates indicate Texas employment increased 3.2 percent in 2006—faster than the state’s 35-year average growth of 2.8 percent.
   
• U.S. jobs rose at a 1.4 percent pace in 2006—slower than the 1.8 percent average recorded over the past three and a half decades.

All sectors added workers in 2006, except information, which includes telecommunication services and the media (Chart 1). Goods-producing employment—construction, manufacturing and natural resources & mining—increased 5.4 percent last year, compared with 2.9 percent in private services—all other sectors except government. The goods sector posted the fastest job growth since the energy and construction booms in 1981.

• Employment in the goods sector increased 4.2 percent in December, while services rose 2.4 percent (Chart 2).

While job growth in the mighty service sector has been relatively slower, that sector still added 202,400 jobs—over twice as many as the 89,700 added in the goods sector.

Changes in goods employment tend to lead changes in services employment.

Strong Exports
Growth in the goods sector is partly because of strong export growth. Texas exports rose to $12.1 billion in November (Chart 3).

• Declines in the value of the dollar helped stimulate exports. The Dallas Fed’s Texas value of the dollar has dipped 13 percent since peaking in 2002–03.
  
• As reported in the Dallas Fed’s January Beige Book, declining natural gas prices made petrochemical exports attractive to the strong Asian economy. A surge in petrochemical exports caused a logjam of railcars at the Port of Houston, leading railroads to impose embargoes and ration capacity. Shipments of some products jumped 30 percent.

Texas shipments account for roughly 15 percent of U.S. exports.

While activity is expected to slow, changes in exports tend to lead changes in goods employment, suggesting Texas could see continued strength in goods employment in coming months.

Cooling Construction and Energy
Texas construction activity and residential real estate markets are cooling but remain relatively strong. Total contract values (five-month moving average) have been flat in the fourth quarter of 2006.

• Residential activity weakened in recent months, particularly in the D/FW area, where the economy tends to follow the nation more closely. Builders have cut back on starts as sales and traffic declined.

Overall, the state’s home markets remain in good shape, with relatively low months in inventory of existing homes.

Declines in residential construction have largely been made up by increases in nonresidential building.

A robust energy industry has buoyed Texas economic growth over the past few years.

• Natural resources and mining employment increased 10.8 percent in 2005 and 11.8 percent in 2006. This job growth would have been stronger with more available labor.

There are signs that this expansion is cooling, however.

• Energy prices eased lower in the second half of 2006, causing drilling activity to pause (Chart 4).
  
• The monthly Texas rig count reached 781 in December—the highest level since December 1984. Still, growth in the rig count has been relatively flat since September.

Energy prices accelerated their decline in January and may fall further. This will reduce profits for mineral rights owners, and drilling activity in the state may slow.

Outlook
After rising in October, the Dallas Fed’s Texas Leading Index fell in November and December. The index has been sluggish since peaking in March 2006, suggesting continued expansion but a deceleration in the rate of growth. Weaknesses in labor market indicators and softer oil prices have been the negative components of the Leading Index in the last three months (Chart 5).

In 2007, Texas employment is expected to increase between 2.0 and 2.5 percent—slower than the pace recorded in 2006 and a bit below the average of the past 35 years. While the state’s economy will continue its expansion, a cooldown in the state’s previously hot energy and housing sectors will reduce the pace.

—Fiona Sigalla