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March 2007
The Texas Economy Continues to Cool
The regional economy continues
to undergo a broad-based slowing from its rapid pace
in 2005 and the first half of 2006. According to Dallas
Fed estimates of quarterly state GDP data, real output
experienced the slowest growth in three years during
the second and third quarters of 2006. Major sources
of weakness affecting the regional economy include the
new-housing market, slowing retail sales, a downturn
in demand for new vehicles and slowing trade with our
NAFTA partners.
Employment Growth Slows
Benchmarked employment data
released on March 8 by the Texas Workforce Commission
reflects the slowing. The new data resulted in a downward
revision of Dallas Fed estimates of 2006 job growth
from 3.2 percent to 2.7 percent (December/ December).
Nonfarm employment grew 3.5 percent in the first half
of 2006, 1.8 percent in the second half and not at all
in January 2007 (Chart 1). Overall, the revised
data suggest that the downward shift in growth in the
second half of 2006 was more pronounced than initial
estimates had implied.
Notwithstanding slower job growth,
the Texas unemployment rate dropped from 4.7 percent
in December to 4.5 percent in January, reaching a six-year
low. The regional labor market remains tight.
Currently, most sectors continue
to expand at a slower rate, but employment in construction,
manufacturing, trade and transportation, education and
health, and other services fell in January (Chart
2). Information employment growth remains weak,
although it picked up in January. Although one month’s
data are not sufficient to identify a trend, January
declines in construction, manufacturing and trade employment
likely reflect underlying weakness in these sectors.
These declines reflect similar trends at the national
level and are consistent with the slowdown in new home
construction and retail sales growth.
Manufacturing employment declined
0.5 percent in the fourth quarter and was down 8.3 percent
(annualized rate) in January. Manufacturing layoffs
are being driven by declines in production of computer
and electronic products, transportation equipment and
construction-related goods.
Construction and Real Estate
Activity Decelerates
New home construction has
slowed significantly in the state in recent months,
and single-family permits continue to post large declines,
particularly in Dallas–Fort Worth (Chart 3).
The most recent data suggest that the slowdown is no
longer limited to the residential sector, but that building
in commercial and retail space is also softening. Construction
contract values for residential, nonresidential and
nonbuilding fell 17 percent, 21 percent and 12 percent,
respectively, in real terms in January (year/year) (Chart
4).
On the upside, existing home sales
are stable, existing home inventories have declined,
and real median home prices are flat as compared with
this time last year. Also, the office market is doing
well, with contacts reporting low vacancy rates and
higher rents.
Real Texas exports fell slightly
in December. NAFTA trade has weakened as industrial
production has slowed in the U.S., Canada and Mexico.
Decreased trade with Mexico and Canada, which accounts
for about half of Texas exports, led to lower exports
from the region at the year’s end (Chart 5).
In contrast, Texas exports to the rest of the world
soared.
Energy and Business Services
Still Strong
Despite overall slowing,
there are still sources of strength in the regional
economy. The energy sector remains strong due to relatively
high prices. Since mid-January, WTI oil prices have
firmed, increasing to $61 per barrel from around $54
(Chart 6). Natural gas prices have been volatile
but settled the week ending March 9 at $7.31 after having
jumped as high as $8.44 in mid-February.
There is also strength and momentum
in financial activity, professional and business services,
and leisure and hospitality. Beige Book contacts indicated
that demand for business services is rising and demand
for legal services is higher than a year ago. Also,
financial service firms reported solid commercial lending
activity.
Outlook
Consistent with overall slowing,
the two-month change in the Texas Leading Index was slightly
negative. With the current mix of strengths and weaknesses,
it looks like the regional economy may be downshifting
to a more moderate and sustainable rate of growth. Texas
employment is currently forecast to grow between 1.7 and
2 percent in 2007, roughly the rate at which the state
labor force is expanding.
—Pia Orrenius and Michael
Nicholson
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