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May 2007
Regional Economy Expanding at a Moderate
Pace
The regional economy continues
to expand at a moderate pace. Job growth was especially
strong over the past six weeks in mining and natural
resources, professional and business services, and the
leisure and hospitality sector. Retail sales and consumer
confidence are also holding up reasonably well. But
there is significant weakness in real estate and manufacturing,
and Texas’ export numbers also came in lower than
expected over the past few months.
The Labor Market Puzzle
Nonfarm payroll employment
grew by 1.5 percent in March and 1.7 percent for the
first quarter after reasonably strong growth over the
previous two quarters (Chart 1). Yet the unemployment
rate fell to a seven-year low of 4.3 percent (Chart
2), and other indicators of labor market conditions,
such as initial claims for unemployment insurance, remain
in favorable territory.
Tepid job growth coupled with
otherwise favorable labor-market data seems odd at first
glance. One obvious avenue through which these observations
may be reconciled in the near future would be an upward
revision to the payroll figure for the most recent
quarter, when better data become available. (Similar
revisions have been an ongoing trend for state payroll
data over the last few years.) Another would be a slowdown
in labor force growth, which does seem to have occurred
in recent months.
So the overall weight of the evidence
suggests that the Texas labor market is stronger than
the currently available first-quarter payroll figure
indicates. Consistent with this line of thought, Beige
Book reports tighter labor market conditions and some
tentative signs that wages are on the rise.
Construction
Single-family housing permits
continue to fall as builders pull back in the face of
rising inventories. Permits were down 24 percent in
March year-over-year (Chart 3). The trends
for housing starts (not shown) are similar.
Manufacturing and High-Tech
Manufacturing jobs continue
to decline, falling by 3.1 percent in March and 3.5
percent for the quarter. One positive development over
the past six weeks is a marked upturn in the petrochemical
sector, driven mainly by unusually strong demand. Construction-related
manufacturing continues to falter, however, which is
to be expected, given the problems in the construction
sector.
There are tentative signs of stabilization
in high tech. High-tech service employment grew by 5.8
percent in the first quarter here versus 1.25 percent
for the nation. But high-tech manufacturing has stalled
after an encouraging January, though it remains slightly
ahead of the nation.
Exports and Mexico
First-quarter data for Texas
exports by country are not yet available, but we do
have monthly aggregate data through February. And in
that month, exports fell by a nonannualized rate of
7.8 percent—their second-largest drop in the past
five years (Chart 4).
This is perhaps not surprising
given that neither Mexican nor Canadian industrial production
is growing. Canadian industrial production is down 3.6
percent year-over year (Chart 5). Mexico's
is flat, and its finance minster recently said Mexican
economic growth will be lower than expected in 2007.
Summary
The regional economy is currently
growing at a moderate pace. The Texas business-cycle
index remains positive (Chart 6), but the leading
index is flat (Chart 7)—which is consistent
with reports from contacts who express cautious optimism
that moderate growth will continue but are skeptical
that another boom is at hand.
—Jason Saving
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