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July 2007
Texas Economy Continues to Expand
After a mild slowing in the first several months of the year, most indicators suggest that the Texas economy has picked up and that labor markets remain tight. The risk of price acceleration in Texas has increased while the risk of recession remains low. The outlook for the remainder of the year is for a slightly slower pace of growth than in the first half.
The Texas Business-Cycle Index (TBCI) continues to grow at a strong pace. Recent strength in employment and continued declines in the unemployment rate have led to a slight acceleration in this aggregate measure of the Texas economy. Over the past year, growth in the index has slowed but remains relatively solid. Growth has averaged 3.6 percent this year after averaging 4.2 percent last year (Chart 1).
All components of the TBCI—unemployment rate, real gross state product (GSP) and employment—corroborate moderate growth. The Texas unemployment rate recently fell to a historically low level—4.1 percent. Although employment grew at a modest annual rate of 1.7 percent in the first quarter, it picked up to 2.4 percent from March to May. Texas real GSP registered a 3.3 percent annualized growth in the last quarter of 2006 (Chart 2).
While a sharp decline in residential construction permits has led to declines in several construction-related manufacturing industries, construction employment continues to increase (Chart 3). However, if the lag between changes in residential permits and changes in construction jobs is similar to the national average, then declines in construction jobs related to the housing downturn are just beginning to show up in the data. Layoffs in the residential sector may continue through early next year. In addition, nonresidential construction contracts have come down from last year�s levels, placing more downward pressure on construction jobs over the next 12 months.
Texas consumer spending remains strong. Monthly real sales tax rebates rose at an annualized rate of 7.1 percent in April (Chart 4). These data are deflated by the national retail sales deflator and adjusted to account for changes in local sales tax rates to more accurately measure the change in real sales.
Growth in the Texas core Consumer Price Index, which excludes the volatile food and energy components, remains lower than the nation's. The risk of price acceleration has increased, however. Both the Eleventh District Beige Book and the Texas Manufacturing Outlook Survey have noted increased price pressures in recent months. Chart 5 shows the large jump in corn prices that has been followed by increases in other prices such as soybeans and milk.
Movements in the Texas Leading Index and past growth in nonfarm jobs suggest that job growth will moderate in the second half of the year. After incorporating possible employment revisions, Texas employment is likely to grow 2.6 percent in 2007, with job growth slowing from 3 percent from January to May to 2.3 percent from May to December. In comparison, job growth in 2006 was 3.4 percent.
—Jesus Cañas and Keith R. Phillips
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