October 2007

Texas Continues Moderate Expansion

The Texas economy expanded moderately in recent weeks but showed continued signs of deceleration. There was considerable weakness in manufacturing and construction even as services and energy sectors remained pockets of strength. Private-sector job growth strengthened in the third quarter.

Texas Employment Strengthens in Third Quarter but Falls Short of 2006 Growth
Texas nonfarm private-sector employment grew at an annualized rate of 2.4 percent in the third quarter—faster than 2.2 percent in the second quarter but slower than the 3.1 percent rate in third quarter 2006 (Chart 1). Year-to-date, Texas added 162,100 jobs at an annual rate of 2.6 percent compared with 224,400 jobs at 3.7 percent over the same period last year. Texas private-sector job growth, however, continues to outpace the nation's year-to-date 1.1 percent growth. Private-sector services have been a source of strength, adding 149,000 jobs during the year at a 3 percent annualized rate.

Service Sectors Contribute More Than Their Fair Share to Texas Job Growth
There is wide variation in the share of Texas employment sectors and their relative contribution to growth (Chart 2). Year-to-date, professional and business services, education and health services, and leisure and hospitality account for more than half of the employment growth, while they constitute just about a third of total employment. Manufacturing and construction accounted for a much smaller share of growth relative to their shares in overall employment.

Labor Market Remains Tight
The unemployment rate for Texas ticked up to 4.3 percent in September but is still quite low by historical standards, suggesting that labor market slack is at a low level (Chart 3). Historically, the unemployment rate in Texas has been higher than that of the U.S., but this trend has reversed since the beginning of 2007. Texas now has a lower unemployment rate, indicating a tighter labor market than the nation. Faster employment growth in Texas, coupled with lackluster labor force growth so far in 2007, partly explains Texas' lower unemployment rate.  

Labor Force Rebounds after Declining in Q2
Recent Bureau of Labor Statistics data suggest that the size of the Texas labor force declined in the second quarter for the first time since 1990, but it has since rebounded (Chart 4). A repeat of the second-quarter labor force decline, however, could contribute to further tightening of theTexas labor market and would be a potential drag on economic activity.

Elevated Subprime Delinquencies and Foreclosures Reflect Weakness in Housing
Statewide data suggest that mortgage debt burden remains elevated. Data from the Mortgage Bankers Association indicate that the number of seriously delinquent subprime mortgages for Texas—which include 90-days-past-due mortgage loans and foreclosures—declined slightly in the second quarter and is below the national average (Chart 5).

Texas Dollar Depreciates Less Than the National Counterpart
The Texas trade-weighted value of the dollar has depreciated less than that for the U.S. due to its appreciation against the Mexican peso (Chart 6). The peso has a relatively large share in the trade-weighted index because Mexico is Texas' largest trading partner. Appreciation against the peso, coupled with a weak GDP growth forecast for Mexico, suggests that export growth to Mexico may be sluggish.

Economic Outlook
Texas' economic growth will likely continue to decelerate. Strong job growth in services and robust energy activity are sources of strength, but weakness in manufacturing and construction could be a drag on overall job growth. High oil prices are likely to keep activity in the energy sector strong. The weakness in housing, with its likely adverse effect on consumer spending, continues to be a downside risk to growth in fourth quarter 2007 and in 2008, although to a lesser extent than the nation.

The Texas leading index increased 0.6 points over the six-month period from April to September 2007. The index increased 0.3 percent in September, suggesting that Texas economic activity will expand moderately in coming months (Chart 7).

—Anil Kumar and Raghav Virmani

About the Authors Kumar is a senior economist and Virmani is an economic analyst in the Research Department at the Federal Reserve Bank of Dallas. Note The employment data used in this analysis have been benchmarked by the Dallas Fed to first quarter 2007and seasonally adjusted by the Federal Reserve Bank of Dallas. For more information about early benchmarking data, see “Getting a Jump on Texas Employment Revisions,” Southwest Economy, November/December 2005.