December 14, 2007

Texas Growth Slows but Remains Healthy

The Texas economy has weakened in recent weeks, but Texas is still performing better than the nation. Employment growth has slowed since the first half of 2007. Manufacturing and housing are the most fragile sectors, but growth has moderated in other areas as well.

Employment
Texas employment growth continues to best the nation's, but the rate of increase has slowed. After robust growth of 3.9 percent in the first half of 2007, employment growth in the third quarter was 1.9 percent, and October’s figure was 2 percent (both figures are subject to revision). Although slowing job growth is broad-based across sectors (Chart 1), the goods sector has been the major drag on economic activity, reflecting the downturn in housing and related weakness in manufacturing. Manufacturing jobs have been declining for the past three months across many sectors, although employment gains remain positive in the wood, cement, petrochemical, machinery, paper and food sectors.

Housing
The single-family housing sector remains weak. Builders continue to pull back on the construction of new homes as evidenced by the persistent fall in single-family building permits, contract values and housing starts (Chart 2). Sales of existing homes remain on a downward trend and inventories have risen to just over the equilibrium mark of 6 months (Chart 3). Inventories for new homes are somewhat higher, ranging from 7.6 months in Austin to 6.1 months in San Antonio. As in the nation, subprime delinquent mortgages continue to inch up in Texas. Texas’ delinquency rate is higher than the national average, but its foreclosure rate remains below average.

On a more positive note, demand for apartments has picked up, and multifamily construction is robust, as evidenced by the increase in multifamily permits (Chart 4). Given tighter credit conditions, people who do not qualify for mortgages are seeking apartments. Moreover, nonresidential and nonbuilding construction have held up well despite recent troubles in the housing sector.

Exports
Texas exports were up 5.5 percent in the third quarter (Chart 5). The largest increases were 12 percent to the European Union and 9.5 percent to Latin America. Exports to Asia were up a meager 2.2 percent, while exports to China declined in the third quarter. The dollar has maintained its strength relative to the peso, and exports to Mexico rose a modest 3.2 percent in the third quarter.

Energy
As oil prices have climbed, activity has increased in the energy sector. Even though the oil and gas extraction sector is less than 2 percent of total employment in Texas, it has added 16,400 jobs year-to-date—making up 6.3 percent of the total job gains in 2007. The rig count stands at 860 rigs, with almost 85 percent of domestic rigs exploring for natural gas.

Outlook
Overall, employment data and anecdotal sources point to a weaker Texas economy, but one that is still quite healthy and stronger than the national economy. While housing woes are beleaguering the national economy, Texas housing markets have held up better than many other areas of the country. Although high oil prices pinch Texas consumers as much as those in other states, Texas gets an offset because it is the top producer of oil and gas in the nation. Hence, the Texas economic outlook is positive moving into 2008.

—Mine Yücel and Michael Nicholson

About the Authors Yücel is vice president and senior economist and Nicholson is a research assistant 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 second quarter 2007 and 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.