June 2008

Regional Economic Growth Moderates

The regional economy continued to slow in April and May, although data were mixed and there were many pockets of strength. Economic growth in the region continued to outpace the nation, due in large part to rapidly growing energy and export sectors.

Employment Growth Slowing
Texas employment grew an annualized 1.3 percent in May, slightly less than its 1.7 percent April increase (Chart 1). In contrast, U.S. employment fell 0.2 and 0.4 percent in April and May, respectively.

Industry Data Suggest Broad-based Slowing
Looking by industry, most sectors have experienced slower job growth so far in the second quarter, as compared with the first quarter (Chart 2). The large service sectors consisting of professional and business services, education and health, and leisure and hospitality generated the bulk of jobs created in April and May.

Trouble in Transportation
A new development is the sharp downturn in the trade, transportation and utilities sector, which had been growing rapidly through first quarter 2008 but has lost employment since March. High fuel costs are adversely impacting the trucking and airline industries. Railroads are transporting more consumer goods than in the past, a sign that trucking is now less competitive vis-à-vis rail. Airlines are increasing fares, reducing capacity and laying off workers to improve efficiency and stem losses from high fuel prices.

Unemployment on the Rise
The Texas unemployment rate rose to 4.5 percent in May, up from 4.1 percent in April, with the increase caused by a surge in the labor force, not a decline in the number of jobs (Chart 3). Initial claims for jobless benefits rose in April but fell in May by roughly the same amount.

Construction and Real Estate Not Much Changed
The construction and real estate sectors continue to struggle. New homebuilders are still very negative and report that starts and sales have fallen further. There were some tentative improvements in April and May in the existing home market, however. May sales increased over April and March but were still 12.9 percent below year-ago levels. The real median sales price held steady at about 3 percent below year-ago levels. Home inventories also improved slightly, ticking down to 6.3 months supply in May.

Nonresidential and nonbuilding construction contract values have picked up in recent months, with nonresidential rising in April and May and nonbuilding contract values jumping up in May (Chart 4). Texas nonresidential construction spiked earlier this year with a planned $7 billion dollar expansion of a Port Arthur refinery.

Energy and Exports are Bright Spots
The energy sector is benefiting from sustained increases in oil and natural gas prices. The Texas rig count reached 931 in June—heights last reached in 1984.

The state's export sector is also strong. Real Texas exports grew 7.2 percent in April after rising 3.9 percent in the first quarter (over fourth quarter 2007) (Chart 5). This compares with slower U.S. growth of 3.3 percent in April and 1 percent in the first quarter. Texas has bested the nation this year, thanks in part to a strong increase in chemical exports.

Outlook Unchanged
The leading index picked up slightly in April owing to the strength in the energy sector and a gain in the April U.S. leading index, but is still down significantly from the end of last year (Chart 6). With discretionary incomes squeezed by rising food and fuel prices and credit markets still in recovery, the near-term outlook is for continued below-average growth in the region in the second half of the year.

—Mike Nicholson and Pia Orrenius

About the Author Nicholson is a research assistant and Orrenius is a senior economist and policy advisor in the Research Department at the Federal Reserve Bank of Dallas.