August 2008

Regional Economy Faces Headwinds

The regional economy is expanding at a moderate pace and continues to outperform the national average. Certain sectors of the Texas economy are showing signs of weakness, yet the overall effects have been mitigated by strength in exports and the energy sector.

A More Temperate Expansion
The Texas Business-Cycle Index, a gauge of current business activity, suggests the economy is currently growing at a slower pace than in recent years (Chart 1). Growth in the index began decelerating in the latter half of 2007 and has continued into 2008. The general slowdown in regional economic growth has been echoed in anecdotal reports such as the Dallas Beige Book.

Employment Growth Slows in First Half
Texas employment grew at an annualized rate of 2.3 percent in the first half of this year, below the 3.2 percent pace recorded in 2007 (Chart 2). Comparatively, U.S. employment fell 0.6 percent in the first half of 2008.

Labor Market Remains Tight, but Claims Tick Up
Texas initial claims for unemployment insurance increased 6.2 percent in June and have risen almost 16 percent since the first of the year. The Texas unemployment rate currently remains near historic lows (Chart 3), but the uptick in claims suggests some future slack in the labor market consistent with recent layoff announcements in some sectors. The minimum wage rose from $5.85 to $6.55 on July 24—the impact will likely be limited to certain lower-wage sectors of the economy.

Continued Weakness in Transportation Sector
Elevated fuel costs strained transportation-related industries in the second quarter. Most noticeably impacted were airlines and trucking firms, and employment levels are beginning to reflect the weakness (Chart 4). Airlines rapidly implemented baggage surcharges and increased fares in an effort to combat rising energy costs, while the trucking industry has steadily raised fuel surcharges to offset the surge in diesel prices.

Housing Remains Soft
Texas housing markets saw further deterioration in sales and construction in the second quarter. According to the Dallas Beige Book, homebuilders said sales weakened in June causing outlooks to be more guarded.

On a brighter note, the Texas housing market is better off than many other parts of the country in some aspects. Home prices are holding up better in Texas. The Office of Federal Housing Enterprise Oversight (OFHEO) purchase-only home price index showed modestly positive appreciation of 2.5 percent in Texas during the first quarter, compared with a decline of 3.1 percent nationally (Chart 5). In addition, Texas home inventories remain near equilibrium levels, and the foreclosure rate in Texas is below the national average.

Commercial Real Estate Slowing
The current credit situation, most notably the dropoff in demand for commercial mortgage-backed securities, has had a large impact on commercial real estate investment activity, both nationally and in Texas. According to anecdotal reports, investors are increasingly concerned about the supply of credit as lenders shy away from real estate. In addition, the backlog of nonresidential development projects continues to dwindle, and there are reports that new deal volume is sluggish. Nonresidential construction is expected to slow in the second half of the year.

Energy and Exports Provide Support
While high energy prices are negatively impacting consumers and some businesses, overall they are boosting growth in the Texas economy. The rig count rose in the second quarter as both oil and natural gas drilling increased (Chart 6).  Drilling companies are hiring and demand is high for professionals in service industries related to energy.

Texas exports have grown faster than the national average this year. Manufacturing respondents to the Dallas Fed’s July Texas Manufacturing Outlook Survey noted exports are helping shore up demand for products despite domestic weakness.

Near-Term Outlook Suggests Below-Average Growth
Economic headwinds—including uncertainty about the pace of recovery in credit markets, continued weakness in housing and the impact of higher transportation costs on businesses and consumers—will create a challenging environment. According to the Dallas Fed’s Texas Leading Index, the outlook continues to suggest below-trend employment growth in the second half of the year.

—D’Ann Petersen and Jackson Thies

About the Author Petersen is a business economist and Thies is a research assistant in the Research Department at the Federal Reserve Bank of Dallas.