December 2008

U.S. Slowdown Reaches Texas

Texas continued to do well after the U.S. went into recession in December 2007. As we end 2008, mounting economic evidence suggests that the state’s economy has begun to falter.

The Dallas Fed’s Texas Business-Cycle Index flashed a warning of possible recession in October, posting a negative monthly change for the first time since July 2003 (Chart 1). Metro Business-Cycle Indexes also indicate that growth has stagnated in recent months in most major Texas metros, with the notable exception of Houston.

The statewide index moves in tandem with its three components—Texas employment, unemployment and gross domestic product (Chart 2). Its recent movements reflect a slowdown in job growth and a jump in the unemployment rate from 5 percent in August to 5.6 percent in October.

Texas employment growth remained positive in October. Most likely, the month’s 1.7 percent job growth will later be revised to reflect the impact of Hurricane Ike on the upper Gulf Coast region.

Beige Book, the Dallas Fed’s anecdotal report on regional economic activity, revealed broad and sometimes deep deterioration in November. Almost all respondents noted declining business conditions and worsening prospects for the economy.

Since firms often cut temporary jobs before permanent staff, demand at staffing firms often falls before declines in overall jobs. In the Beige Book, staffing firms reported a falloff in demand for personnel and a large number of layoffs across many industries, including manufacturing, auto parts manufacturing, financial services, information technology and accounting.

Widespread Weakness
Disappointing reports came from just about every sector of the Texas economy.

Factory activity, for example, slipped further in November. The Dallas Fed’s Texas Manufacturing Outlook Survey suggests that production, shipments, new orders and capacity utilization measures all declined sharply (Chart 3). Many respondents said tightening credit conditions were impacting their businesses.

Despite significant volatility, Texas exports have declined on net over the past three months due to the dollar’s rising value and faltering growth overseas.

Housing inventories, foreclosures and delinquencies continue to look better in Texas than the nation. Home prices, which grew year-over-year in the third quarter, helped boost the state’s relative performance (Chart 4). Even so, Texas housing markets continue to erode. Homebuilding and residential construction employment are likely to remain weak for some time. Also, Beige Book suggests downward pressure on home values.

Energy prices have fallen significantly in recent months, and the rig count has begun to respond. These declines will likely put downward pressure on Texas job growth in the months ahead.

Financial-sector employment has been shrinking nationally for almost two years; in Texas, it has flattened out and will likely decline in coming months (Chart 5). Troubled bank loans are increasing in the state.

The Texas Leading Index, a gauge of economic prospects for the next three to six months, has fallen broadly and sharply in recent months (Chart 6). Six of the index’s eight components have declined.

—Keith R. Phillips and Mike Nicholson

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