October 6, 2009

Stabilization Continues, but Recovery Will Take Time

The Eleventh District economy continues to show signs of stabilization; however, downside risks could hamper growth. Household financial stress and continued softness in the labor market are suppressing consumer spending, and weakness in the energy sector due to low natural gas prices remains a drag on the Texas economy. Commercial real estate is an area of concern and will be for some time.

Job Growth: One Step Forward, Two Steps Back
Texas added 6,800 private-sector jobs in July, only to lose 44,300 in August. Over the past year, Texas has lost just over 361,000 private jobs, or about 4.1 percent. While this is not an encouraging sign, it is better than the corresponding figure for the U.S., which shows a loss of 5.7 million jobs, or about 5 percent (Chart 1). More encouraging is that initial claims have continued to trend down, though they remain at elevated levels.

Employment trends have differed widely across Texas metropolitan statistical areas. Dallas–Fort Worth and Houston have thus far borne the brunt of job losses (Chart 2). This is likely due to their larger dependence on energy, construction and financial services, some of the hardest-hit sectors. The other metro areas have lost jobs, but not as steeply.

Labor Market Likely to Remain Soft
Texas’ unemployment rate increased one-tenth of a percentage point to 8 percent in August from July, compared with 5.6 percent at the beginning of the year (Chart 3). While this is 1.7 points lower than the nation’s, anecdotal reports of hiring freezes and general weakness in the labor market do not portend a quick turnaround.

Manufacturing Activity Outlook Improves
Anecdotal reports and employment figures suggest that weakness in the manufacturing sector will likely persist in the near term. The Dallas Fed's Texas Manufacturing Outlook Survey shows a much improved level of activity in manufacturing since midyear, although the sector continues to operate at subdued levels (Chart 4).

Residential Construction Improves Slightly
Single-family permits turned up in both June and July, while residential construction contract values increased for four straight months beginning in May (Chart 5). Multifamily construction permits continue to be plagued by the slump in commercial real estate. Construction employment has also seen a slowdown in the pace of job declines.

Housing starts also rose for three months straight, lending support to the possibility of a bottom in housing. New-home inventories continue to improve, with median- and lower-priced homes hovering between six and seven months’ inventory but higher-priced homes at above-average levels. Existing-home inventories edged up slightly in August to 7.2 months, while existing-home sales improved in almost all Texas metro areas.

Commercial Real Estate Malaise Continues
Commercial real estate continues to struggle under the combined weight of the credit crunch and recession. Data indicate that all four major markets in Texas are continuing to see declines in transaction volumes and prices. As prices have declined, cap rates—the required rate of return that investors use to price properties—have shot upward in Dallas and Houston (Chart 6). The number of delinquent and distressed properties continues to rise, and difficulty in the commercial real estate market is expected to outlast the weakness in the overall economy.

Energy Sector Continues to Muddle Along
Energy-sector employment continues to decline; however, the rig count has shown signs of improvement. Oil prices continue to hover near $70 per barrel, but low natural gas prices have adversely affected the sector. Spot natural gas prices recently fell below $2 per Btu—their lowest level in over seven years—before rebounding to $3.50 per Btu. Because of the low prices, tax revenue from natural gas production has dropped sharply for Texas, and declining royalty income has impacted consumer spending in some areas.

—Anil Kumar and Jackson Thies

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About the Authors Kumar is a senior economist and Thies is a research analyst in the Research Department at the Federal Reserve Bank of Dallas.