July 2009

Texas Contraction Shows Some Signs of Moderating, but Outlook Remains Feeble

The Texas economy remains weak, but recent data and anecdotal reports suggest that activity is stabilizing at low levels across some sectors. Sentiment regarding future economic activity has also become somewhat more positive, but a turnaround is not expected in the near term.

Broad-Based Employment Declines Are Ongoing
Employment contracted at a slower pace of 2.4 percent in May, following a 3.7 percent decline in April and a 4.4 percent drop in the first quarter (Chart 1). Year to date through May, Texas has shed jobs at a 3.9 percent rate (173,500 jobs), and the unemployment rate has climbed to 7.1 percent. The June Beige Book confirms that the pace of job losses has decelerated, and staffing firms note that demand for contract work is picking up.

Two service sectors have bucked the trend and are still adding jobs (Chart 2). Through May, employment in the education and health services industry has climbed 4.6 percent (24,600 jobs), while the leisure and hospitality sector has grown its payrolls by 1,700 positions.

Homebuilding and Prices Remain Depressed but Sales Activity Ticks Up
The pullback in single-family home construction has not let up. Permits fell 32 percent, and starts were down 54 percent in May compared with year-ago levels (Chart 3). However, contract values, which are 32 percent below year ago levels, appear to be bottoming out. Homebuilders say that new-home inventories have been greatly reduced, and outlooks suggest a pickup in home starts.

Existing-home sales rose at a 2.6 percent pace in May thanks to the first-time homebuyer tax credit and relatively low interest rates, but sales are still down 18.4 percent from May 2008 levels. The recent uptick in sales may be short-lived because a large share of the current increase is driven by the tax credit, which expires on Nov. 30, 2009.

Downward pressure on home prices has mounted as economic conditions in Texas have weakened. Price indexes produced by the National Association of Realtors and Case-Shiller, as well as the Federal Housing Finance Agency's purchase-only index, indicate some erosion in Texas prices, but compared with the national averages, values in Texas have held up better.

Texas mortgage foreclosures rose in the first quarter, although levels remain much lower than the nation due to a slower pace of job losses and relatively steady home prices (Chart 4). The share of delinquent mortgages continues to climb as well.

Commercial Real Estate Continues to Falter
Nonresidential private construction is falling as investors and lenders shy away from real estate. Office, industrial and retail vacancy rates are rising as companies downsize, industrial production and global trade remains sluggish and consumers rein in their spending. Sales of commercial properties dropped sharply in the first quarter of 2009 compared with the previous year's levels in all four major Texas metros. In contrast, public-sector construction spending is holding up, with expansion projects under way at some hospitals and universities.

Manufacturing Shows Some Signs of Stabilization
The June Texas Manufacturing Outlook Survey suggests that declines in overall manufacturing activity appear to have slowed over the past four months (Chart 5). The June Beige Book also reported that despite ongoing broad-based weakness in the state's manufacturing sector, there were more signs of stabilization compared with the last survey.

Texas Exports Plummet in First Quarter, but April Data Show Slight Improvement
Texas exports continued their decline in the first quarter, plunging 12.3 percent, following a drop of 7.4 percent and 1.3 percent in the last two quarters of 2008. Exports to most of the state's major trading partners saw large declines in the first quarter, with the exception of export demand from China, which held steady.

Despite weak quarterly numbers, monthly data show that Texas exports grew 1.6 percent in April (Chart 6). Anecdotal Beige Book reports confirm this uptick, with contacts in cargo, container and intermodal trade noting an improvement in demand.

Retail Sales Firm Up at Low Levels, but Expectations Remain Uncertain
Retail sales data, available through April, point to continued declines in spending. However, more recent anecdotal evidence brightens the grim picture, with Beige Book reporting slight improvement in sales and traffic in May. Retailers note that sales in Texas are faring better than in other parts of the country. That said, activity remains well below year-ago levels and the outlook remains uncertain.

Outlook Points to Continued Weakness
Texas' economy remains fragile, but additional signs of life have surfaced in recent weeks. The Texas Index of Leading Indicators, which forecasts employment growth for the state, edged up 1.3 percent in April—its first positive reading following nine consecutive months of declines. Nonetheless, the employment forecast of a 3.5 percent contraction in 2009 (or a loss of approximately 350,000 jobs) remains unchanged, and the outlook is of continued weakness in the medium term.

—Laila Assanie and Michael Nicholson

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About the Author Assanie is an associate economist and Nicholson is a research analyst in the Research Department at the Federal Reserve Bank of Dallas.