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Regional Economic Update

Regional Economy Still Expanding, but Outlook Is Uncertain

September 23, 2011 | Update in PDFPDF

The regional economy remains in recovery, although there are signs the pace of growth has slowed. Most data show the Texas economy continues to outperform the nation, driven in part by strong energy activity, yet the outlook is more uncertain. National and global factors appear to be weighing on businesses and consumers.

Labor Market
The Texas economy added 12,300 jobs in August. This compares with the national average of zero net change during the month (Chart 1). Texas job growth was 1.6 percent at an annualized pace, slower than in June and July. The unemployment rate rose to 8.5 percent in August, bringing Texas closer to the national average of 9.1 percent. On a positive note, Texas year-to-date employment growth stands at 2.5 percent, more than twice the national average of 1 percent.

Texas private-sector employment growth through August remained strong at an annualized pace of 3.2 percent. The energy sector has driven growth this year, and the sectors of trade and transportation, manufacturing, and leisure and hospitality have added jobs at a robust pace.

The government sector has recorded the most job losses, just over 9,000 this year, despite a small increase in August.

Construction and Real Estate
Construction remains subdued in Texas, with the exception of apartment buildings. However, residential and commercial real estate continue to show signs of improvement. Texas existing-home sales continued to rise in August, and the state edged closer to the six months’ supply of inventory that is considered healthy (Chart 2). Additionally, past-due mortgages and foreclosures continued to decline in Texas and the nation.

Manufacturing and Service Sectors
The Texas Business Outlook Surveys (TBOS) headline indexes for production, revenue and sales remained positive in August (Chart 3). The manufacturing survey’s headline index for production fell to 1.1, which suggests Texas factory activity was flat. The service survey’s revenue index suggested positive, but slower, growth in service-sector activity. The retail survey’s sales index rebounded from near zero growth in July, suggesting retail sales rose in August.

Dallas Fed surveys continue to report that uncertainty about national and global conditions is tempering business outlooks. Many Dallas Fed Beige Book contacts reported that stock market volatility and declining consumer confidence had dampened their outlook. TBOS respondents expressed uncertainty about increased financial regulation, possible tax changes, health care reforms and the current political environment.

Energy
The energy sector continues to drive economic activity in Texas. Drilling activity remains at high levels, although the rig count dipped by four in early September (Chart 4). The energy industry boosts state employment not only in the oil and gas sector but in related services such as engineering.

Exports
Real Texas exports were up 3 percent in July following declines in both May and June. Despite the declines, Texas exports rose 8.5 percent in the second quarter, with shipments to the European Union particularly strong. Exports to China, however, were down sharply at 16.4 percent.

Petroleum and coal products, together the largest share of Texas’ exports, rose 13.6 percent in the second quarter. Agriculture exports fell 20 percent, likely due to the severe Texas drought (Chart 5).

Agriculture
Drought in the Eleventh District remains severe, further deteriorating agriculture conditions. The Texas AgriLife Extension Service estimates losses of $5.2 billion in Texas through Aug. 1, already passing the previous record of $4.1 billion set in 2006.

High temperatures, and the driest 12 months on record since recording began in 1895, have led to unprecedented crop abandonment and yield reductions of between 40 and 60 percent.

Prices
Price pressures remain but appear to have eased recently on lower energy costs, while wage pressures are minimal. TBOS surveys noted rising selling prices for service-sector firms, albeit at a slower pace than in recent months. Just over 30 percent of respondents reported higher selling prices in the retail survey, leaving the price index for retailers at elevated levels.

Outlook Is Uncertain
The regional outlook is becoming more uncertain as national and global factors affect consumer and business sentiment. Consumer confidence has declined in both the region and the nation, although the regional decline has been less severe.

The Texas Leading Index, a composite of eight leading indicators, fell for the second month in July, suggesting slower employment growth (Chart 6). Job growth is expected to be moderate through the end of the year, contributing to a growth rate of between 2 and 3 percent for all of 2011, slightly below estimates from earlier this year .

—Christina Daly and D’Ann Petersen

About the Authors

Daly is a research assistant and Petersen is a business economist in the Research Department of the Federal Reserve Bank of Dallas.

 

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