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Regional Economy Shows Positive Signals

August 1, 2013 · Update in PDF PDF

The regional economy is expanding at a moderate pace, with employment growth slightly stronger in the second quarter than in the first. The Texas Manufacturing Outlook Survey (TMOS) headline index rose to its highest level in two years in June and remained at an elevated level in July, and Texas exports picked up in April and May after weakness earlier in the year. The housing and energy sectors remain major contributors to growth. The outlook for the rest of 2013 continues to project Texas job growth of 2 to 3 percent, weighed down by losses in federal government employment.

Employment Growth Above Trend

Employment growth in the first half of 2013 is just above the state’s long-term average and is outpacing many other areas of the country. Job growth was also slightly less volatile in the second quarter, suggesting that uncertainty may be affecting business decisions less than it was earlier in the year. That said, current numbers suggest job growth has slowed from last year’s stronger pace of over 3 percent (Chart 1).

Employment gains have been broad-based, with the biggest headwinds coming from the government and manufacturing sectors. Job growth in the private sector is 2.6 percent year to date, annualized. The Texas unemployment rate held steady in June at 6.5 percent, but remains elevated from a low of 6.2 percent in December 2012 (Chart 2).

Texas Business Outlook Surveys Suggest Optimism

The TMOS headline index reached its highest level in two years in June, suggesting strong growth in manufacturing output. The July index suggested some slowing from June, but recent strength in the index may portend better growth in the manufacturing sector, which has been a drag on employment growth this year. The most recent Dallas Beige Book report also supports recent strength in manufacturing.

The Texas Service Sector Outlook Survey (TSSOS) index for general business activity rose to its highest level in over a year, while the corresponding TMOS manufacturing index remained positive for the second month in a row, suggesting optimism about the general business conditions in the broader economy (Chart 3).

Housing Inventory Continues to Decline as Sales Increase

House prices continue to rise due to strong demand and historically low inventories, making the existing market a seller’s market. Home sales growth has been in the double digits every month year over year in 2013, and sales are up 16 percent year to date annualized.

Construction contract values picked up in June but are still historically low. Single-family construction remains robust, and apartment construction is expected to pick up after recent weakness. Single-family permits are up 14 percent from a year ago, but overall starts are down due to recent slower construction activity in the apartment sector (Chart 4).

Energy Continues to Drive the Texas Economy

The price of West Texas Intermediate crude oil spiked to $106 per barrel by mid-July (Chart 5). The Texas rig count has remained mostly steady but may rise in the latter part of the year due to increases in Gulf Coast drilling.

Petroleum and coal products are leading export demand, and exports have showed some signs of life recently after months of stagnation. Weak global demand is limiting growth in exports, however. The 2013 forecast for gross domestic product growth in Mexico, Texas’ largest trading partner, has been revised down to 2.8 percent from 3 percent.

Price Pressures Subdued Overall

In the most recent Dallas Beige Book, most responding firms said prices were stable, although there were some reports of increases due to factors such as rising jet fuel and home prices and higher mortgage rates. The Texas Business Outlook Surveys price indexes suggested mixed movements in prices. The manufacturing index for prices received for finished goods ticked up but remained in negative territory, while growth in prices paid for raw materials picked up. The Texas Retail Outlook Survey and Texas Service Sector Outlook Survey both suggested strong growth in selling prices for July. The retail survey’s selling price index posted its highest value in 11 months. All three surveys noted that wages and benefits indexes remained in positive territory, but the manufacturing and services indexes edged down, suggesting subdued wage pressures.

Outlook Depends on Several Factors

While the regional economy has improved, the outlook remains conditioned on the housing improvement and growth in the energy industry. Employment growth is forecasted to remain between 2 and 3 percent through the rest of the year. The Texas Leading Index ticked down slightly in May, though the three-month growth in the index remained positive, with contributions from the Texas Value of the Dollar, Texas Stock Index, well permits, new unemployment claims and the U.S. Leading Index (Chart 6).

—D’Ann Petersen and Melissa LoPalo

About the Authors

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

 

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