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Regional Economy Continues Moderate Expansion

December 19, 2013 · Update in PDF PDF

The Texas economy has continued to grow at a moderate pace in recent weeks. Employment has picked up significantly following weak growth in August. Energy job growth has subsided from high third-quarter rates, and construction jobs have rebounded after weakening in August. Manufacturing increased strongly in October, in part due to strength in Texas exports.

Overall job growth in 2014 is likely to be nearly the same as in 2013. Manufacturing activity is likely to pick up, while growth in energy and residential housing construction jobs may decelerate and federal government jobs will likely decline.

Employment Activity Improves

Texas jobs grew at an annual rate of 2 percent in October, 3.7 percent in September and 0.3 percent in August (Chart 1). Despite the uncertainty surrounding the October federal government shutdown, private sector hiring was largely unaffected, with employment growing above the long-term trend of 2.1. Unemployment fell to 6.2 percent in October from 6.4 percent in August, the lowest level since the beginning of the year.

Over the past year, job growth in metropolitan areas with a large share of federal employment has slowed compared with the rest of Texas (Chart 2). While federal employment represents only 1.7 percent of nonagricultural employment in Texas, its proportion is twice as large in areas along the Texas–Mexico border and in San Antonio. These areas encountered headwinds from federal spending cuts in 2013, which hampered growth not only in direct federal civilian employment, but also private industries such as defense manufacturing and health care that rely on federal contracts.

Real Estate Prices Continue to Rise

The Dallas Fed’s Beige Book reported a softening in the housing sector, in part due to large home price increases in the region through October. Existing-home inventories remained at a historic low of 3.8 months of supply, a strong contributing factor to the recent upward pressure on home prices, which in turn led existing-home sales in October to decline 2.9 percent from their peak in August.

Construction Growth Mixed

Despite continued increases in overall construction—including nonresidential—residential activity remained flat. Residential permits spiked in October due to a surge in multifamily permits, but overall activity in recent months and increases in the 30-year mortgage rate suggest a slower pace of growth in residential construction in 2014 (Chart 3).

Nonresidential construction continued to grow strongly through October, and the population-weighted office vacancy rate across Dallas–Fort Worth, Houston, Austin and San Antonio continued to decline (Chart 4). Typically, office vacancy rates below 16 percent coincide with a rise in office construction, which has proved to be the case for much of 2013. The continued decline in vacancy rates suggests that growth in nonresidential construction will somewhat offset the slower growth of residential construction in the coming year.

Energy Beginning to Level Off

Energy activity has slowed since October from the very strong growth seen in the third quarter. The Texas rig count grew slightly in November but remained 2 percent below its peak value in August. The rig count has been generally stable throughout the year.

Exports Pick Up in October

Texas exports grew 4.2 percent in October after posting weak growth in September and a moderate 2.9 percent decline in August. Texas exports are up 12 percent year to date through October, while the Dallas Fed’s manufacturing production index has continued to rise since September (Chart 5). Accordingly, manufacturing employment grew at a 4.5 percent annual rate in October.

Inflation Remains Mild

Texas remains one of the fastest-growing areas in the nation, and its low levels of inflation reflect lower overall inflation in the U.S. The Dallas Fed’s Texas Service Sector Outlook Survey captures business expectations of future price changes, and a statistical analysis shows that this index tracks closely with overall U.S. inflation. The survey indicates a slight increase in inflation pressure in November, but overall price pressures remain mild (Chart 6).

Outlook for Continued Moderate Growth

Going into 2014, the Texas economy remains poised for moderate job growth of about 2.5 percent, which is similar to 2013. Although the Texas Leading Index flattened in October, it has accelerated overall since midyear. Slower growth in residential construction and continued cuts in federal government spending will hinder expansion, but faster growth in manufacturing and a stable energy sector will keep Texas on track for job growth exceeding the 20-year historical average of 2.1 percent (Chart 7).

—Christopher Slijk and Keith Phillips

About the Authors

Slijk is a research assistant and Phillips is a senior economist and policy advisor in the Research Department at the San Antonio Branch of the Federal Reserve Bank of Dallas.

 

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