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Regional Growth Continues at Moderate Pace

March 20, 2014· Update in PDF PDF

The Texas economy continues to expand at a moderate pace. January payroll job growth strengthened modestly from December and continued to outpace the nation. The unemployment rate declined sharply in January, reaching a five-year low. Despite recent weakness in home sales, the housing market remained robust, with low inventories and continuing house price appreciation. The energy sector also remained strong, and exports jumped in January following a dip in December.

Job Growth Up Slightly in January

The Texas economy added 21,200 jobs—a 2.3 percent annualized increase, up from 1.9 percent in December (Chart 1). Construction and services grew at a stronger pace in January, while the manufacturing sector lost jobs, partly due to adverse weather across the nation.

The unemployment rate declined 0.3 percentage points to 5.7 percent in January—a rate last seen in November 2008 (Chart 2).

Manufacturing Activity Continues to Expand

The Texas Manufacturing Outlook Survey (TMOS) production index increased for the 10th consecutive month in February, rising to 10.8 from 7.1 in January (Chart 3).

Despite robust manufacturing activity, the sector’s employment growth was sluggish for much of 2013, which may be partly due to long-term gains in productivity.

Residential Real Estate Faces Supply Limitations

Existing-home sales declined at a nonannualized 2 percent rate in January on the heels of a relatively flat December (Chart 4). Year-over-year growth was flat in January, compared with an impressive 22 percent increase the same month last year.

Sales could be slowing for a number of reasons. First-home affordability could be declining due to steady home-price growth, higher mortgage rates and stricter guidelines for qualified mortgages. Another possibility is a shortage of homes for sale. The average inventory of existing homes in Texas has plummeted to 3.6 months of supply, well below the six-month supply that is considered healthy.

Low home inventories could persist in the short term as single-family construction remains soft. Housing starts declined 19 percent month over month in January, although the five-month moving average was buoyed by strong growth in November and December (Chart 5). Single-family permits increased 3.6 percent in January but have yet to regain momentum after losing steam in the second half of 2013. Only multifamily permits have continued to grow, posting a 25 percent year-over-year increase in January.

Recent construction softness may be partly due to unusually cold weather, but the housing sector faces other constraints. Limited availability of vacant and developed lots has been a persistent problem for the past few months. Labor shortages, wage pressures and construction cost increases are also hampering activity.

Retail Growth Moderate; Wage Pressure Rises

The Beige Book reports weaker growth in retail and automobile sales in February compared with January, primarily due to adverse weather. Consistent with Beige Book reports of weather-related weakness, February’s Texas Retail Outlook Survey from the Dallas Fed pointed to slower growth as the sales index remained in positive territory but plunged from 20.7 to 5.

The Beige Book indicates that prices were mostly stable, while reports of wage pressures appeared to be more pronounced than in the previous reporting period. The TMOS wages and benefits index remained in positive territory, indicating continued wage growth.

Energy Activity Strong

The Beige Book reports that energy activity in Texas remained strong in February, and contacts sounded more optimistic than in January. Rig counts increased in the first week of March, although rig counts could understate energy sector strength because of increases in rig efficiency, particularly in the Eagle Ford in South Texas. Data on drilling efficiency from the U.S. Energy Information Administration show that oil production per rig (barrels per day) in the Eagle Ford increased 50 percent in the year ending in February 2013.

Exports Up in January

Texas’ monthly real exports increased 3.2 percent in January following a small decline in December. Exports to China and the European Union surged year over year in fourth quarter 2013, but exports to Latin America declined slightly. Exports to Mexico grew 6 percent year over year in the quarter, just half of the 2012 growth rate, reflecting a significant slowdown in the Mexican economy in 2013.

Outlook for Moderate Growth

The Texas Business Outlook Survey’s company outlook indexes declined in February, suggesting diminished optimism (Chart 6). The broad-based decline likely reflects weakness in the national economy in December and January and the adverse weather. To the extent weather was cited, this dip in optimism may well be temporary.

—Christina English and Anil Kumar

About the Authors

English is a research analyst and Kumar is a senior research economist and advisor in the Research Department of the Federal Reserve Bank of Dallas.


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