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Resilient Texas Economy Dodges Recession but Oil Prices Pose Continued Risk, Says Dallas Fed

For immediate release: March 31, 2016

Southwest Economy Also Highlights Efforts to Improve Financial Literacy and Outlooks for Commercial Real Estate and Home Prices

DALLAS—Texas job growth has slowed, but the state has so far averted recession, according to the latest issue of the Federal Reserve Bank of Dallas’ Southwest Economy. Employment is expected to grow in 2016, according to a Dallas Fed employment model, but the downturn in oil prices continues to create uncertainty.

“Oil prices averaging less than $30 per barrel pose the greatest risk to the outlook and could result in overall job losses,” write Keith Phillips and Christopher Slijk in “Texas Economy Remains Resilient, but Low Oil Prices Loom as Future Risk.” “Besides further decreasing energy and manufacturing employment, low oil prices could increase problem loans at financial institutions with exposure to the [energy] industry.”

Texas oil and gas-related employment fell 19.4 percent in 2015 as oil prices dropped 66 percent, and the rig count has plummeted by nearly 75 percent since mid-2014, according to the authors. The decline in energy and manufacturing employment created a regional divide in economic performance. Growth was weaker in areas with a bigger share of energy-sector jobs, such as Midland, Odessa, Corpus Christi and Houston. Meanwhile, regions such as Austin, Dallas and San Antonio continued to see strong growth.

While low oil prices have slowed the state’s economic growth, several factors have helped mitigate the overall impact, including a rapidly expanding workforce and an increasingly diversified economy that has become more like that of the U.S. since the 1980s. The mining sector, which includes energy jobs, accounted for only 2.7 percent of jobs in 2014 vs. 4.5 percent in 1982. As a share of output, mining went from a peak of 15.1 percent in 1981 to a low of 4.2 percent in 1999 before rebounding to 13.5 percent in 2014 amid the shale revolution.

Nevertheless, oil prices continue to pose a risk to the forecast, the authors stress. If oil prices were to remain below $30, not only could job growth turn negative, but loan defaults and oil and gas bankruptcies would likely increase, they say.

“As credit among energy producers began drying up in the face of falling oil prices, delinquencies in oil and gas-related loans picked up in the second half of 2015,” Phillips and Slijk write. “However, overall loan quality held up, and data through fourth quarter 2015 show that banks in the Federal Reserve Eleventh District—largely Texas—con­tinued to be more profitable than the U.S. average.”

In “High School Financial Literacy Mandate Could Boost Texans’ Economic Well-Being,” Camden Cornwell and Anthony Murphy discuss how financial literacy coursework required in Texas high schools seem to have significantly improved consumer credit measures among young Texans.

In a 2012 survey of financial literacy conducted by the Financial Industry Regulatory Authority, the average Texas test score ranked 45th out of 50 states and the District of Columbia. Financial literacy has a strong correlation with financial well-being, which can be reflected in credit scores, the authors write. Texas average credit scores ranked even lower than the financial literacy scores, coming in at 47th. Texans also rank poorly in measures of outstanding medical debt, dependence on high-interest loans and preparation for retirement.

However, the picture is not entirely bleak, according to the report’s authors. In 2007, the state began requiring coursework in personal financial literacy for high school students, and that seems to be having a positive impact.
“After the mandate, the credit scores of young Texans rose significantly and their loan delinquency rates fell,” the authors write. Despite these improvements, the authors say that more work needs to be done to improve financial behavior and outcomes for Texans.

In “Texas Office, Industrial Markets Mostly Healthy Despite Energy Bust,” Laila Assanie looks at how the state’s commercial real estate activity has generally remained strong despite an energy-related slowdown in Houston.
“Net absorption of office space set records in 2015 in most major Texas met­ros, and continued solid demand kept industrial vacancy rates in the low single digits despite high levels of ongoing con­struction,” Assanie writes. “Rents rose for both industrial and office space and increased markedly in some markets.”

This issue of Southwest Economy also includes an “On the Record” conversation with James Gaines, chief economist of the Real Estate Center at Texas A&M University. He discusses the rapid rise in Texas home prices even amid the energy slowdown and explains the important role that municipal utility districts (MUDs) play in Texas single-family housing construction.

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Media contact:
Jennifer Chamberlain
Federal Reserve Bank of Dallas
Phone: (214) 922-6748
Email: Jennifer.Chamberlain@dal.frb.org