Texas Economy still expanding but low unemployment could constrain growth, says Dallas Fed economist

For Immediate Release: October 4, 2018

DALLAS—The Texas economy continues to post strong growth and outpace the nation, according to the Federal Reserve Bank of Dallas’ latest Texas Economic Update. However, an extremely tight labor market has made hiring difficult for local firms, and that could constrain the expansion.

“The most recent data for the Texas economy is very positive,” said Pia Orrenius, Dallas Fed vice president and senior economist, in a video accompanying the report. “We continue to grow at a very rapid rate. Over the summer months, we expanded at a 2.8 percent job growth rate. Now that’s down a little bit from the red-hot 3.5 percent in the second quarter, but it’s still a very high rate—much higher than the nation.”

The Texas employment growth forecast for the year is 2.8 percent (December/December, with a range of 2.3 percent to 3.3 percent), suggesting growth in the remaining four months of the year will slow further from the current pace. This slowdown comes not as a result of slowing demand but due to supply-side constraints, as firms struggle to find qualified workers, Orrenius said.

“The most significant constraint is the tight labor market,” she said. “We saw in August that the Texas unemployment rate slipped under 4 percent to 3.9 percent, and we have several large metropolitan areas in Texas that are far under the state average.”

Since the recession, wage increases in Texas have either been slow to materialize or hard to measure, according to the report—but that may finally be changing, Orrenius said.

“The tight labor market is causing wages to rise,” she said. “We have two measures of wage pressures. One is the Texas Business Outlook Surveys, where the wage and benefits indexes are at record highs.”

Orrenius also pointed to the Bureau of Labor Statistics’ Employer Costs for Employee Compensation data that point to “record wage growth in Houston and Dallas over the last year—about three to four times the pace of wage growth for the nation on average,” Orrenius said.

Another force acting to slow the red-hot economy is higher interest rates, according to the report. Housing markets in particular are sensitive to higher rates, and Texas house prices appear to be decelerating slightly. The latest reading of the S&P CoreLogic Case-Shiller Home Price Index for Dallas–Fort Worth puts year-over-year home price appreciation at 5.1 percent compared with 6.0 percent for the nation as a whole.

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