Regional Economic Update
Regional Economic Outlook Remains Mixed Going into 2016
The Texas economy picked up slightly after weakening at the end of the summer. Employment grew an annualized 2.2 percent in October on top of a revised 1.5 percent in September. The Texas Manufacturing Outlook Survey (TMOS) points to a pickup in manufacturing activity, while the Texas Service Sector Outlook Survey (TSSOS) continues to suggest sustained moderate growth in services. Despite a renewed decline in oil prices and continued strength in the Texas trade-weighted value of the dollar, the Texas economy is expected to grow at a modest pace in coming months.
Recent Job Growth Similar to Nation
Texas job growth has been close to the national average since the second quarter of this year (Chart 1). Employment growth was slightly faster in October than in the third quarter, but the quarterly pace has been close to 2 percent since weakening sharply in the first quarter.
Growth continues to be concentrated in the service sector, although construction employment accelerated in October (Chart 2). Jobs related to oil and gas remain in persistent decline, while the rise in the value of the dollar continues to hurt many manufacturers. Education and health services growth softened in October but remains strong year to date, while professional and business services employment has gained momentum all year. Leisure and hospitality employment has grown strongly most of the year.
Energy Sector Deteriorates Further
After stabilizing around $45 per barrel in October, West Texas Intermediate crude oil prices fell more than 20 percent to $37 in early December. This decline has put further downward pressure on the drilling rig count, which is only slightly above the low it reached during the depths of the 2008–09 recession.
Employment in areas of manufacturing tied to energy, particularly fabricated metals and mining machinery manufacturing, has been sharply curtailed since the beginning of the year (Chart 3). Historically, large swings in oil prices tend to lead job growth by about three months in these sectors, and this suggests the recent price decline will lead to further weakness in the months ahead.
Several Service Sectors Continue to Expand
Leisure and hospitality employment has grown at a strong 4.4 percent pace this year, likely due in part to the large decline in fuel prices, which has encouraged travel and contributed to an uptick in demand at restaurants and hotels.
Health care employment has also increased at a 4.4 percent annualized pace. Some of the strength may be attributable to rising health care utilization since last year. One measure of this is the sharp increase in Medicaid enrollments (Chart 4). Although Texas did not expand Medicaid coverage as part of the Affordable Care Act, the state has very low rates of enrollment relative to the eligible population, and the individual mandate for health insurance likely prompted eligible nonparticipants to enroll. Historically, however, health care job growth has moderated in the aftermath of a surge in new insurance enrollees, and it is likely that the pace of growth will normalize next year.
Real Estate Markets Healthy in Most Texas Metros
Despite concerns about the effects of a slumping energy sector, residential and commercial real estate activity is strong in the large metro areas, with the exception of Houston. Texas residential inventories remain at a low 3.4 months, while the value of new construction contracts and permits for new construction have picked up. Office vacancy rates in all major metros except Houston remain near historic lows. Several large projects, mostly concentrated in the Dallas–Fort Worth area, will likely buoy office construction through the beginning of 2016.
Price Growth Weak, but Wage Growth Strong in Texas
Low energy prices and the strengthening dollar continue to put downward pressure on prices, particularly in manufacturing. The Dallas Fed’s Texas Business Outlook Surveys in November showed prices falling in manufacturing for the 11th consecutive month and weak price growth in services.
However, wage pressure has been persistent in Texas as both the TMOS and TSSOS wage indexes have held above their postrecession averages (Chart 5). Wage pressures in manufacturing have come down from their postrecession highs near the end of last year but remain elevated due to continued difficulty in finding skilled workers.
Outlook Slightly Improved for 2016
The Texas Leading Index picked up in October for the first time in four months, rising 1 percent. Appreciation in the Texas trade-weighted value of the dollar has slowed since August, but the component was still the largest drag on the leading index over the three months ending in October (Chart 6). Falling oil prices and rising unemployment claims also contributed to the three-month decline but were offset somewhat by a pickup in the U.S. leading index and help-wanted advertising.
While October job growth exceeded expectations, the Texas employment forecast continues to predict slightly less than 1 percent growth during the last two months of the year. At this rate, overall growth for 2015 would be 1.3 percent, still positive but far below the 3.6 percent gain seen in 2014.
—Christopher Slijk and Keith R. Phillips
About the Authors
Slijk is a research analyst and Phillips is an assistant vice president and senior economist at the San Antonio Branch of the Federal Reserve Bank of Dallas.