Texas Economic Update
Texas Economy Strengthens
The Texas economy is growing at a moderate pace. Employment continued to expand in May and the Texas Business Outlook Survey (TBOS) indexes point to a pickup in the manufacturing and services sectors, but slightly slower growth in retail from April to May. The latest Dallas Fed Texas Employment Forecast for 2017 ticked up slightly from 2.4 to 2.6 percent. Downside risks are sharply declining oil prices, continued strength in the dollar and uncertainty regarding both U.S. trade and tax policy.
Employment Growth Picks Up in May
Texas added jobs at a 2.4 percent annualized rate in May, faster than the 2.1 percent increase in April. Texas employment has grown at an annualized 2.5 percent pace year to date, outpacing the nation’s 1.3 percent increase.
The manufacturing and energy sectors saw continued job gains in May, as oil prices stabilized and the effect of the strong dollar on exports abated somewhat. The energy sector continues to make significant employment gains since fourth quarter 2016, after losing 1 in 3 jobs from its previous peak in fourth quarter 2014. Construction employment expanded 6.5 percent in May, following a 10.4 percent decline in April. Goods-producing sectors have added jobs at a 6.5 percent rate year to date, outpacing the 1.9 percent growth in private services. Most service sectors have added jobs year to date, though information services has contracted.
Boosted by the recent stability in oil prices, Houston employment expanded for a fifth consecutive month in May, registering the fastest year-to-date growth among the major metros. Payrolls in Dallas–Fort Worth recovered from April’s 3.7 percent decline with 4.9 percent growth in May, and the metro has expanded 2.3 percent year to date. Of the major metros, only Austin reduced employment in May, though it still has registered 1.8 percent growth year to date (Chart 1).
Labor Market Remains Tight
The state unemployment rate dropped from 5.0 percent to 4.8 percent in May, which exceeds the 4.3 percent May rate for the nation. This drop was driven by a decrease in the labor force that exceeded a slight decline in household employment. It is worth noting that, although the Texas unemployment rate is higher than the nation, the incidence of discouraged workers, the marginally attached and the underemployed have been more muted and remain mostly at or below their national rates (Table 1).
Table 1: Broader Measures of Labor Market Slack
|U-3 (headline unemployment rate)||5.1||4.6||5.7||5.2|
|Part time for economic reasons||3.2||3.5||3.1||2.8|
|U-6 (broader unemployment rate)||9.2||9.1||9.7||9.0|
|NOTES: See www.bls.gov/lau/stalt.htm for definitions of special
unemployment rates. U-6 (broader unemployment rate) equals U-3 (headline unemployment rate) plus discouraged
workers, marginally attached, and part time for economic reasons, although U-6 may differ from the total due
to rounding. The prerecession period excludes 2001.
SOURCES: Bureau of Labor Statistics; Current Population Survey; authors' calculations.
TBOS Indexes Suggest Strong Growth in Manufacturing
The three-month moving averages of the TBOS headline indexes suggest a strong recovery in manufacturing in recent months, with some slowing in service sector growth (Chart 2). Alternative indexes constructed using Texas Manufacturing Outlook Survey responses show positive growth in both energy- and exports-related manufacturing in Texas (Chart 3). Slower growth in energy- and exports-related production relative to overall manufacturing output reflects that the energy and export sectors are still recovering from the oil bust and the impact of the strong dollar, respectively.
Residential Construction Recedes While Home Prices Appreciate
Most indicators of residential construction receded in April after posting gains in March. Housing starts, single-family permits, multifamily permits and real residential contract values fell in their most recent April readings. In contrast with the weak April numbers for residential construction, nonresidential construction contract values and nonbuilding construction contract values increased.
Existing-home sales edged up in April from March and have increased 6.0 percent year over year in April—a faster pace than the year-over-year rate of 4.9 percent in March. Inventory of existing homes in Texas held steady at 3.7 months in April, and the supply of homes remains tight in most metros.
With strong demand and inadequate supply, almost all house price measures suggest that house price appreciation continues. The Case-Shiller home price index for Dallas was up 8.6 percent year over year in March 2017. The index grew at a healthy 6.6 percent annual rate from February to March. The quarterly Federal Housing Finance Agency (FHFA) house price index for Texas also increased 5.7 percent (annualized) in first quarter 2017, following 6.1 percent growth in fourth quarter 2016.
Auto Delinquencies Rise Driven by Subprime Loans
Delinquency rates on auto loans have been trending up in both Texas and the U.S. (Chart 4). Underlying this trend is an increase in auto loans to subprime borrowers (Chart 5). From first quarter 2014 to first quarter 2017, the balance of subprime loans increased 41.0 percent, while that of other auto loans increased 31.6 percent. Additionally, the percent of subprime loans that are seriously delinquent has increased over the same period from 12.9 percent to 15.0 percent, while the percent of other loans that are seriously delinquent has decreased from 0.6 percent to 0.4 percent.
These trends corroborate anecdotal reports that loose credit standards and an increase in the incidence of subprime auto loans are likely behind the recent rise in auto delinquency rates. Contacts reported in the May Beige Book that auto lenders have tightened credit amid the increase in delinquencies. With rising interest rates, analysts expect both auto and credit card delinquencies to increase further in 2017.
Texas Leading Index Indicates Continued Growth
The Texas Leading Index rose 0.61 percent in April, and the three-month change in the index from February to April was 1.70 percent, indicating continued growth going forward (Chart 6). The U.S. leading index contributed positively to the three-month change.
About the Authors
Gullo is a research assistant and Kumar is an economic policy advisor and senior economist in the Research Department at the Federal Reserve Bank of Dallas.
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