Regional Economic Update
November 7, 2011
Texas Economy Continues to Expand at a Moderate Pace
Texas economic growth continues at a moderate rate. Conditions in the housing market are improving, with increased home sales and lower inventories; house prices, however, are stagnant. Despite recent weakness in oil prices, energy activity remains strong. Concerns regarding the European debt crisis, continued sluggishness in the national economy and prospects of further job losses in the state and local government pose notable downside risks.
In September, Texas gained 800 jobs at a 0.1 percent annual rate. Employment was largely flat because local education lost 16,100 jobs due to state budget cuts. Meanwhile, the private sector gained 24,000 jobs at a 3.3 percent annual rate. The unemployment rate remained unchanged at 8.5 percent.
Over the first nine months of 2011, total nonfarm jobs have grown at a modest 2.1 percent annual rate (Chart 1). The oil and gas extraction and mining support sector outperformed other sectors, with 17.6 percent annual growth in employment. Professional and business services grew at a 5.7 percent annual rate, and trade, transportation and utilities grew at a 2.8 percent annual rate. Sectors that have lost jobs this year include government and information.
Jobs growth in manufacturing decelerated in the third quarter, with weaknesses in durables, high-tech and chemicals. Dallas Fed Beige Book contacts also noted a slowdown in the high-tech sector due to global demand weakness. The Texas Manufacturing Outlook Survey’s production index remained positive in October at 4.1, but edged down from 5.9 in September, suggesting slightly slower but positive growth.
Construction and Housing
While construction employment growth remains relatively flat, residential construction is showing signs of improvement. Residential contract values jumped 10.7 percent in September (Chart 2). Single-family housing permits increased 2.6 percent in September and 11.8 percent in August after falling for three months. Multifamily permits have been on the rise since first quarter 2010, fueled by robust demand for apartment rentals.
Existing-home sales continue to trend upward, although home sales declined 2.1 percent in September after three months of increase. Home inventories remain unchanged at 7.1 months of supply. The S&P/Case–Shiller home price index for Dallas ticked up in August but is still down 1.9 percent from August 2010.
Commercial Real Estate
Commercial real estate has come a long way since prices bottomed out in late 2009. Since that time, office property prices have risen and capitalization rates for office properties—the required rate of return that investors use to price commercial properties—have come down in Dallas and Houston, in line with national trends (Chart 3). Second-quarter data on industrial availability and apartment vacancies indicate that conditions are much improved since last year. Despite an improvement in commercial real estate conditions across most major segments, overall market sentiment still remains cautious due to uncertainty regarding Europe and the national economy.
Dallas Fed Beige Book contacts report that energy activity continues to be strong in Texas. Even with the recent softening in oil prices, the rig count has soared to a new post-recession high (Chart 4).
Texas exports ticked up in July and August after declining in May and June (Chart 5). Exports are up by less than 1 percent (non-annualized) year to date. Continued export growth faces headwinds from two sources: a slowdown in Mexico and a stronger dollar.
The Beige Book reports that retail sales continued to grow in September although at a slightly slower pace than in August. The Dallas Fed’s Texas Retail Outlook Survey indicates that retail sales grew at a slower pace in October compared with September.
Helped by a recent drop in commodity prices, price pressures appear to have moderated. According to the Beige Book, there were some reports of an uptick in food, apparel and jewelry prices, but overall price pressures remained insignificant.
The outlook for the Texas economy is mixed. The Texas Leading Index fell in September for the fourth month in a row. However, the six-months-ahead index for all three Dallas Fed Texas Business Outlook Surveys remains positive, pointing to continued growth.
—Anil Kumar and Yingda Bi