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Signs of Growing Slowdown in Texas; Pricing pressures ease


Mytiah Caldwell and Yichen Su

August 04, 2022

The Texas economy continued to expand in June and July, albeit at a slower pace compared to the start of the year. There are growing signs of slowing activity, particularly weaker demand in the manufacturing sector, although overall employment growth remains strong.

The trade outlook was negative and price and wage pressures eased in July. Home prices in some metropolitan areas appear to have peaked and apartment rent increases are slowing.

Strong job growth in Texas

Texas job growth accelerated to an annualized 7.3% in June, beating the downwardly revised rate of 5.6% in May. The expansion of the state was widespread during the second quarter. Texas led the nation in every sector except government (Chart 1).

Chart 1: Texas second-quarter job growth outpaced the US in every sector except government

Downloadable Grid | Chart data

The fastest growing sector was energy, where employment grew at an annualized rate of 22%. The information, leisure and hospitality and construction sectors also grew strongly in the second quarter. Dallas and Houston led major Texas metropolitan areas in employment during the quarter, with Dallas gaining 9.7% on an annualized basis and Houston 7.7%.

The Dallas Fed’s job forecast for Texas calls for 4.5% growth this year (December vs. December), an upward revision from previous forecasts due to June’s strong performance. These gains pushed the growth rate in the first half of the year to an annualized 5.8%. While employment forecasts imply a slowdown in the second half, the state is still expected to exceed its historical average of 2% growth.

The unemployment rate in Texas fell to 4.1% in June from 4.2% in May. Unemployment rates for black and Hispanic workers fell more than for white workers in the first half of the year. The improvement indicates that the racial gap in unemployment rates seen at the height of the COVID-19 pandemic has narrowed significantly this year.

Economic activity increases in July; The outlook remains pessimistic

Texas’ economy expanded in June and July, although the pace of growth slowed significantly from the start of the year, according to the Texas Fed’s Texas Business Outlook Surveys (TBOS). Dallas. The manufacturing production index rose from 2.3 to 3.8 from June to July, while the service sector income index was virtually unchanged (Chart 2). TBOS indices are diffusion indices, with positive values ​​generally indicating growth and negative values ​​reflecting contraction.

Chart 2: Texas economy continues to grow, but at a slower pace

Downloadable Grid | Chart data

While manufacturing output growth remained positive, manufacturing demand indices such as new orders and the growth rate of orders indicated contraction in June and July, reaching their lowest levels since mid-2020. .

The retail sector has struggled this year, with sales falling at an accelerated rate. Despite the weakness reported by retailers, state sales tax revenue rose 16.4% year-over-year in June, suggesting spending was up from a year ago. .

In June, respondents to the TBOS survey answered a special question on income constraints. The responses suggest that weak demand is increasingly limiting business revenues; 26% of businesses reported weak demand in June, compared to 15% in March 2022.

Supply chain constraints and labor shortages remained the top challenges cited. Additionally, the TBOS special questions in July show that the share of companies looking to hire workers has declined since April, reaching its lowest point in more than a year. Even with a slightly reduced demand for labour, most survey respondents indicated that hiring remains problematic, although the difficulty in filling low- and medium-skilled positions eased in July compared to November 2021, when this question was last asked.

Despite continued expansion, business prospects were gloomy in June and July (Chart 3). Businesses have expressed growing uncertainty and worry about a possible economic slowdown.

Chart 3: downgraded company outlook in June, July;  Increased uncertainty

Downloadable Grid | Chart data

Yet, since power generation makes up a larger part of Texas’ economy than the national economy, the state typically outperforms the United States when oil and gas prices are high. Chart 4 plots the Texas job growth premium (Texas 12-month job growth rate minus the national 12-month job growth rate) and the simultaneous benchmark price series of the West Texas Intermediate oil.

Chart 4: Texas often outperforms the US economy when the price of oil is high

Downloadable Grid | Chart data

The chart illustrates a strong degree of co-movement between these two series. In the event of a national slowdown or recession, this relationship suggests that the Texas economy could outperform the nation given recent high oil and gas prices.

The housing market is slowing down

The housing market is showing signs of slowing down. The months of supply of homes in Texas metros was higher in June than at the same time last year. In particular, Austin has seen a faster increase in the number of homes for sale than other metropolises, and the number of sales has fallen faster than other regions. The rate of home price increases slowed in June, with the median price peaking in Houston and San Antonio and declining slightly in Austin.

Rent growth has similarly slowed in Texas metros, with Austin seeing the most pronounced slowdown after a year of rising rents that led other Texas metros into 2021. Apartment occupancy rates remained high in recent months.

The Dallas Fed Banking Conditions Survey shows continued growth in lending volume in June, although residential real estate lending remained flat. Financial institutions in Texas expect loan demand to weaken in the coming months.

Pressure on prices and wages eases in July

Pricing pressures have increased – the Houston Metro Consumer Price Index (CPI) for June, which reached 10.2% annualized, exceeded the national CPI by 9.1%. In particular, energy and food prices rose more in Houston than in the United States

However, TBOS results indicate that upward pressure on prices in Texas likely eased in July (Chart 5).

Chart 5: Upward price pressure eased in July, Texas Business Outlook Survey shows

Downloadable Grid | Chart data

The manufacturing input price index fell sharply from 57.5 in June to 38.4 in July. The service sector input and broadcast selling price indices also declined after remaining at highs through June. Based on the survey results, inflation appears to have slowed in Texas in July.

about the authors

Mytia Caldwell

Caldwell is a research analyst in the research department of the Federal Reserve Bank of Dallas.

Yichen Su

They are is a Research Economist in the Research Department of the Federal Reserve Bank of Dallas.

The opinions expressed are those of the authors and should not be attributed to the Federal Reserve Bank of Dallas or the Federal Reserve System.

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