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Texas economy remains strong despite weakening outlook


Laila Assanie and Keighton Hines

June 23, 2022

Texas’ economic expansion remained solid in May, although the pace of growth slowed. Employment gains remained robust. Growth in manufacturing output picked up, but revenue growth in services slowed. Ongoing supply chain disruptions and labor shortages continue to drive up input costs. Businesses, particularly in the service sector, have noted a reduced ability to pass on higher costs to customers.

Conditions in the housing market have weakened considerably, with home sales declining, although prices have remained at record highs. Optimism about the outlook has faded and uncertainty has risen amid expectations of an impending slowdown, with persistent inflation and higher interest rates.

Employment increases in May

Employment in Texas rose 6.2% at an annualized rate in May, higher than April’s 5.2% increase and above the US rate of 3.1%. Employment growth was mostly broad-based, with the exception of the oil and gas and education and health services sectors. Texas’ unemployment rate fell to 4.2% in May, but remained above the US figure (3.6%), in part due to stronger labor force growth in the state.

Year-to-date through May, payrolls in Texas rose an annualized 5.6% (298,400 jobs), with gains in nearly every industry outpacing those in the United States (Chart 1). Over the five-month period, growth was strongest in the energy sector (19.1%), supported by high oil and gas prices.

Chart 1: Texas job growth in January exceeds the state's long-term average of 2%

Downloadable Grid | Chart data

Growth in the state’s two largest employment sectors – commerce, transportation and utilities, and professional and business services – was strong, exceeding 5.0%. The sectors together account for more than a third of state employment. Dallas Fed forecasts call for 4.0% job growth in Texas in 2022, suggesting the rate of expansion will slow in the coming months from its current robust pace.

The labor market remains tight. Texas businesses continue to report hiring difficulties and job postings remain well above pre-pandemic levels. However, initial Texas unemployment insurance claims have steadily increased since early April and, as of the week ended June 11, were largely back to levels last seen in early March 2020 at the onset of the COVID pandemic. -19.

Services growth is slowing; Mixed Manufacturing

Results from the Dallas Fed’s Texas Business Outlook Survey (TBOS) indicate that expansion in the state’s service sector slowed significantly in May. Growth in industrial production strengthened while demand weakened. New orders and the growth rate of the order index fell to their lowest in two years, indicating a slowdown in the expansion of production to come.

In May, the general sentiment-based business activity index for the manufacturing sector turned negative for the first time since July 2020. The services sector index fell to near zero, meaning that service companies were roughly split in their assessment of whether or not economic activity is deteriorating. improved over the past month. The outlook has weakened for both sectors, uncertainty has increased and expectations for production and revenue expansion in the next six months (end of 2022) were less optimistic.

Supply chain bottlenecks persist

Supply chain challenges remain prevalent, particularly among companies sourcing internationally, in part due to added stress from the Ukraine-Russia conflict and COVID-19 lockdowns in China. According to the May TBOS, 65% of companies had supply chain issues, the same proportion as in February. Texas companies with international supply chains were more prone to disruptions: 87% of foreign suppliers experienced disruptions, compared to 42% of companies with only domestic suppliers.

The expected timeline for supply chain standardization continues to lengthen. Among businesses facing supply chain disruptions in May, only a quarter expect conditions to return to normal within the next six months and 37% expect it to take longer. a year.

In June 2021, nearly half of companies believed these supply issues would be resolved within six months and only 13% said it would take longer than a year. A weighted average of TBOS respondents’ expectations for supply chain resolution reveals that time to standardization decreased from 7.4 months in June 2021 to 9.6 months in May 2022 (Chart 2).

Chart 2: Supply chain disruptions continue among manufacturing companies

Downloadable Grid | Chart data

Expectations for supply chain standardization have deteriorated more among large businesses than among small ones, as shown by a comparison of the current TBOS results with those of February 2022. Small businesses (less than 100 employees) were more optimistic in May about the timeline for normalization: 31% said they expected supply chains to normalize within six months, compared to 19% of large companies (more than 100 employees). In February, 33% of small businesses and 28% of large businesses expected supply issues to be resolved within six months.

Cost pass-through decreases

Pricing pressures remain high, with input and selling prices at or near record highs. But passing on costs has become more difficult for businesses, especially for small businesses and businesses in the service sector.

According to the May TBOS, only 24.6% of all respondents passed on most or all of their higher costs to customers via price increases, compared to 35.2% in December. Most companies that have passed on rising costs have done so by raising prices this year (85%), although 29% plan to raise prices next year as well.

Large companies had more leeway – around 30% said they could pass on most or all of their increased costs, compared to 21% of small companies.

By industry, cost pass-through was lowest in the services sector, particularly in professional and technical services and in education and health services (Chart 3). Respondents from the education and health sectors attribute this to fixed tuition fees and Medicare and insurance reimbursements. Conversely, manufacturers and wholesalers reported the greatest ability to pass on costs. According to anecdotal feedback from these companies, customers recognize supply chain constraints and increases in input costs and are therefore more accepting of price increases.

Chart 3: Price growth accelerates in February and hovers around record highs

Downloadable Grid | Chart data

The hot housing market is cooling

The housing market appears to have reached an inflection point, with the recent surge in mortgage rates and record prices having dampened demand. Sales of existing homes in Texas fell 2.2% in March on a monthly basis and remained flat in April. Weekly data from Redfin, a national real estate brokerage firm, indicates that sales continued to decline until mid-June (Chart 4).

Chart 4: Wage Growth, Benefits Reduced in February, Remaining High

Downloadable Grid | Chart data

Traffic from new homebuyers has been disappointing, cancellations are up, conversions are taking longer, and waiting lists are shrinking. Incentives are being reintroduced to drive sales, particularly mortgage rate buyouts, rate locks and closing costs. Some builders are also releasing homes earlier in the construction cycle to allow customers to lock in rates.

The slowdown is more pronounced among entry-level buyers, although high rates are also starting to hit other segments, such as investors. Despite the slowdown, median home prices continue to rise and set another record high in April.

The pace of price increases is slowing, with contacts noting that offers are closing in on asking prices, unlike the premiums seen before. Most homebuilders say they have kept their base prices stable over the past few weeks. With mortgage rates approaching 6%, home sales and price growth will continue to slow.

about the authors

Laila Assanie

Assanie is a senior business economist at the Federal Reserve Bank of Dallas.

Keighton Hines

Hines is a senior research analyst at the El Paso branch 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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