Outlook for the Texas Economy

The Texas economy slowed in March in the wake of lower oil prices, a strong U.S. dollar, and a weak global economy. That’s the summary of Luis Torres and Wayne Day for the Real Estate Center at Texas A&M University. The duo’s research shows that the number of jobs in the state decreased in March, although annual employment grew primarily due to the services sector, trade, and leisure and hospitality. The unemployment rate ticked up with increased participation in the labor force. Texas manufacturing and mining and logging employment declined, while services continued a positive trend. Texas housingdemand improved moderately although Houston exhibited more pronounced weakening.

The Texas Leading Index, which signals future directional changes in the business cycle, edged up in March 2016, although the overall trend has been declining since its August 2014 peak. The index was negatively affected by declines in well permits, Texas value of the dollar, the help-wanted index, and average weekly hours worked. The index was only positively affected by moderate increases in oil prices, stock prices of Texas-based companies, and a dip in new unemployment claims. The Texas Business Cycle Index, which measures current economic activity, continued its positive trend in March.

Texas Housing demand showed some signs of gaining strength. In March, statewide housing sales increased 8.5 percent year-over-year on a seasonally adjusted basis (positive 7.2 percent not seasonally adjusted). Austin, Dallas-Fort Worth, and San Antonio continued to register an increase in sales. Houston dropped 0.9 percent year-over-year seasonally adjusted (positive 2.9 percent not seasonally adjusted), reflecting the impact of the energy sector decline. Overall, Texas housing sales, after slowing down in prior months, appear to be growing at a more rapid pace.

On the supply side, the number of building permits issued in March increased moderately in Texas although still below the rate of growth for the U.S. Austin recently experienced positive year-over-year growth for the first time since April 2015, with eight straight months of uninterrupted increases in permitting. Dallas-Fort Worth building permits leveled off after rapid growth in prior months while Houston and San Antonio posted negative year-over-year values due to the lack of developed lots for housing construction. During March, Houston and Dallas-Fort Worth led the nation in the number of single-family permits issued followed by Atlanta, Phoenix, and Austin.

Months of Inventory of Texas houses for sale remained low at near 3.7 months of inventory in March compared with 5.8 for the nation (seasonally adjusted; around 6.5 months of inventory is considered a balanced housing market). Overall, supply has been restricted due to limited lot inventory and construction labor shortages.

Rising Texas home prices reflect the low inventories resulting from constrained supply and steadily increasing demand. Since 2011, Texas home prices have increased more rapidly than the rate of increase for the U.S. In 4Q15, the U.S. and Texas FHFA Purchase-Only Housing Price Indexes increased from the prior year by 5.8 percent and 7.6 percent, respectively.

West Texas Intermediate crude oil prices averaged $37.77 per barrel in March compared with $47.77 a year earlier. A world oil supply glut pressured oil prices downward in the face of static demand. The decrease in the number of operating rigs in Texas continues in 2016 and has caused oil production to decline slightly after reaching a peak in March 2015. Registering a more pronounced fall in March 2016, market observers expect Texas oil production to fall more forcefully later in 2016.

Texas employment continued to register a positive annual growth rate although it lost 12,000 jobs during March from February. After the employment growth rates in the United States and Texas converged in 3Q2015, Texas continued beneath the year-over-year employment growth rate (seasonally adjusted) for the U.S. during March.

Much of the employment growth occurred in the services sectors, primarily financial services, education and health services, professional and business services, as well in trade and leisure and hospitality. Even with the increase in retail trade employment, retail sales showed some weakness in March as retailers’ perception of economic conditions were mixed in the Texas retail outlook survey. The continued expansion in the services sectors follows the expectations presented by the Texas service outlook survey.

The major losses in March employment occurred in manufacturing and mining and logging. Construction employment grew by 1.3 percent year-over-year seasonally adjusted. Manufacturing employment continued a decline that started in April 2015 with a negative 4.2 percent year-over-year change and monthly job losses. Even with manufacturing employment contracting, the manufacturing outlook survey gave some signs that the sector has possibly rebounded with a positive production index. Both the employment data and the survey outlook could be signaling that a trough has been reached in the sector.

Houston, as expected, registered a more drastic slowdown in overall employment versus the other major metros in the state. Even in the presence of dramatically lower oil prices and drilling activity, total jobs in Houston were 0.3 percent greater than March 2015, despite the loss of 2,600 jobs from February 2016.

Job growth and the decline in the labor force in Texas helped to keep the unemployment rate below the national average. In March, Texas’ seasonally adjusted unemployment rate equaled to 4.6 percent compared with 5.0 percent for the U.S. Labor force participation reversed its trend over the past couple of years from workers opting out of the job market instead of joining the labor force. In the past few months, participation has increased in Texas and across the U.S.

Real total private employee hourly earnings in March fell 1.5 percent year-over-year, registering a lower growth rate than the nation since August 2015. Real earnings in Texas have not consistently remained above January 2007 levels on a seasonally adjusted basis. Real earnings for Austin and Houston have increased above January 2007 levels while Dallas, Fort Worth, and San Antonio have not.

Increases in the Consumer Price Index have been suppressed and remain low in the U.S. as a consequence of low oil prices and a strong dollar that has made imports cheaper. The Consumer Price Index for Dallas posted negative rates of year-over-year change from January 2015 until December 2015 when it registered a value above zero and then in March 2016 a positive 0.6 percent. The Consumer Price Index for Houston year-over-year change was 2.0 percent in February 2016.

Because of weakening global demand, lower oil prices, and a stronger dollar, U.S. and Texas exports of all commodities and manufactured goods fell in 2015 and continued to fall in March 2016 year-over-year. But the monthly gains give a possible sign that maybe a trough has been reached. The real trade weighted value of the U.S. dollar steadily increased for both the U.S. and Texas. This reflects the appreciation of the U.S. dollar with respect to world currencies, making U.S. and Texas exports more expensive to foreign buyers.

Note: Recent changes in the Real Estate Center’s data reporting have included shifting from reporting on Multiple Listing Service (MLS) areas to a Metropolitan Statistical Area (MSA). In this report, the respective charts reflecting these changes include Months of Inventory and Housing Sales.