October 2008

Growth in Texas Economy Slows

The Texas economy is facing the same headwinds afflicting the nation as a whole. In the third quarter, Texas showed growth, but at a slower pace than in previous periods. It appears the credit crunch is taking a toll in the region. High energy prices—which were supporting the oil and gas industry in Texas—have pulled back severely in recent weeks, but this also means businesses and consumers get some relief from the elevated prices.

Job Growth Wanes
Year-to-date nonfarm employment has grown at a meager 1.9 percent annualized rate, adding 150,000 jobs.  This is below Texas’ long-term trend growth rate—but far better than the nation as a whole—which saw employment fall 1.1 percent.  There was strong growth in oil and gas support, while the information services and manufacturing sectors saw declines (Chart 1).

After months of tight labor market conditions, there are signs of loosening. The state unemployment rate rose to 5.1 percent in September—an increase of 0.1 percentage point over August, but still below the national rate of 6.1 percent. These rates, however, do not account for losses due to Hurricane Ike.

Hurricane Ike
The impact of Hurricane Ike on Texas is not fully known at this point. Based on preliminary estimates, the statewide unemployment rate would be around 6.1 percent if we assume that everyone in Galveston is classified as unemployed for October. Unemployment claims spiked by 40,000 in September, and the University of Texas Medical Branch at Galveston is preparing to lay off a significant portion of their 12,000 person workforce. Current estimates put the total damage at over $11 billion (Chart 2).

The Credit Crunch
The credit crunch continues to take its toll nationwide, and Texas is no exception. Over the past six weeks lending standards have tightened further, as evidenced by anecdotal reports from Beige Book contacts. The contraction in credit markets is affecting multiple sectors, most notably commercial real estate. The total dollar volume of commercial real estate transactions closed year-to-date has dropped precipitously over the last year in all four major Texas markets.

Credit constraints are also hampering auto sales, as buyers can no longer finance their purchases. GMAC recently decided to limit loans to only those with FICO scores in excess of 700. This stands to have a significant impact on new car sales (and dealerships) in Texas because the average credit score in the state is lower than the nation's. According to Texas Comptroller's estimates, car sales dropped for the fifth consecutive month in August (Chart 3).

Continued Strength in Exports
Texas real exports grew 11.3 percent year-over-year in August, and exports to virtually all major trading partners grew faster in Q2 than in Q1. However, a slowing global economy and the sharp appreciation of the dollar in recent weeks—particularly against the peso—will most likely dampen export growth in the future.

Falling Energy Prices
Since hitting a high of $147 per barrel in mid-July, oil prices have plunged over 50 percent and are hovering in the mid $60s currently (Chart 4). Even after the decline, prices are still high enough on a historical basis to maintain industry activity.

Natural gas prices have fallen in tandem with oil, and reports indicate this has led to reduced drilling activity in the Barnett Shale. The credit crunch is also affecting natural gas drilling as some of the more leveraged players have been forced to cut back on capital expenditures. As of Oct. 2, the Texas rig count stood at 920, down 4 percent from the high in late August.

Housing Market Searches for Bottom
The housing market for both new and existing homes continues to stagnate, though the decline in construction activity has helped keep inventories in line. Texas new-home inventory stands at 6.8 months in a market where 6 months of supply is considered equilibrium, which compares with 11 months of supply for the nation on average.

The median sales price of existing homes was down nominally for Q3, though it fared much better than the nation. In a ranking by the PMI group, Texas was ranked at the bottom of the list of housing markets most at risk of a sustained decline in housing prices.

The Outlook Points to Weakening
While Texas is still stronger than the nation, the outlook is for further weakening over the coming months. Falling energy prices combined with the continued effects of the credit crisis have increased chances of a decline in economic activity. The downward movement in the leading index (Chart 5) also suggests that the Texas economy will slow further in the months ahead. On a brighter note, the Financial Times recently ranked Texas as the state most able to cope with the credit crisis.

—Anil Kumar and Jackson Thies

About the Author Kumar is a senior economist and Thies is a research assistant in the Research Department at the Federal Reserve Bank of Dallas.