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Regional Update
Texas Recovery on Track
May 2004

Priscilla Caputo reviews recent economic conditions in Texas.

The Texas economy is showing increasing signs of recovery. Job growth has been steady over the first quarter. Manufacturing job losses continue to hinder stronger employment growth, but at a decreasing rate. The recovery in job growth is becoming broader based across industries, with energy, construction, trade and transportation, financial services, leisure and hospitality, information, and education and health services all providing a modest boost. Energy-related activity has heightened due to elevated oil and natural gas prices, providing a boost to the energy-sensitive Texas economy. The high-tech sector appears to have turned the corner, and although activity is still weak in Texas, this segment is moving in the right direction. A healthy housing market continues, but weakness persists in commercial real estate. Overall, the Texas Coincident Index indicates continuing economic expansion for the state.

Employment growth
Since the beginning of the year, 21,500 jobs have been added to Texas' labor market. Although minimal, the monthly growth has been positive—a trend that started in October 2003 (Chart 1). The largest contributor to job growth in the first quarter was the trade, transportation and utilities sector, which added 11,300 jobs, followed by educational and health services and government, with 9,200 and 5,500 jobs, respectively. The educational and health services, and government sectors have shown consistent growth even through the recession. Respondents from the Federal Reserve Bank of Dallas' recent survey on current economic conditions (Beige Book) offered encouraging news, expressing increased optimism in their hiring outlook for 2004. Given the recent strength in U.S. job growth and growing optimism among business leaders in the region, improvements at the state level are likely to continue and gain momentum as well.

Chart 1

Energy
The energy sector has been a strong contributor to the state's growth. During the first quarter, this sector grew at an annualized rate of 6.2 percent. Sustained higher energy prices have spurred increased drilling in Texas, lending support to the growth in oil and gas. The petrochemical industry also posted employment growth at an annualized rate of 6.9 percent in the first quarter—a gain of 400 jobs. Beige Book respondents suggested a turnaround in the petrochemicals industry due to stronger demand and easing price pressures. Increased demand has resulted from a recovering economy, while price competition with cheap imports from Asia has nearly vanished because China has been buying most of Asia's output. Collectively, higher energy prices, a recovering economy and developments in China have contributed to the growth in Texas' energy sector.

Improvements in High-Tech
The region’s high-tech sector is beginning to show some stirrings. In the first quarter, high-tech manufacturing, which includes semiconductor, computer and telecommunications equipment, posted the first employment gain since the beginning of 2001. The 2.3 percent increase came from the semiconductor manufacturing sector, which added 300 jobs. Similarly, for the first time since the beginning of 2001, the information sector added jobs in the first quarter, growing at a 0.5 percent annualized rate (Chart 2). This sector includes telecommunication services, internet service providers and data processing services, which have added 100 jobs since the beginning of the year. National indicators of high-tech activity are also showing positive developments, suggesting that this sector is poised for a recovery. Beige Book contacts resonated the improvement in the data by noting increased orders, the start-up of more production lines and, for the first time, the possibility of hiring in 2004.

Chart 2

Real Estate Remains Stable
Real estate is still being driven by a healthy housing market, and concerns about the weakness in commercial real estate have eased. Despite the softening of median single-family home prices, permits are still being issued at a relatively fast pace (Chart 3). Commercial real estate, on the other hand, continues to be weak, and Texas office vacancies are among the highest in the nation. The health of the office market is closely associated with job growth. As job growth picks up, we may see an improvement in this area as well. Beige Book respondents reported growing optimism in commercial real estate with expectations of a turnaround at the end of 2004 or early 2005.

Chart 3

Recovering and Gaining Momentum
Another encouraging signal of the overall progression of the state's economic recovery is the Texas Coincident Index. This index is constructed using payroll employment, gross state product and the unemployment rate. When the index is above zero, it suggests economic expansion, while a drop below zero suggests contraction. The index entered positive territory in October 2003 and has posted positive growth at an increasing rate since then (Chart 4). The Coincident Index, steady employment growth, and improvements in sectors key to the Texas economy suggest that the recovery is on track and gaining momentum.

Chart 4