Laila Asany and Prithvi Kalkunte
The modest expansion of the Texas economy appears to be slowing, albeit with some strength.
Manufacturing is stagnating, the labor market shows signs of cooling, commercial real estate activity is sluggish and banks’ prospects continue to deteriorate. However, the service sector has continued to grow in recent months, job growth remains strong, wage pressures have not yet eased and the housing market is beginning to stabilize.
Manufacturing and service industries struggle to grow
The Texas Manufacturing Outlook Survey (TMOS) production index has been hovering near zero since January, suggesting little change in production. The index of new orders for the manufacturing industry, which represents demand, turned negative in April for the 11th straight month.
According to the Texas Services Sector Outlook Survey (TSSOS) Earnings Index, Texas services sector activity is growing, albeit slowly. The index has been below trend for the past year.
Job growth remains strong, but there are signs of cooling
Texas payrolls rose 3.0% month-on-month in March, but February growth was revised down. Notably, March employment fell in the financial activities and information sectors, while manufacturing and professional and business services sector growth fell below 1.0%. Employment in the construction and energy sectors recovered from February levels.
Jobs in Texas grew at an annual rate of 3.9% in the first quarter, accelerating from the fourth quarter of 2022. Growth was extensive (chart 1).
Jobs growth in Texas remains strong, above trend at 2% and broadly ahead of US growth, but there are signs of slowing. Manufacturing payrolls were flat in the first quarter, and the Dallas Federal Reserve Bank of Texas Business Outlook Survey (TBOS) suggests some tightening in the labor market has eased. 40% of TBOS respondents considering hiring said their job retention improved in April, up from 29% in January.
The slowdown is more pronounced in certain parts of the state. For example, Austin’s job growth lagged other major cities for the first time in decades. Austin’s first-quarter job growth rate was 2.4% annualized, trailing Houston (3.6%), San Antonio (3.5%) and Dallas/Fort Worth (3.2%). Workers Adjustment and Retraining Notice (WARN) data showed layoffs across the state by mid-April, despite subways making up 9.4% of jobs in Texas. 18% of them were in Austin. The weakening of Austin’s labor market is likely related to the sharp slowdown in the tech sector after its pandemic-era boom.
Wage pressures to remain largely unchanged in 2023
Wage pressures have changed little, with the TBOS Wage Index trending downward in the spring and summer of 2022 before moving roughly flat in 2023 (chart 2).
Hourly wages in the private sector in Texas were flat in March. Year-over-year he was up 5.9 percent, while nationally he was 4.3 percent. The Texas Employment Cost Index (wages and salaries) rose 4.4% in the first quarter, little changed from growth in the fourth quarter.
Home sales are recovering.Prices are flat to down
The Texas housing market appears to be stabilizing, but construction remains sluggish. Home sales fell through the end of 2022, but this year saw a third straight month of growth in March (chart 3). Home sales in Texas are in line with early 2019 levels, but sales are down nationwide. Home prices are flat in most major Texas cities, except Austin, which continues to fall. Austin has seen the fastest price gains and the steepest price drops of any big Texas city during the pandemic.
Residential construction has fallen by a third from record levels, but construction has been on the rise recently. Single-family permits in Texas increased 4.4% in March, while single-family contract value (before adjusting for inflation) increased 6.5%. Homebuilders expect 2023 construction starts to fall below last year’s levels, and construction is expected to be volatile.
Office market expected to slow further
The office market remains stagnant. First-quarter asking rents were little changed year-over-year, and quarter-over-quarter vacancy rates were flat or slightly up in most major Texas cities and across the United States. Rising levels of subleasing space in the Texas and U.S. office markets are hampering market recovery.
The office outlook is weak, with net absorptions flat to declining since 2020. The introduction of hybrid and remote work is unlikely to significantly increase leasing fees. Larger metropolitan areas such as DFW and Austin are likely to see further declines in leasing as the tech sector shrinks, and if the slowdown spills over to other sectors such as professional services, business services and financial activities.
Houston’s vacancy rate is already past oil crisis highs. Most tenants want new buildings with high-end amenities, and older properties are less desirable. Increased employment and immigration rates in Texas could be helped by a higher number of workers returning to offices in Texas compared to the rest of the country (chart 4).
Credit tightening has not yet become a major obstacle
Respondents to the April TBOS survey said businesses in Texas are starting to face difficulties in obtaining loans. Most companies seeking financing reported having no problems accessing financing for their business needs, although the proportion of companies reporting at least some difficulty increased by 5 percentage points (about 35 percent). bottom.
Respondents to the Dallas Fed Bank Business Survey said March continued to tighten credit standards and terms for all loan types, especially commercial and industrial loans and commercial real estate loans.
The outlook for this year deteriorates
Texas’ 2023 employment forecast was revised down to 2.4% in April from 2.8% in March, and is expected to average 1.9% annual growth for the rest of the year.
The TBOS current and future employment index peaked in early 2022 and has been trending downward since. Texas job vacancies—a proxy for Texas labor demand—have flattened out in recent weeks and are below their December 2021 peak. According to WARN data available through mid-April this year, Texas job cuts (8,622) have already exceeded the 2022 total and will exceed the 2021 total by the end of the year at current pace. deaf.
The TBOS outlook index remains negative, and bankers are generally pessimistic about their expectations for loan demand and performance of existing loans. Texas businesses cite weak demand, high interest rates, rising input costs and tight credit as headwinds.
About the author
The views expressed are those of the authors and not attributable to the Federal Reserve Bank of Dallas or the Federal Reserve System.