Texas Economic Outlook: Leaning Into Strong Headwinds

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Texas Economic OutlookLeaning Into Strong
Headwinds

• Robert W. Gilmer
• Vice President and Senior Economist
• Federal Reserve Bank of Dallas
• June 2008

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Percent Change in Texas Employment, 1996-2008
Note December to December changes, except 2008
which is year-to-date
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Texas Job Growth Much Faster than U.S.
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Texas Index of Coincident Economic Activity 2000
- present
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Major Metros Continue to Expand with Houston and
Ft. Worth Strongest
Business Cycle Indexes
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Unemployment RateTexas vs. US, SA
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External Forces that Drive Texas

• US Economy
• Oil and Natural Gas
• High Tech
• Global Economic Conditions

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Gross Domestic ProductQuarterly Percent Growth,
Chained 2000 Dollars
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U.S. Employment GrowthIn Thousands of New Jobs
per Month,1983 to 2008
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Industrial Production Growth Still Matching
Long-term Trends
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Gross Product Slows in 2006-07Housing Weakens,
Strength Elsewhere Evaporates
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12-Month Changes New starts -30.6 New home
sales -42.0 Existing home sales
-17.5 Existing home price -8.0 12-month
change is May to May
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NAHB Housing Market Index Shows Depth of
Pessimism
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Percent of Local Families that Can Afford
Median-Priced Home
Source Wells Fargo Housing Opportunity Index, by
metro area or major division
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Source National Association of Realtors
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Existing Home Sales Now Falling in All Major TX
Markets
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Use of High-Cost Mortgages By Metro Area (Percent
of Mortgages in 2006)

• Detroit 37.2
• Miami 45.1
• Dallas-Fort Worth 29.4
• Houston 33.9
• Los Angeles 32.3
• Washington, DC 22.7
• Phoenix 31.2
• Chicago 27.2
• Boston 17.7
• Atlanta 25.6
• Philadelphia 18.4
• New York 22.4
• San Francisco 22.4
• Source Home Mortgage Disclosure Act

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Texas Home Prices Not Boom and Bust
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Texas Subprime Foreclosures Lower than US
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Inventories of Existing Homes for Sale Much Lower
in TX
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Retail sales, ex autos and gasoline 2004-2008
Monthly change at annual rates
May to May Changes
Seasonally adjusted data
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Survey of Professional ForecastersHousing Hits
Bottom in 2008
Federal Reserve Bank of Philadelphia, Survey of
Professional Forecasters, May 2008
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Survey of Professional Forecasters General
Outlook for 2008
Federal Reserve Bank of Philadelphia, Survey of
Professional Forecasters, May 2008
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U.S. Leading Index Likely Signaling Recession
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Refiners Acquisition Cost of Crude Oil 1994 to
Present
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Wellhead Price of Natural Gas1994 to Present
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OPECs Price Band and the Old Paradigm

• In March 2000, OPEC established a price range of
  22-28 for crude oil
• The lower band of 22 was to protect OPECs
  revenue at a sufficiently high level
• The upper band of 28 was to keep price from
  going too high, to avoid offering exploration
  incentives to non-OPEC producers
• Non-OPEC producers saw this as a range of
  moderate prices, with likely periodic collapses
  in price due to slack demand and OPEC-member
  cheating

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Growth in the Demand for Crude Oil (Annual
Percentage Rate)
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Excludes Iraq and Angola, and excludes Nigeria,
Venezuela and Indonesia from Spare capacity
calculations. IEA, Oil Market Report
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Sources of Oil Supply(Million Barrels per Day)
Changes from second quarter to second quarter of
each year.
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Why Havent Oil Supplies Responded?

• Reluctance by producers to buy into this price
  cycle until 2004.
• Global scarcity of equipment and oil-related
  skills once they did buy into the expansion.
  This raised the price of oil investment.
• Reluctance to move into or expand exploration in
  politically unsettled regions. Geologic
  uncertainty preferred to political uncertainty.
• Oil fields getting smaller, scarcer. Higher
  prices justified for conventional oil.
• Oil is increasingly coming from unconventional
  areas that technical barriers in development

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Baker Hughes rig count, seasonally adjusted
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International Rig Count Highest Since 1982
Excludes Iran and the Sudan
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Oil and Natural Gas Mining Jobs in Texas 1990 to
Present
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Texas Shows Growth in Both Producer and Oil
Service Jobs
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High-Tech Doing Well
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Manufacturing Jobs in Texas1990 to Present
Non-Durables
Durables
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Board of Governors, Federal Reserve System
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IMF World Economic OutlookAnnual Percent Growth
Source IMF, World Economic Outlook Update
Projections, April 2008
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Can Emerging Country Growth Really Decouple from
the US, Europe and Japan?

• Strong internal growth dynamics
• A rising share of the global economy
• More resilient policy framework
• But spillovers from the developed world still a
  factor accounting for maybe 35 percent of
  growth for emerging economies, 45 percent for
  more commodity dependent

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Texas Jobs Growing Much Faster than U.S.(Growth
at Annual Rates)
Comparison through May, data seasonally adjusted
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Forecasting Model Predicts 1.5 Job Growth in
2008 After 3.1 in 2007
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Summary

• U.S. economy very weak in first half of 2008,
  likely to gradually improve in second half
  probability of recession somewhere about 50
  percent
• Texas job growth moderating but remaining
  positive.
• Home construction declining sharply in US and
  Texas but price appreciation moderating more in
  U.S.
• Most metros doing well. Austin and Houston led
  major metros in 2007 sign of strength in
  high-tech and energy.
• Texas forecast calls for slowing of job growth in
  2008 to about 1.5 to 2.0 percent - U.S. likely
  about 0.5 percent.

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Texas Economic OutlookLeaning Into Strong
Headwinds

• Robert W. Gilmer
• Vice President and Senior Economist
• Federal Reserve Bank of Dallas
• June 2008