Is the worst over for the Texas economy? Dallas Fed researchers say maybe

Two Federal Reserve Bank of Dallas researchers think the worst of the Texas economic slump may be over.

“The Texas economy had a rough start in 2015, with a sharp deceleration in growth from the end of 2014,” Dallas Fed senior economist Pia Orrenius and research assistant Emily Gutierrez wrote in a new report.

We know the economy took a hit from the oil price collapse, the strong U.S. dollar’s negative impact on exports, the West Coast port strike and bad weather.

“Compared with the weak first quarter, the regional economy is looking slightly better in the second quarter,” Orrenius and Gutierrez said. “The dark clouds over the regional economy are breaking up just enough to let some rays of sunlight through.”

They note that April brought some good news for Texas: Employment edged up; the unemployment rate held steady at 4.2 percent; initial jobless claims declined for the second straight month; exports improved; and energy prices stabilized.

In addition, they say two Dallas Fed forward-looking indicators show promise. Both its Texas service revenue index and its Texas Leading Index ticked up in May.

The report comes as the May employment and unemployment updates for Texas and other states come out today. I’ll post a blog item on that later this morning.

Here are some highlights of the report:

Oil prices and rig counts

Crude oil prices have rebounded somewhat since hitting their recent lows in March.The price of West Texas Intermediate crude oil fell from over $100 a barrel last summer to around $44 in March. The price has risen in recent weeks and closed at $60.45 a barrel yesterday, but it remains about 40 percent lower than a year ago.

Although the Texas rig count continues to fall, it may be leveling off in some neighboring states. Texas is the nation’s No. 1 oil-producing state.

The service sector

In May, the Dallas Fed’s monthly surveys of over 350 manufacturing and service businesses statewide showed that service revenue grew (albeit at a slower pace), but manufacturing activity continued to decline. Many Texas manufacturers have reported being “significantly negatively affected” by lower energy prices in recent months.

Employment

Texas job growth accelerated in April, after decelerating in March, thanks largely to service industries and parts of the state with diverse economies. (See chart at top.)

The Dallas and Fort Worth areas added jobs so far this year, though at a slower pace than last year. Austin’s employment is up 4.2 percent year to date — the fastest growth among large Texas metro areas, Orrenius said.

Places with a high concentration of energy jobs and businesses have fared worse. Employment shrunk 0.4 percent year to date in the Houston area. San Antonio, which is near the Eagle Ford Shale, had two straight months of no job growth. El Paso employment has been flat.

The Dallas Fed’s forecast calls for below 1 percent job growth this year vs. 3.6 percent in 2014.

Jobless claims

Initial claims for unemployment benefits in most of the nation’s biggest energy-producing states, including Texas but excluding North Dakota, appear to have peaked, Orrenius said.

The energy industry has accounted for 40 percent of the increase in Texas continuing jobless claims since December, according to the Dallas Fed. Oil and gas jobs represent less than 3 percent of the state’s total employment.

Real estate

Home price appreciation should slow as the Texas economy gears down and the first interest rate hike is expected this year, but it hasn’t happened yet, Orrenius noted. She noted that metro data suggests median home prices may be on their way down in the Houston and San Antonio areas.

Statewide, housing construction activity rose in April, but apartment building may be slowing since year-to-date permits are below their 2014 monthly average, according to the Dallas Fed report.

Commercial real estate in Texas remains strong, with some softening in the Houston office market. Houston’s office vacancy rate rose in the first quarter, but remains low at 12.6 percent, according to CBRE research.

Exports

Texas exports in April rose 4.9 percent — the biggest monthly gain since October 2013. The increase probably reflects the effect of the recent oil price rebound on petroleum product exports — the state’s No. 1 export group.

Still, the state’s exports are down 2.9 percent from a year earlier due to lower oil prices, weaker global demand and a stronger dollar.