FEDERAL RESERVE BANK of DALLAS

SAN ANTONIO BRANCH

The views expressed in this presentation are strictly those of the presenter and do not necessarily reflect the positions of the Federal Reserve Bank of Dallas or the Federal Reserve System. Any secondary distribution of this material is strictly prohibited.

2016 Texas Economic Outlook:

Riding the Energy Roller Coaster January 12, 2016

Keith Phillips

Assistant Vice President and Senior Economist

National Economy Slowed Slightly in 2015

• Job growth slowed from 2.3% in 2014 to 1.9% in 2015, while RGDP growth likely slowed from 2.5% to 2.1%.

• Manufacturing sector hit by global weakness and strong dollar.

• Health care sector picked up with greater insurance coverage. Retail and leisure and hospitality remained healthy, but positive impact of lower energy prices smaller than expected.

• RGDP expected to pick up slightly in 2016.

2015 Consumer Spending Weaker Than Expected

-12

-10

-8

-6

-4

-2

0

2

4

6

8

'91 '93 '95 '97 '99 '01 '03 '05 '07 '09 '11 '13 '15

Real Personal Consumption Expenditure

Real Retail Sales

Percent Y/Y

Sources: Bureau of Economic Analysis, Federal Reserve Bank of St. Louis.

U.S. Households Reduced Debt

1.19

0.95 (Q3)

1.35

0.97 (Q3)

0.60

0.70

0.80

0.90

1.00

1.10

1.20

1.30

1.40

2000 2002 2004 2006 2008 2010 2012 2014 2016

Ratio, personal debt per capita/personal income per capita

U.S.

Texas

Mortgage68.7%

HE revolving4.1%

Auto loan8.7%

Credit card5.9%

Student loan9.7%

Other2.9% U.S.

Mortgage61.4%

HE revolving0.9%

Auto loan15.6%

Credit card7.0%

Student loan10.7%

Other4.4%

Texas

Note: Data are through third quarter 2015, except where noted.Sources: Federal Reserve Bank of New York, Bureau of Economic Analysis.

Average Job Growth of 221K per Month in 2015

After 260K in 2014 (1.9% vs 2.3%)

-1000

-800

-600

-400

-200

0

200

400

600

Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16

Thousands,SA

Source: Bureau of Labor Statistics

U.S. Leading Index Suggesting Healthy Growth in

Months Ahead

-20

-15

-10

-5

0

5

10

15

20

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Percent change, annualized

12-month6-month

Note: Shaded areas represent U.S. recessions.Source: Conference Board, Federal Reserve Bank of Dallas

January Blue Chip Survey Projects 2.1% RGDP Growth in

2015 and 2.6% in 2016

3.9

1.7

3.9

2.7 2.5

-1.5

2.9

0.8

4.6

2.7

1.9

0.50.1

1.9

1.1

3.0

3.8

-0.9

4.64.3

2.1

0.6

3.9

2.0

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

SAAR, Percent

2013 2.5% Q4/Q4

2014 2.5% Q4/Q4

Source: Blue Chip Economic Indicators

2015 2.1% Q4/Q4

2016 2.6% Q4/Q4

Texas Economy Weakened Sharply in 2015 but

Continued to Add Jobs

• In five years prior to 2015, growth in energy, construction and exports provided a strong stimulus to Texas.

• In 2015, low oil prices, strong dollar and labor market tightness reduced job growth.

• Health care and leisure and hospitality remained strong—offsetting some of the weakness in energy and manufacturing.

• In 2015, jobs grew about 1.3% (150,500 jobs), a drop from 3.6% in

2014. In 2016, if oil prices remain near $40 - $50, growth will be around 1.4% (161,200 jobs).

Texas Economic Growth Below Trend but Positive

(Texas Business Cycle Index)

-8

-6

-4

-2

0

2

4

6

8

10

12

Percent, M/M SAAR

Note: Shaded areas represent Texas recessionsSource: Federal Reserve Bank of Dallas

3.8% trend

Texas Ranked Third in Job Growth in 2014, Growth in

Energy States Varied Widely

-0.5

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

ND FL TX GA UT NV OR CO WA CA NC SC AR AZ TN US DE ID KY MA LA WY MI WI OK NY AL NM MD CT IN IA KS OH NH MN RI PA IL DC VT AK VA SD MO NJ NE MS MT ME HI WV

Percent Change,Dec. 2013 - Dec. 2014

U.S.

TX

Note: Black bars represent large energy-producing states.Source: Bureau of Labor Statistics

Texas Ranked 32nd in Job Growth in 2015, but

Above Most Energy States

-4

-3

-2

-1

0

1

2

3

4

5

ID UT FL WA OR SC CA SD NV AZ HI MA GA MD NC KY IN NY IA US RI VT MI CO NE NJ TN VA ME DE CT OH TX DC AL MN WI MO AR MS NM PA MT NH IL KS OK AK LA WY WV ND

Annualized Percent Change,Dec. 2014 - Nov. 2015

U.S.

TX

Note: Black bars represent large energy-producing states.Source: Bureau of Labor Statistics

2015 Texas Job Growth Less Than the Nation’s

-3.8

0.8

1.6 1.7 1.8

2.3

1.82.1 2.3

3.5

2.7

3.6

1.3

-5

-4

-3

-2

-1

0

1

2

3

4

5

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

U.S.

Texas

Percent, Job Growth Y/Y

-3.4

Note: 2015 data annualized through November.Source: Bureau of Labor Statistics, Federal Reserve Bank of Dallas

Job Growth Has Been Broad-Based Across

Large Texas Metro Areas

90

95

100

105

110

115

120

125

2008 2009 2010 2011 2012 2013 2014 2015 2016

Houston

San Antonio

Ft. Worth

Austin

Dallas

Nonfarm Employment IndexAug. 2008=100

TX

El Paso

Corpus Christi

U.S.*

*Indexed from U.S. Peak Employment in January 2008Source: Bureau of Labor Statistics, Federal Reserve Bank of Dallas

Texas Unemployment Rate Still Below Nation’s but Rising

4.6(Nov.)

3.5

4.5

5.5

6.5

7.5

8.5

9.5

10.5

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Percent, SA

US unemployment rate

Texas unemployment rate

5.0(Nov.)

Source: Bureau of Labor Statistics.

Energy & Manufacturing Weakened Sharply in 2015

-20

-15

-10

-5

0

5

10

15

20

(Job Growth 2012-2015)

Oil & Gas

Construction

Trade, Transportation, & Utilities

Manufacturing

Business Services

Finance, Insurance,& Real Estate Leisure &

Hospitality

Information Services

Health & Education

Government

(2.1%) (5.8%) (20.2%) (7.3%) (13.5%) (6.0%) (10.5%) (1.7%) (13.5%) (15.6%)

Share of Total Employment

Dec/DecPercent Change

Note: Striped bars represent Dec. 2014 - Nov. 2015 annualized changeSources: Bureau of Labor Statistics, Federal Reserve Bank of Dallas

Texas Construction Contracts Strong in 2015

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Real $, Mil5MMA, SA

Residential

Non Residential

Non Building

Total

Sources: F.W. Dodge, Federal Reserve Bank of Dallas

Texas Home Inventories Remain

Near Historically Low Levels

0

2

4

6

8

10

12

14

16

18Texas

U.S.

Months

3.5

5.3

Nov.2015

Source: Multiple Listing Service

Texas Office Markets Remain Healthy

5

10

15

20

25

30

35

0

50

100

150

200

250

300

350

400

450

'86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14

Real, Millions $, 5MMA Percent

Office Vacancy Rate

Office and Bank Buildings Contract

Values

Note: Shaded areas represent Texas recessionsSources: F.W. Dodge, CBRE, Federal Reserve Bank of Dallas

16%

Texas Manufacturing Indicators Mixed

-100

-80

-60

-40

-20

0

20

40

60

80

100

Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15

Production

Volume of New Orders

Company Outlook

Index

Dec. 15

Source: Federal Reserve Bank of Dallas Texas Manufacturing Outlook Survey

Texas Exports Have Weakened as Value of the

Dollar Continues to Rise

65.0

70.0

75.0

80.0

85.0

90.0

95.0

100.0

105.0

110.0

115.0

80

100

120

140

160

180

200

220

240

260

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

U.S. minus Texas

Texas

Index, SA, RealJan. 2000=100

Texas Value of the Dollar

Source: U.S. Census, Bureau of Labor Statistics, WISERtrade, Federal Reserve Bank of Dallas

IndexJan. 1988=100

Drilling Rig Count Continues to Fall Amidst Renewed

Plunge in Energy Prices

0

20

40

60

80

100

120

140

160

200

300

400

500

600

700

800

900

1000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Gas price(*10)

Oil price

Rig Count

Source: Oil and Gas Journal, Baker Hughes

Number

Source: Oil and Gas Journal, Baker Hughes.

Nominal $

Which Metros Performed the Best in 2015?

Size of Energy Sector Explains a Lot

0 5 10 15 20 25

Midland (-2.1%)

Odessa (-2.6%)

Longview (-5.1%)

Corpus Christi (0.9%)

Houston-Baytown-Sugar Land (0.1%)

San Angelo (-0.4%)

Wichita Falls (0%)

Laredo (2.4%)

Abilene (0.6%)

Tyler (-0.2%)

College Station-Bryan (5.8%)

McAllen-Edinburg-Mission (2%)

Beaumont-Port Arthur (0.5%)

Dallas-Fort Worth-Arlington (3%)

San Antonio (3.6%)

Amarillo (-0.4%)

Sherman-Denison (-0.2%)

Austin-Round Rock (4.2%)

Lubbock (1.3%)

Waco (-0.5%)

Texarkana (-0.2%)

Killeen-Temple-Fort Hood (2%)

Brownsville-Harlingen (1.3%)

El Paso (3.5%)

Mining sector share of total employment

Note: Data in parentheses are annualized job growth, Dec. 2014 - Nov. 2015. Mining share data as of 2014.Sources: Texas Workforce Commission, Bureau of Labor Statistics, Federal Reserve Bank of Dallas.

Austin-Round Rock (4.2%)

San Antonio (3.6%)Dallas-Fort Worth-Arlington (3.0%)

Houston-Baytown-Sugar Land (0.1%)Corpus Christi (0.9%)

Correlation: -0.52

Share of Manufacturing Also Accounts for

Some Differences in Job Growth

0 2 4 6 8 10 12 14 16

Beaumont-Port Arthur (0.5%)Waco (-0.5%)

Sherman-Denison (-0.2%)Amarillo (-0.4%)

Fort Worth-Arlington (0.2%)Longview (-5.1%)

Wichita Falls (0%)Houston-Baytown-Sugar Land (0.1%)

Odessa (-2.6%)Dallas-Plano-Irving (4.1%)

Corpus Christi (0.9%)San Angelo (-0.4%)

Austin-Round Rock (4.2%)El Paso (3.5%)Tyler (-0.2%)

College Station-Bryan (5.8%)Killeen-Temple-Fort Hood (2%)

San Antonio (3.6%)Midland (-2.1%)

Abilene (0.6%)Brownsville-Harlingen (1.3%)

Texarkana (-0.2%)Lubbock (1.3%)

McAllen-Edinburg-Mission (2%)Laredo (2.4%)

Note: Data in parentheses are annualized job growth, Dec. 2014 - Nov. 2015. Manufacturing share data as of 2014.Sources: Texas Workforce Commission, Bureau of Labor Statistics.

Manufacturing sector share of total employment

Austin-Round Rock (4.2%)

San Antonio (3.6%)

Corpus Christi (0.9%)Dallas-Plano-Irving (4.1%)

Houston-Baytown-Sugar Land (0.1%)

Fort Worth-Arlington (0.2%)

Correlation: -0.36

11th District Banks Remain More Profitable

Than U.S. Banks…

U.S.1.05

11th District 1.12

-0.2

0

0.2

0.4

0.6

0.8

1

1.2

1.4

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015*

Return on Assets, Percent

*Annual data, 2015 data are annualized through Q3

1.58

0

1

2

3

4

5

6U.S.

0.89

0

1

2

3

4

5

6Other

Consumer

C&I

Commercial RE

Residential RE

11th District

*Annual data, 2015 data are annualized through Q3

…But Noncurrent Loans Have Ticked Up Regionally

Percent of Total Loans

-0.08

0.17

0.27

-0.08

-0.10

-0.01

0.31

-0.21

0.26

-0.3 -0.2 -0.1 0.0 0.1 0.2 0.3 0.4

Average Weekly Hours

Help Wanted Index

Texas Stock Index

New Unemployment Claims

Well Permits

Real Oil Price

U.S. Leading Index

Texas Value of the Dollar

Net Change in Texas Leading Index

Net contributions to Change in the Texas Leading IndexSeptember-November

NOTE: Seasonally adjusted.SOURCE: Federal Reserve Bank of Dallas.

Leading Index Components Mixed

90

95

100

105

110

115

120

125

130

135

140

9.0

9.5

10.0

10.5

11.0

11.5

12.0

12.5

13.0

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17

Index, 1987=100

Leading Index

Texas nonfarm employmentand forecast

(with 80% confidence band)

SOURCES: Bureau of Labor Statistics; Texas Workforce Commission; Federal Reserve Bank of Dallas.

Millions, seasonally adjusted

Texas Job Growth Likely to Be Between

1.0%–2.0% in 2016, Similar to 2015

San Antonio Economy Grew Strongly in 2015

-2

0

2

4

6

8

10

2013 2014 2015*

Total nonfarm jobs

Health Care

*Annualized through Nov. 2015

Construction

Federal Government

% Growth Dec./Dec. • 2015 job growth at 3.6% so far—same pace as 2014.

• Health care and construction growth remained robust.

• Financial activities, business services also strong.

• Manufacturing, mining, federal government weak last year.

• Declines in Eagle Ford had little net negative impact.

Eagle Ford Jobs Declining

90

95

100

105

110

115

120

125

'07 '08 '09 '10 '11 '12 '13 '14 '15

Rest of Texas

Eagle Ford counties

Permian Basin counties

Index, 2007:Q1 = 100*

*Quarterly, seasonally adjusted.Sources: Bureau of Labor Statistics, seasonal and other adjustments by Federal Reserve Bank of Dallas.

Summary

• Texas weakened in the first half of 2015, but outlook improved as oil prices stabilized near $60—recent fall below $45 has weakened the outlook.

• Texas doing much better than 1980s and better than other energy states.

• Tight real estate markets and continued growth in sectors such as health care and leisure and hospitality are helping sustain positive job growth.

• 2016 Texas job growth likely to be about 1.4% (161,200 jobs).

Biggest risk to the forecast is declining oil prices. If average oil prices fall to $20–$30, then negative job growth likely.

How Did My Forecast From Last Year Do?

Last year stated: Texas likely to continue to grow, but not nearly as strong as

previous year.

– Forecast was not weak enough

Last Year’s Job Growth Rate Weaker Than Forecast

(1.3% vs. Forecast of 2.0%–2.5%)

95

100

105

110

115

120

125

130

135

9.0

9.5

10.0

10.5

11.0

11.5

12.0

12.5

Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16

Millions of JobsIndex

(1987=100)

Leading Index

Texas Nonfarm Employment, actual growth,

and TLI Forecast (with 80% confidence band)

Source: Bureau of Labor Statistics, Federal Reserve Bank of Dallas, author's calculations

Texas Business Outlook Surveys