Keith Phillips, Sr. Economist and Advisor

2014 Economic Out look:St i l l Good to be in Texas

National Economy Still Growing at a Modest Pace

• International weakness slowing US exports• Uncertainty surrounding federal government

spending, Furloughs, Debt Ceiling, Affordable Care Act restraining growth

• Meantime housing sector, consumer finances, and state and local government improving

• 2013 another year of moderate growth with some improvement likely in 2014

Home Construction Picking Up

0

50

100

150

200

250

300

350

400

450

0.25

0.50

0.75

1.00

1.25

1.50

1.75

2.00

1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010

Millions, units Billions, $2000

Source: Bureau of Economic Analysis, U.S. Census Bureau and author’s calculations.

Real single-family construction

Single-family building permits

Home Prices Increasing

90

110

130

150

170

190

210

230

250

270

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

U.S.

Texas

California

Florida

Nevada

FHFA House Price Index, 2000=100

Lower Prices and Interest Rates Helping Housing Affordability – No Bubble Now

Source: NAHB - Wells Fargo Housing Opportunity Index

(Percent of homes sold for which the median family income could qualify)

  1999:Q4 2013:Q3 Low PointDate of Low

PointUnited States 64 65 40 2006 : Q3

Los Angeles 43 21 22006 :

Q1/Q2/Q3New York 55 23 5 2006 : Q3/Q4Miami 59 55 10 2007 : Q1Austin 56 63 50 2000 : Q4Dallas 64 60 54 2007 : Q3Houston 66 62 47 2007 : Q3San Antonio 64 66 47 2006 : Q3

2000 2002 2004 2006 2008 2010 20120.600000000000001

0.700000000000001

0.800000000000001

0.900000000000001

1

1.1

1.2

1.3

1.4

1.19

0.96

1.35

1.00

Ratio, personal debt per capita/personal income per capita

U.S.

Texas

Household Balance Sheets in Better Shape

Job Growth Persistently Positive but not as Strong as Typical Rebound

-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

Thousands (SA)

U.S. Leading Index Suggests Moderate Pick Up Over Next 6 Months

-20

-15

-10

-5

0

5

10

15

20

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Annualized% change

12-month6-month

November Blue Chip Survey Projects RGDP Growth of 2.1% in 2013, 2.8% in 2014

-8.3

-5.4

-0.4

1.3

3.9

1.6

3.9

2.82.8

-1.3

3.2

1.4

4.9

3.7

1.2

2.8

0.1

1.1

2.52.8

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

SAAR, Percent

2013 2.1% Q4/Q4

2012 2.0% Q4/Q4 2014 2.8%

Q4/Q4

Past Several Years Texas Economy Has Grown above Trend and Stronger than Nation

• In past three years growth in energy, high-tech and exports provided a stimulus to Texas. Housing market better shape than nationally

• This year manufacturing, energy and Fed. Govt. have slowed while residential construction continues to grow strongly

• This year I expect job growth of about 2.5% - slightly weaker than 2012 (3.3%)

• In 2014 Texas growth will be very similar to 2013

Texas Economy Growing Above Trend(Texas Business Cycle Index)

-8

-6

-4

-2

0

2

4

6

8

10

12

M/M SAAR

NOTE: Shaded areas represent Texas recession.

2.5% trend

Texas was Third Fastest Growing Job Growth State in 2012

-1

0

1

2

3

4

5

6

7

ND

UT

TX

NV

CO

MT

AZ

CA

NC

SC HI

TN ID FL IN LA

GA NJ

US

KS

WA

MN

MA

OK

KY IA

MD

AK

MS

NY IL VA

SD

VT

OR

NH

MI

MO

WI

NE

OH RI

DE

PA

AL

NM CT

DC

AR

WV

ME

WY

Y/Y Percent Change, December 2012

U.S.

TX

Source: Bureau of Labor Statistics

Texas 4th Fastest this Year

-2

-1

0

1

2

3

4

ND

FL

ID TX

DE

MI

GA

WA

UT

OR

MS

CO

NE

US

NC

SC

WV

MN

CA

WI

MA

ME

AZ

IN

WY

LA

SD

NY

MO IL KS

RI

AR

NJ

HI

NV

MD

CT

TN

MT

NH

OK

VA

OH IA VT

PA

DC

NM

AL

KY

AK

2013 YTD Annualized Change

US

TX

Source: Bureau of Labor Statistics, Data through August

Texas Jobs Growing Faster Than Nation’s

-3.8

0.8

1.6 1.7 1.7

2.2 2.3

3.3

2.4

-5

-4

-3

-2

-1

0

1

2

3

4

5

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

U.S.

Texas

Job Growth Y/Y, Percent

-3.4

Texas State and Local Government Jobs Growing after 2011 Fiscal Cliff

95

100

105

110

115

120

125

U.S.

Texas

Index, Jan 2000 = 100

U.S. State and Local Share of Total Nonfarm Jobs- 14.0%

Texas State and Local share of Total Nonfarm Jobs - 14.3%

Texas Unemployment Rate Falling After Uptick Earlier in the Year

6.2

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

Percent, SA

US unemployment rate

Texas unemployment rate

7.3

Most Industries Adding Jobs – Manufacturing, Construction Weakening

-2

0

2

4

6

8

10

12

14

16

Q/Q, SAARTexas Industry Employment 2012 Q3 : 2013 Q3

Mining

Construction

Trans., Trade , Utilities Manufacturing

Business Serv.Finance ,

Insurance,Real Estate

Leisure and Hospitality

Information Services

Health and Education

Govt.

Texas Real Retail Sales Growing Moderately

90

100

110

120

130

140

150

160

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

Index, SA, Real $Jan. 2000=100

Texas

U.S.

Texas Construction Contract Values Picking Up

0

1000

2000

3000

4000

5000

6000

7000

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Real $, Mil5MMA, SA

Residential

Non Residential

Non Building

Total

Home Inventories in TX Have Fallen to Historically Low Levels

0

2

4

6

8

10

12

14

16

18

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

Texas

U.S.

Months

3.8

4.9

2.3

0.45

0.60

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

TX Delinquencies TX Foreclosures Started

US Delinquencies US Foreclosures Started

.35

2.6

Mortgage Foreclosures Sliding, Delinquency Rates High but Falling, TX Better than US

Texas Mortgages Less at Risk of Default

36.4

24.7

31.5

22.5

15.4

11.6

4.3

14.5

0

10

20

30

40

50

60

70

Nevada Arizona Florida Michigan California Idaho Texas U.S.

Percent of Mortgages "Under Water"Q2 2012 - Q2 2013

Percent

Declining TX Office Vacancy Rate Suggests Office Construction May Continue to Pick Up

5

10

15

20

25

30

35

0

50

100

150

200

250

300

350

400

450

'89 '96 '03 '10

Real, Millions $, 5MMA Percent

Office Vacancy Rate

Office and Bank Buildings

Contract Value

TX Manufacturing Production and Orders Growing at Mixed Pace

-100

-80

-60

-40

-20

0

20

40

60

80

100

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

Production

Volume of New Orders

Index

Nov.-13

Texas Exports Picking Up

60.0

65.0

70.0

75.0

80.0

85.0

90.0

95.0

100.0

105.0

110.0

80

100

120

140

160

180

200

220

240

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

U.S. minus Texas

Texas

Index, SA RealJan. 2000=100

Texas Value of the Dollar

Oil Prices Falling, Drilling Rig Count Stable

0.000

20.000

40.000

60.000

80.000

100.000

120.000

140.000

160.000

200

300

400

500

600

700

800

900

1000

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

Gas price(*10)

Oil price

Rig Count

All Texas Metros Moved From Recovery to Expansion

92

94

96

98

100

102

104

106

108

110

112

Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13

Houston

San Antonio

Ft. Worth

Austin

Dallas

Nonfarm Employment IndexAug. 2008=100

TX

El Paso

CorpusChristi

Metros with Big Presence of Fed. Govt. and Health Care Slowing

98

100

102

104

106

108

110

112

114

116

July '10 July '11 July '12 July '13

Austin

Houston

DFW

Border

San Antonio

El Paso

Index, Nov.2009=100, SA

Federal Govt. Educ. & Health Svc.Border, SA, El Paso 3.6% 16.9%Rest of Texas 1.5% 12.1%

NOTE: Figures are shares of total nonfarm employment.SOURCE: Texas Workforce Commission.

Mixed Growth in TLI Components

0.17

0.07

0.23

-0.16

-0.12

-0.11

0.59

0.14

0.80

-0.40 -0.20 0.00 0.20 0.40 0.60 0.80 1.00

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

Texas Leading Index Components, 3 month changeAugust -October

Job Growth Likely to Increase Remain About 2.5% in 2014

95

100

105

110

115

120

125

130

135

9.0

9.5

10.0

10.5

11.0

11.5

12.0

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

Millions Index

Leading Index

Texas Nonfarm Employmentand TLI Forecast (with 80%

confidence band)

Summary• U.S. economy continues to grow at a moderate,

disappointing pace • Texas has faced similar headwinds (weak consumer

spending, housing) but has grown faster due to strong growth in energy and exports and fewer problems in housing.

• 2013 TX job growth slower, as energy, exports and federal government slow and construction remains strong.

• In 2014 residential construction growth will likely dampen while manufacturing activity picks up – overall job growth will be close to this year or slightly better.

• Risks to the outlook include political and international uncertainty and continued uncertainty with US fiscal spending.