January 31, 2020

The views expressed are my own and do not reflect official positions of the Federal Reserve Bank of Dallas or the Federal Reserve System.

Expansion Likely to Continue Keith R. PhillipsKeynote Speaker

National Economy Growing Strongly

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• After growing a strong 1.8% in 2018 job growth slowed to 1.3% in 2019, while real GDP growth slowed from 2.5% to 2.3%

• Manufacturing, construction and mining jobs slowed last year• Labor market below full employment at 3.5% unemployment rate • Inflation is stable near Fed target of 2% • USMCA passage and first stage of China trade deal has reduced uncertainty• Negative yield spread in August, September and more recent declines in US

Leading Index suggests some concern about the outlook for 2020• Forecasters project GDP to grow between 1.8% and 2.2% this year

Job Growth Averaged 176K Per Month Last Year, 223K in 2018

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-1000

-800

-600

-400

-200

0

200

400

600

800

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Thousands, SA

SOURCE: Bureau of Labor Statistics

200

12060

3.5

6.7

0

2

4

6

8

10

12

14

16

18

Headline Unemployment RateU6 Unemployment Rate

Percent

NOTES: U6 Unemployment rate includes marginally attached and part-time for economic reasons workers. Gray shaded areas indicate NBER recessions.SOURCES: Bureau of Labor Statistics; NBER.

Dec ‘191994-2007:Q3 Average

1994-2007:Q3 Average

Unemployment Rate Lowest in 50 Years (1969)

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Core Inflation Near 2 Percent Goal

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1.472.0

-2

-1

0

1

2

3

4

5

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Headline PCE inflation

Trimmed Mean PCE inflation

Percent, Y/Y

SOURCES: Bureau of Economic Analysis; Federal Reserve Bank of Dallas.

Fed 2 percent target

Nov. ‘19

0.31

-4

-3

-2

-1

0

1

2

3

4

10-year minus 1-year Treasury rate, monthly

NOTE: Data through December 2019.

Yield Curve Turns Positive in October – But Caution Remains

Percentage points

7 months negative

U.S. Leading Index Suggests Weaker Growth Over Next 3-6 Months

7

-30

-25

-20

-15

-10

-5

0

5

10

15

20

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020

Percent change, annualized

12-month6-month

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

GDP Growth Expected to Slow – No Recession Forecasted for 2020

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-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Percent, SAAR

SOURCES: Bureau of Economic Analysis; Blue Chip Economic Indicators.

2016 2.0%

Q4/Q4

2017 2.8% Q4/Q4 2018 2.5%

Q4/Q4 2019 2.3%Q4/Q4

2020 1.8%Q4/Q4

• Following oil bust in 2015 and 2016, Texas economy picked up in 2017 and 2018 but slowed in 2019.

• Last year job growth weakened slightly from 2.4 to 2.0 percent as the energy industry declined and labor market constraints continued to suppress job growth.

• Growth in the second half of 2019 improved and the leading index picked up –but manufacturing and energy weakened further.

• This year, less trade uncertainty is a positive although the energy sector will remain a drag. Election uncertainty may restrain business investment.

• Overall the forecast is for steady job growth near 2.1 percent with further declines in the unemployment rate.

Texas Economy Moderated in 2019

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Texas Job Growth Above the Nation’s

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NOTES: Long-run trend growth is 1.1 percent for the U.S. and 2.1 percent for Texas. SOURCES: Bureau of Labor Statistics, Texas Workforce Commission; FRB Dallas.

1.81.4

2.42.0

-5

-4

-3

-2

-1

0

1

2

3

4

5

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

U.S. TexasPercent change, year/year, SA

Texas Economy Expanding At Strong Pace(Texas Business-Cycle Index)

11

-8

-6

-4

-2

0

2

4

6

8

10

12

Percent, M/M SAAR

NOTE: Data through December 2019. Shaded areas represent Texas recessions. Trend refers to growth from Jan. 1990 – present.

3.8% trend

Texas Unemployment Near Historical Low

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3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Percent, SA

US unemployment rate

Texas unemployment rate3.53.5

NOTES: Data through December 2019.SOURCE: Bureau of Labor Statistics.

Job Growth Broad-Based Across Regions

2.42.6 2.7

3.4

2.3

1.62.0

1.6

2.6

3.5

2.62.2

0

2

4

Texas Houston(24.6%)

Dallas(21.2%)

Austin(8.7%)

Ft. Worth(8.5%)

San Antonio(8.4%)

2017 2018 2019Percent job growth, SAAR

NOTES: Numbers in parentheses refer to the share of Texas employment in the most recent month. SOURCES: Bureau of Labor Statistics; Texas Workforce Commission; seasonal and other adjustments by Dallas Fed.

2019 Job Growth Broad-Based Except Mining

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2.0 1.3 0.32.8 2.9 1.9 2.6

4.2 5.2

-5.4

2.5

-10

-5

0

5

10

15

Total(100%)

Trade,Transp.& Util.

(19.6%)

Gov.(15.2%)

Prof. &Bus. Serv.(14.1%)

Educ. &Health Serv.

(13.7%)

Leisure& Hosp.(10.9%)

Mfg. (7.1%) Fin. Act.(6.3%)

Constr.(6.2%)

Oil & GasExt., MiningSup. (1.8%)

Info. (1.6%)

2017 2018 2019Percent change, SAAR

NOTES: Numbers in parentheses are share of Texas employment for most recent month.SOURCES: Bureau of Labor Statistics; Texas Workforce Commission; seasonal and other adjustments by FRB Dallas.

Manufacturing and Services Activity Picked Up in January

3.9

-10

0

10

20

30

2014 2015 2016 2017 2018 2019 2020

16.3

05

1015202530

NOTES: Data through January 2020. Dashed lines are postrecession averages.SOURCE: Dallas Fed Texas Business Outlook Surveys.

Diffusion index, 3MMA, SA

Manufacturing TMOS production

Services TSSOSrevenue

-40

-30

-20

-10

0

10

20

30

40

50

60

Input costs Selling prices Production/revenue Capital spending plans Company outlook Profit margins

Manufacturing Service Sector

Net percent*

*Net percent calculated as the share of respondents reporting increase minus the share reporting decrease.

Tariffs Increasing Costs and Prices, Reducing Capex

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Notes: 360 responses; 115 manufacturing, 245 service sector. Data collected Jun. 11-19, 2019.Source: Dallas Fed Texas Business Outlook Surveys, June 2019 Special Questions.

“What impact have U.S and foreign tariffs implemented since last yearhad on the following aspects of your firm’s business?”

Energy Exports Growing Strongly: Less Impacted by Tariffs, Dollar Strength

50

150

250

350

450

550

650

750

850

'03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19

Texas exports less energy related exportsTexas energy related exportsTexas total exports

NOTE: Energy related exports include mining, chemical, and petroleum and coal products exports. Data through November 2019.SOURCES: U.S. Census, USATrade.

Index, Jan 2003 = 100, 5MMA, real 2018$

Texas Non-Energy Exports Doing Better than Rest of U.S. States

80

90

100

110

120

130

140

150

160

170

180

'03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19

Texas exports less energy related exportsUS exports less energy related and Texas exports

Index, Jan 2003 = 100, 5MMA, real 2018$

NOTES: Energy related exports include mining, chemicals and petroleum and coal products exports. Data through November 2019.SOURCE: U.S. Census, Bureau of Labor Statistics, USATrade.

134

176

3.0

3.5

4.0

4.5

5.0

80

90

100

110

120

130

140

150

160

170

180

2013 2014 2015 2016 2017 2018 2019 2020

Texas home salesTX Single Family Permits30-year Fixed Rate Prime Mortgage

Index, Jan 2012 = 100, 3MMA, SA Interest Rate

NOTES: Data through December 2019. Effective interest rate is for closed 30-year, fixed rate, prime, first mortgages.SOURCES: MLS; Texas A&M Real Estate Center; Wall Street Journal.

(Shifted forward 3 months)

Mortgage Rates Declined in 2019 – Home Building Grew Strongly

Oil Price Suggests Flattening Rig Count

20

0

20

40

60

80

100

120

2010 2011 2012 2013 2014 2015 2016 2017 2018 20190

100

200

300

400

500

600

700

800

900

1,000

Oil price (shifted 3 months forward)

Rig count

NOTE: Data are weekly, through the week ending January 24, 2020.SOURCES: EIA; Baker Hughes.

Number of rigs$/bb

397

$56.15

Current Oil Prices Support Moderate Drilling Activity

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Permian (Midland)

Permian (Delaware)Other U.S.

(Shale)

Other U.S. (Non-shale) Eagle Ford

SCOOP/STACK

Permian(Other)

$48 $49 $49 $49 $51 $53 $54

0

10

20

30

40

50

60

70

80

90

In the top two areas in which your firm is active:What WTI oil price does your firm need to profitably drill a new well?Dollars per barrel

NOTES: Lines show the mean, and bars show the range of responses. Executives from 82 exploration and production firms answered this question during the survey collection period, March 13–21, 2019.SOURCE: Federal Reserve Bank of Dallas.

17 12 13 45 11 5 20Number of responses

Current Price$56

Energy Survey Suggests Continued Weakness

22

-20

0

20

40

60

80

Business Activity Capital Expenditures Employment Company Outlook Uncertainty End of Year PriceForecast

Q4 2018 Q1 2019 Q2 2019 Q3 2019 Q4 2019

Diffusion index Price per barrel

NOTE: Price forecast is average year-end forecast of WTI oil price among respondents.SOURCE: Federal Reserve Bank of Dallas Energy Survey.

$58.54(2020)

$56.92 (2019)

0

20

40

60

80

100

120

140

160

-6

-4

-2

0

2

4

6

'82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20

Oil price (Shifted forward 6 months)

Texas minus U.S. job growth

Percent, Year/YearReal price, $/bb

monthly average

NOTE: Nominal oil price was $59.81 a barrel in Dec. 2019. SOURCES: Wall Street Journal; Bureau of Labor Statistics.

Recent Oil Prices Suggest Texas Job Growth Will Remain Above Nation’s

Outlook Improving in Services but not in Manufacturing

-50

-40

-30

-20

-10

0

10

20

30

40

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

TMOS company outlookTSSOS company outlook

Index, 3MMA

NOTES: Data through January 2020. Dashed lines are post recession averages.SOURCES: Federal Reserve Bank of Dallas Outlook Surveys: Manufacturing (TMOS); Service Sector (TSSOS).

TX Leading Index Components Mostly Positive Over Past 3 Months

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-0.20

-0.11

0.00

0.08

0.09

0.10

0.20

0.46

0.60

-0.3 -0.2 -0.1 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7

Initial unemploymentclaims

U.S. leading index

Average weekly hours

Help-wanted index

Well permits

Real oil price

Texas Stock Index

Texas value of the dollar

Net change inTexas Leading Index

NOTE: Three-month percent change through December, seasonally adjusted. Texas value of the dollar is a preliminary estimate from the Dallas Fed. SOURCE: Federal Reserve Bank of Dallas.

Net contributions to change in Texas Leading Index

Texas Jobs Forecast to Grow about 2.1% in 2020

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80859095100105110115120125130135

9.0

9.5

10.0

10.5

11.0

11.5

12.0

12.5

13.0

13.5

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20

Index, 1987 = 100

Texas Leading Index

Texas nonfarm employment and forecast

(with 80% confidence band)

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

Millions*

San Antonio Economy Picked Up in 2019

27

-2

-1

0

1

2

3

4

5

6

2015 2016 2017 2018 2019

Total JobsHealthcareLeisure & HospitalityFederal Govt.

SOURCES: Bureau of Labor Statistics; adjustments by FRB Dallas.

% Growth Dec./Dec. 2019 job growth at 2.2% after 1.6% in 2018

Federal govt. declined slightly after growing moderately in 2018

Construction, health care and leisure and hospitality strong

Finance and Insurance down, retail flat

UR very low at 3.0 percent – labor force picked up in second half of 2019

• National economy slowed in 2019 but remained above trend –forecasters expect continued growth but caution remains

• Texas even stronger than nation but energy sector likely to continue to decline

• Historically tight labor markets continue to restrain job growth • Texas jobs grew 2.0 percent in 2019 and will likely grow about 2.1

percent this year – with greater downside than upside risks• Texas unemployment rate likely to decline further • Biggest downside risks to forecast are sharp decline in oil prices, trade

war escalation, national recession

Summary

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Uncertainty in Crude Price Forecasts

20

40

60

80

100

120

2014 2015 2016 2017 2018 2019 2020 2021

Historical spot priceSTEO price forecastNYMEX futures price95% NYMEX futures confidence interval

Note: Prices as of 1/14/20. STEO: Short-Term Energy Outlook. NYMEX: New York Mercantile Exchange. Source: EIA

WTI crude oil, dollars per barrel

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How Did My Forecast From Last Year Do?

Last year stated: “Texas expected to have grown 2.4 percent in 2018 and will likely slow to about 1.4 percent in 2019”

– Instead growth slowed from 2.4% in 2018 to 2.0% in 2019

Publications and Surveys:

• Texas Employment Forecast• Metro Economic Indicators• Regional Economic Updates• Southwest Economy• Heart of Texas• Dallas Fed Blog• National Economic Updates• International Economic Updates• Texas Business Outlook Surveys• Energy Survey

Dallas Fed Resources

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