Growth Returns to Texas

Robert W. GilmerVice President and Senior Economist

Federal Reserve Bank of DallasJune 2011

Texas Came Into Recession Late –Rebounded Strongly

• Texas began a recession in the second half of 2008 due to a deepening financial crisis, and a decline in energy prices and in high-tech.

• Texas jobs declined about 3.5 percent (about 366,000 net job loss) in 2009.

• Rebounds in energy and high–tech provided a stimulus to Texas in 2010. Housing market less of a drag than nationally. Job growth was about 2.1 percent in 2010.

• This year Texas job growth picking up as consumer and business optimism increases. For the year, job growth will likely be about 3.0 to 4.0 percent.

Texas Jobs Growing Faster Than Nation’s

-3.8

0.7

1.7

-3.5

2.1

3.0

-5

-4

-3

-2

-1

0

1

2

3

4

5

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

U.S. Texas

Y/Y, Percent

Texas Employment Runs in Front of US (3-month percent change at annual rates)

-8

-6

-4

-2

0

2

4

6

US

Texas

Texas UR Has Remained Stubbornly High

9.0

8.0

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

Percent, SAUS unemployment rate

Texas unemployment rate

April

April

Business Cycle Pattern Similar Across Metros

92

93

94

95

96

97

98

99

100

101

102

Jun-08 Jun-09 Jun-10

Houston

S.A.

Ft. Worth

Austin

Dallas

Private Employment

Index Jun. 2008=100

Texas

El Paso

All the State’s Major Cities Caught Up in the Great Recession

Metro Area Peak Trough Percent Decline

Trough to Today

Texas July2008

December 2009

-5.2 3.8

Houston August 2008

November2009

-2.5 5.6

Ft Worth May2008

November 2009

-5.4 3.8

Dallas February 2008

December2009

-6.5 3.7

San Antonio May2008

April2010

-6.0 0.6

Austin March2008

March2010

-7.7 2.2

Texas Economy Growing Moderately to Strongly(Texas Business Cycle Index)

-8

-6

-4

-2

0

2

4

6

8

10

12

-8

-6

-4

-2

0

2

4

6

8

10

12

M/M SAAR M/M SAAR

NOTE: Shaded areas represent Texas recession.

Moving Past The Recession? For Texas That Means Energy, Tech, and Trade

• The US economy remains sluggish, moving forward in low gear

• The global economy is soaring again, driving exports in the US and – especially– in Texas

• Energy rides the commodity boom again

• Tech bounces back

US Recovery Is Sluggish

96

98

100

102

104

106

108

110

2006 2007 2008 2009 2010 2011

Overall Coincident Index Hit Bottom in June 2009, Recovery Is Slow

Gross Domestic ProductQuarterly Percent Growth, Chained 2005 Dollars

-8

-6

-4

-2

0

2

4

6

8

10

2.8

2.2

2.6

1.1

0.8

0.9

1.6

1.0

-3.7

6.8

0.9

0.9

-6.0 -4.0 -2.0 0.0 2.0 4.0 6.0 8.0

Inventory Change

Final Sales

Percent Contribution to GDP By Sector

2009 - Q4 2010 - Q1 2010 - Q2 2010-Q3 2010-Q4 2011-Q1

Job Market Improves Slowly, Unemployment Rate Will Lag Recovery

U.S. Employment GrowthIn Thousands of New Jobs per Month,1990 to 2011

-850

-650

-450

-250

-50

150

350

0.9

0.92

0.94

0.96

0.98

1

1.02

Employment

GDP

Dec 2007X

Paradox of This Recovery Is Behavior of Employment vs. GDP

Autos and housing drove the decline, … and recovery is slow and

incomplete

Manufacturing Led Recovery …But Still a Partial Return

80

85

90

95

100

105

1998-01 2000-01 2002-01 2004-01 2006-01 2008-01 2010-01

Auto Sales Still In Recovery

8

9

10

11

12

13

14

15

16

17

18

2006 2007 2008 2009 2010 2011

Million units, annual rate

Lower Prices and Interest Rates HelpHousing Affordability

Source: NAHB - Wells Fargo Housing Opportunity Index

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

1999:Q4 2011:Q1 Low Point

Date of Low

Point

United States 64 75 40 2006 : Q3

Los Angeles 43 43 2

2006 :

Q1/Q2/Q3

New York 55 24 5 2006 : Q3/Q4

Miami 59 69 10 2007 : Q1

Austin 56 74 50 2000 : Q4

Dallas 64 69 54 2007 : Q3

Houston 66 72 47 2007 : Q3

San Antonio 64 70 47 2006 : Q3

Existing U.S. Home Sales Set Back AfterHomebuyer Incentives Expire in Spring 2010

(million units)

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

New Home Construction Stalled Out in 2010

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

00 '01 '02 '03 '04 '05 '06 '07 '08 '09 10 11

Permits

Starts

Texas Housing Not Exempt from Excesses… But In Better Shape

Home Prices Still Falling After Boom and Bust in Many Markets

Source: Federal Finance Housing Agency.

100

120

140

160

180

200

220

240

260

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

U.S.

Texas

California

Florida

Nevada

House Price Index, 2000=100

US

Texas

85

100

115

130

145

160

175

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Index, Jan'00=100,6MMA

.

Existing Home Sales Are Struggling

Texas

US

85

100

115

130

145

160

175

190

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Texas

Austin

Dallas

Houston

San Antonio

Ft. Worth

U.S.

Index, Jan'00=100,6MMA

.

Existing Home Sales Struggle Across State

7.8

8.9

2

3

4

5

6

7

8

9

10

11

12

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

Months

Single Family Home Inventory(Months Supply)

Texas

U.S.

30

80

130

180

230

280

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Index, Jan'00=100,five-month moving average

Dallas-

Ft. Worth

San

Antonio

Austin

Texas

Houston

Single Family Construction Permits Off the Bottom from 2009 Lows

2

3

4

5

6

7

8

9

10

11

12

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

Months Months in Inventory

Dallas

Ft. Worth

San Antonio

Austin

Texas

Houston

U.S.

Mortgage Foreclosures Flat, Delinquency Rate High but Falling, TX Better than US

2.9

0.8

3.7

1.0

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

TX Delinquencies TX Foreclosures Started

US Delinquencies US Foreclosures Started

Consumer Key to Recovery

Retail sales, ex autos and gasoline 2004-2010

Seasonally adjusted data

12-month percent changesMonthly change at annual rates

*

* February to February-20

-15

-10

-5

0

5

10

15

20

Jan

-07

Jul-

07

Jan

-08

Jul-

08

Jan

-09

Jul-

09

Jan

-10

Jul-

10

Jan

-11

Retail 6-mo avg

7.06.0 6.0

4.0

2.6

3.7

6.2

-2

0

2

4

6

8

10

55

59

63

67

71

75

79

83

87

91

95

jan '06 jul jan '07 jul jan '08 jul jan '09 jul jan '10 jul

Ind

ex

University of Michigan Consumer Sentiment Survey

Household’s Deleveraging – Good for Long-Term but Weakens Spending in Short-Term

90

100

110

120

130

140

150

160

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

Index, SA, Real $

Jan. 2000=100

Texas

U.S.

Texas Retail Sales Outperform US

Blue Chip Survey Projects Real GDP Growth to Continue at 3.0-3.5 percent

-8

-6

-4

-2

0

2

4

6

2004 2005 2006 2007 2008 2009 2010 2011 2012

The global economy drove the commodity boom from

2003-2008. Now it is back!

0

100

200

300

400

500

600

700

800

Food

Ag Raw Materials

Metals

Crude Oil

Oil Part of a Wider Commodity Boom

What Was Behind the Commodity Boom?

• Primarily, it is the growth of the developing world.From 2002-2007, the IMF estimates they account for 90% of the growth in consumption of oil, 90% of metals’ growth, and 80% of food.

• Dollar depreciation raises the purchasing power of other currencies, and stimulates the demand for commodities priced in dollars. Raises the price to US consumers.

• Low U.S. interest rates (other things equal) can raise the price of commodities by lowering the cost of borrowing, reducing the price of storage, and encouraging speculation.

-1

0

1

2

3

4

5

6

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

Global Growth Slows in 2008, Falls Into Recession in 2009, Back on Track by 2010

%/yr

IMF World Economic Outlook, January 2011

Throughout the last decade, the developing world outperformed by wide margin

(percent GDP growth)

-4

-2

0

2

4

6

8

10

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

%/yr

IMF World Economic Outlook, Jan 2011

Could 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

Is There A Slower Global Economy Ahead?

Multi-Speed Recovery Divides Growth into Haves and Have-Nots

2009 2010 2011 2012

World -.05 5.0 4.4 4.4

Advanced Economies

-3.4 3.0 2.4 2.6

Developing Economies

2.7 7.3 6.5 6.5

International Monetary Fund, World Economic Outlook (April 2011)

Advanced Economies Uniformly Slow Performance

2009 2010 2011 2012

Advanced Economies

-3.4 3.0 2.4 2.6

United States -2.5 2.8 2.8 2.9

Euro Area -4.1 1.7 1.6 1.8

Japan -6.3 3.9 1.4 1.8

UK -4.9 1.3 1.7 2.3

Canada -2.5 3.1 2.8 2.6

Developing Countries Expand Faster –But Growth Rates Vary

2009 2010 2011 2012

Developing/Emerging

2.7 7.3 6.5 6.5

Central/East Europe

-3.6 4.2 3.7 4.0

Russia -7.8 4.0 4.8 4.5

China 9.2 10.3 9.6 9.5

India 6.8 10.4 8.2 9.8

ASEAN-5 1.7 6.9 5.4 4.2

Brazil -0.6 7.5 4.5 4.1

Mexico -6.1 5.5 4.6 4.0

Middle East/ North Africa

1.8 3.8 4.1 4.2

Growth Slowing Around the Globe

Developed Nation Slowdown Heavily Influenced by Japan

Industrial Production in Large Emerging Countries

China Tightens Credit and Slows Lending

Baltic Dry: Commodity Shipping Cost

Container Shipping Cost

Oil and natural gas as examples – oil the global commodity and natural gas a domestic

energy source

Refiners’ Acquisition Cost of Crude Oil 1994 to Present

5

25

45

65

85

105

125

1994

1996

1998

2000

2002

2004

2005

2006

2007

2008

2009

2010

2011

Doll

ars

per B

arrel

Wellhead Price of Natural Gas1994 to Present

1

3

5

7

9

11

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Doll

ars

per T

hou

san

d C

ub

ic F

eet

World oil demand staggered under global recession, recovers in 2010-2011(million barrels per day)

84.1

85.1

86.786.1

85

87.8

89.3

81

82

83

84

85

86

87

88

89

90

2005 2006 2007 2008 2009 2010 2011

Recovery in Oil Demand Led By Asia and the Developing World in 2010

(percent change in oil demand)

-0.6 -0.6

-3.4

-4.6

1.5

-0.2

4.14.8

3.5

2.3

5.6

3.6

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

2006 2007 2008 2009 2010 2011

OECD

Non-OECD

International Rig Count Continues to Hold Up

500

600

700

800

900

1000

1100

1200

1300

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Excludes Iran and the Sudan

0

200

400

600

800

1000

1200

1400

1600

1800

2000

US Rig Count Flattens Out on Weak Natural Gas Prices

Natural Gas-Directed Drilling

– Demand has is back at pre-recession levels, even without the help of cold winters in 2010 and 2011.

– Drilling is increasingly directed to oil, not natural gas. But marketed production is up 7 percent since 2007.

– Currently only 880 rigs drilling for natural gas, compared to 1600 at the 2008 drilling peak.

– Shale more prolific than expected, technology continues to improve.

– Inventories remain near normal despite a lot of help from weather-driven demand.

Since 2005 U.S. Marketed Natural Gas Production Has Grown Rapidly

1200000

1300000

1400000

1500000

1600000

1700000

1800000

1900000

2000000

2100000

Six month average, DOE/EIA

High Oil/Low Gas Price Push Drilling Toward Oil-Directed Activity

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

01/05/07 01/05/08 01/05/09 01/05/10 01/05/11

Oil-Directed

Gas-Directed

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

1/5/2007 1/5/2009 1/5/2011

% DIR.

% HORIZ.

% VERT.

Horizontal Drilling Grows with Shale Gas,Complex Oil Projects

Natural Gas from Shale: New Supplies of Clean Fuel

Tech and Trade Also Drive Texas Growth

High tech in Texas

• High-tech manufacturing and services an important economic driver in the 90s– High-tech manufacturing output grew 10X as fast

as Texas GDP

– Austin – “silicon prairie”

– Dallas – “telecom corridor”

• Tech bust caused industry downsizing

• Growth strongest in high-tech manufacturing and computer systems design since bust

High-Tech Output Plunged in During

Recession, Now Growing Strongly

-40

-20

0

20

40

60

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

Semiconductor and other

electronic components

Computer and peripheral

Percent, Y/Y

Trade Grows on Gulf Coast and Border with Mexico

• Gulf Coast ships refined products and chemicals

• Mexican maquiladora rebounds with auto-related growth

Texas Exports Surpass Pre-Recession Level

80

100

120

140

160

180

200

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

U.S. minus Texas

Texas

Index, SA Real

Jan. 2000=100

U.S. petroleum product exports double

800

1000

1200

1400

1600

1800

2000

2200

2400

Jan. 2000 Jan. 2002 Jan. 2004 Jan. 2006 Jan. 2008 Jan. 2010

B/D, thousands

With capacity growth, weak consumptionat home, & strong global demand

Exports of chemicals and plastics grow, quickly recover from recession

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

'97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10

Plastics

Chemicals

2000 $,

millions

Growth of petrochemical and plastics exports fueled by low natural gas prices

• Chemical exports growing because of weak domestic demand at home, strong growth in developing world

• But also driven by low natural gas prices

– North America makes many key chemicals and plastics with natural gas, while rest of world uses oil

– On an energy-equivalent basis, natural gas less than one-third the price of oil – North American companies have huge cost advantage

US-Mexico Trade in apparel lost to China, but a growing role for autos

0

50

100

150

200

250

'97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10

Index, real $,

1997Q1=100

Autos and trucks

Apparel

Despite Headwinds and Risks, Texas Outlook is Strong

Recent Broad-based Increase in TLI

Components

0.93

-0.15

0.23

0.19

0.37

0.49

0.42

0.39

2.86

-0.50 0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50

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 change(February-April)

Texas Jobs Likely to Grow about 3.5% in 2011

– Surpass Previous Peak before end of Year

95

100

105

110

115

120

125

130

9.0

9.5

10.0

10.5

11.0

11.5

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

Millions Index

Leading Index

Texas Nonfarm Employment

and TLI Forecast (with 80%

confidence band)

Recent Job Growth Suggest Declines Likely to

Occur in TX UR in 2011

4

5

6

7

8

9-5

-4

-3

-2

-1

0

1

2

3

4

5

6

1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011

Unemployment

Rate

(Reverse Scale)

Non-farm Job Growth and Forecast

(Shifted Forward by 6 Months)

12-month Percent Change, SA Percent

Fall in Initial Claims for Unemployment

Insurance also Suggests UR Drop

0

1

2

3

4

5

6

7

8

9

0

20

40

60

80

100

120

140

1990 1995 2000 2005 2010

Initial Claims for

Unemployment Insurance

Unemployment Rate

Percent, SAThousands, 6MMA, SA

Summary

• Texas entered the recession late and has come out of it at a stronger pace than most states

• Texas job growth will likely pickup from near 2.0 percent in 2010 to about 3.0 to 4.0 percent in 2011.

• The Texas unemployment rate likely to fall from about 8.0 percent to about 7.0 percent.

• Growth should be broadly shared across the state

• Risks to the outlook? Plenty! Political uncertainty in the Middle East, the European sovereign debt crisis, cuts in state and local government spending, a federal fiscal crisis, US growth falters, inflation… or deflation.

Growth Returns to Texas

Robert W. GilmerVice President and Senior Economist

Federal Reserve Bank of DallasJune 2011