Texas Economic Outlook: Recovery in 2010

Keith PhillipsFederal Reserve Bank of Dallas

San Antonio Office

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

material is strictly prohibited. May be quoted with appropriate attribution to the author.

National Economic Overview

Home Construction Showing Signs of a Bottom

197019701970197019701970197019701970197019701971197119711971197119711971197119711971197119711972197219721972197219721972197219721972197219721973197319731973197319731973197319731973197319731974197419741974197419741974197419741974197419741975197519751975197519751975197519751975197519751976197619761976197619761976197619761976197619761977197719771977197719771977197719771977197719771978197819781978197819781978197819781978197819781979197919791979197919791979197919791979197919791980198019801980198019801980198019801980198019801981198119811981198119811981198119811981198119811982198219821982198219821982198219821982198219821983198319831983198319831983198319831983198319831984198419841984198419841984198419841984198419841985198519851985198519851985198519851985198519851986198619861986198619861986198619861986198619861987198719871987198719871987198719871987198719871988198819881988198819881988198819881988198819881989198919891989198919891989198919891989198919891990199019901990199019901990199019901990199019901991199119911991199119911991199119911991199119911992199219921992199219921992199219921992199219921993199319931993199319931993199319931993199319931994199419941994199419941994199419941994199419941995199519951995199519951995199519951995199519951996199619961996199619961996199619961996199619961997199719971997199719971997199719971997199719971998199819981998199819981998199819981998199819981999199919991999199919991999199919991999199919992000200020002000200020002000200020002000200020002001200120012001200120012001200120012001200120012002200220022002200220022002200220022002200220022003200320032003200320032003200320032003200320032004200420042004200420042004200420042004200420042005200520052005200520052005200520052005200520052006200620062006200620062006200620062006200620062007200720072007200720072007200720072007200720072008200820082008200820082008200820082008200820082009200920090

50

100

150

200

250

300

350

400

0.25

0.50

0.75

1.00

1.25

1.50

1.75

2.00

Millions, units

Billions, $2000

Source: Bureau of Economic Analysis, U.S. Census Bureau and author’s calcula-tions.

Real single-family construc-

tion

Single-family building per-

mits

Steep Home Prices Declines Abating in Many Markets

(OFHEO Price Indexes)

2000

2001

2002

2003

2004

2005

2006

2007

2008

-30

-20

-10

0

10

20

30

FL

CA

U.S. NY

TX

4-Q Percent Change

  1999:Q4 2009:Q1 Low Point Date of Low PointUnited States 64 73 40 2006 : Q3Los Angeles 43 42 2 2006 : Q1/Q2/Q3New York 55 22 5 2006 : Q3/Q4Miami 59 50 10 2007 : Q1Austin 56 75 50 2000 : Q4Dallas 64 76 54 2007 : Q3Houston 66 72 47 2007 : Q3San Antonio 64 73 47 2006 : Q3Source: NAHB - Wells Fargo Housing Opportunity Index

Lower Prices and Interest Rates Helping Housing Affordability

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

2007 2008

TAF established

(Dec. 12)

Bear Stearns

Lehman Brothers

G-7 Action

Libor – 3month Treasury

TED Spread Falling to Normal Levels

July August Sept Oct Nov Dec Jan Feb Apr May June July August Sept Oct Dec Jan Feb Mar Apr May0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

Percent

Quality Spread Peak Highest Since 1932 But Down Over Past Four Months

Baa/Aaa Spread

1 58 115 172 229 286 343 400 457 514 571 628 685 742 799 856 913 97010270

1

2

3

4

5

6

Percent

Negative Fundamentals Weighing on Consumption

• Rising unemployment, job insecurity• Tight credit conditions• Loss of wealth, need to save

---------------------------------------------------------------

Bottom line: Consumption will be very weak in 2009

Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09-800

-600

-400

-200

0

200

400

600

May-345

Thousands (SA)

Jobs Declines Slowing From Huge to Very Bad

U.S. Leading Index Declining by Less – Recession Likely to Dissipate

1960196019601960196019601961196119611961196119611962196219621962196219621963196319631963196319631964196419641964196419641965196519651965196519651966196619661966196619661967196719671967196719671968196819681968196819681969196919691969196919691970197019701970197019701971197119711971197119711972197219721972197219721973197319731973197319731974197419741974197419741975197519751975197519751976197619761976197619761977197719771977197719771978197819781978197819781979197919791979197919791980198019801980198019801981198119811981198119811982198219821982198219821983198319831983198319831984198419841984198419841985198519851985198519851986198619861986198619861987198719871987198719871988198819881988198819881989198919891989198919891990199019901990199019901991199119911991199119911992199219921992199219921993199319931993199319931994199419941994199419941995199519951995199519951996199619961996199619961997199719971997199719971998199819981998199819981999199919991999199919992000200020002000200020002001200120012001200120012002200220022002200220022003200320032003200320032004200420042004200420042005200520052005200520052006200620062006200620062007200720072007200720072008200820082008-20

-15

-10

-5

0

5

10

15

20

Apr

Annualized% change

12-month6-month

'03

'04

'05

'06

'07

'08

'09

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0SAAR, Percent

June Blue Chip Survey Projects Positive RGDP Growth in Q3 2009

1.9 2.4

-6.1

This Will Be the Longest Recession Since 1933

4313

811

108

1011

166

1688

17 and counting

Aug'29-Mar'33

May'37-Jun'38

Feb'45-Oct'45

Nov'48-Oct'49

Jul'53-May'54

Aug'57-Apr'58

Apr'60-Feb'61

Dec'69-Nov'70

Nov'73-Mar'75

Jan'80-Jul'80

Jul'81-Nov'82

Jul'90-Mar'91

Mar'01-Nov'01

Dec'07-present

Texas

Through Most of 2008 Texas Was Stronger Than Nation

• High energy prices provided a stimulus to Texas in first half of 2008 but fell sharply since then.

• High-tech fared better than overall manufacturing until second half of 2008

• Texas Job growth in 2008 was about 0.6 percent versus -2.2 percent in nation.

• TX home prices do not experience large swings like in other areas of the country

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

• Texas jobs will likely decline this year about 3.5 percent (about 371,000 net job loss).

Texas Jobs Declining Sharply

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009-8

-6

-4

-2

0

2

4

6

U.S.

Texas

Y/Y, Percent

0.6

-2.2

3.10

0.84

--5.6

-4.2

Texas UR Has Increased Sharply – But Remains Below the Nation’s

8.9

6.7

200020002000 200120012001 200220022002 200320032003 200420042004 200520052005 200620062006 200720072007 200820082008 3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

Texas Unemployment Rate

U.S. Unemployment Rate

Percent, SA

April Marked Nine Consecutive Decline in the TX 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.

Most Major Metros WeakeningBusiness Cycle Indexes

2000 2001 2002 2003 2004 2005 2006 2007 200880

90

100

110

120

130

140

150

Houston

S.A.

Ft. Worth

Austin

Dallas

IndexJan 2000=100

Texas

Texas Housing Prices Holding UpOFHEO metro

2000

2001

2002

2003

2004

2005

2006

2007

2008

-5

0

5

10

15

Austin

San An-tonio

Houston

Ft.WorthDallas

4-Q Percent Change

US

Texas

Existing Home Sales Falling Sharply in All Major TX Markets

2000 2001 2002 2003 2004 2005 2006 2007 200880

95

110

125

140

155

170

185

200

Index, Jan'00=100,

6MMA

Dallas

Ft. WorthSan Anto-

nio

Austin

Texas

U.S.

Houston

Home Inventories Relative To Sales Lower Than Nation in Texas MSAs

19901991199219931994199519961997199819992000200120022003200420052006200720080

2

4

6

8

10

12

14

16

18Texas

Austin

Dallas

Houston

San Antonio

Ft Worth

U.S.

Months

9.3

7.0

6.7

6.7

6.2

8.4

6.4

TX Foreclosure Rate High But Better Than Nation

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

0.90

4.53

0.41

2.61

U.S. PrimeU.S. SubprimeTexas Prime

Percent, SA

Seriously Delinquent Mortgage Share Rising More Slowly in TX

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

3.0

11.8

5.9

13.3Texas Prime ARMTexas Subprime ARMU.S. Prime ARMU.S. Subprime ARM

Percent, SA

Texas Subprime Mortgage Characteristics Show Less Risk

Texas Non-Residential Contract Values Take A Dive

199019901990 199119911991 199219921992 199319931993 199419941994 199519951995 199619961996 199719971997 199819981998 199919991999 200020002000 200120012001 200220022002 200320032003 200420042004 200520052005 200620062006 200720072007 200820082008 100

1,000

10,000

Real $, Mil5MMA, SA

Residen-tial

Nonresiden-tial

Nonbuild-ing

U.S. Dallas San Antonio Austin Houston0

2000

4000

6000

8000

10000

12000

14000

-73.7 %

-74.6%

-76.6% -89.6% -90.6%

Commercial Property Sales Hit Hard by Financial Crisis

2008 2009 YTD, annualizedMillions, Real $ (U.S. in tens of millions)

What about Other Sectors of the Texas Economy?

Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08-100

-80

-60

-40

-20

0

20

40

60

80

100

Declines in Texas factory activity are moderating(Texas Manufacturing Outlook Survey)

Production Volume of New Orders Volume of Shipments Capacity Utilization

May-09

Index, SA

Exp

an

d-

ing

Co

n-

tra

cti

ng

Exports Have Decreased Sharply

2000 2001 2002 2003 2004 2005 2006 2007 2008 200980

100

120

140

160

180

200

Index, Jan'00=100

Texas

U.S.

High-Tech Output Plunges - Weaker than 2001

2000 2001 2002 2003 2004 2005 2006 2007 2008-50

-30

-10

10

30

50

70

Semiconductor and other electronic com-ponents

Computer and pe-ripheral equipment

Percent,Y/Y

TX Energy Sector Declining Sharply

2000200020002000200020002000 2001200120012001200120012001 200220022002200220022002 200320032003200320032003 200420042004200420042004 200520052005200520052005 200620062006200620062006 2007200720072007200720072007 2008200820082008200820082008 200920092009200920092009200

300

400

500

600

700

800

900

1000

0

20

40

60

80

100

120

140

160

Rig count, weeklyNominal Price, $Weekly

Note: Gas price is multiplied by 10

Texas Rig Count

Natural Gas price

Oil price

TXLI Components Declined Sharply and Broadly early in 2009

Recent Movements in TXLI Components Negative But More Mixed

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

-3.00 -2.50 -2.00 -1.50 -1.00 -0.50 0.00 0.50 1.00 1.50

-1.25

-1.67

0.84

-0.26

-0.79

0.44

0.10

0.02

-2.57

Texas Leading Index Components, 3 month change(Feb. - Apr.)

Declines in Leading Index Suggest Job Losses Through End of Year

Jan-00Feb-00Mar-00Apr-00May-00Jun-00Jul-00Aug-00Sep-00Oct-00Nov-00Dec-00Jan-01Feb-01Mar-01Apr-01May-01Jun-01Jul-01Aug-01Sep-01Oct-01Nov-01Dec-01Jan-02Feb-02Mar-02Apr-02May-02Jun-02Jul-02Aug-02Sep-02Oct-02Nov-02Dec-02Jan-03Feb-03Mar-03Apr-03May-03Jun-03Jul-03Aug-03Sep-03Oct-03Nov-03Dec-03Jan-04Feb-04Mar-04Apr-04May-04Jun-04Jul-04Aug-04Sep-04Oct-04Nov-04Dec-04Jan-05Feb-05Mar-05Apr-05May-05Jun-05Jul-05Aug-05Sep-05Oct-05Nov-05Dec-05Jan-06Feb-06Mar-06Apr-06May-06Jun-06Jul-06Aug-06Sep-06Oct-06Nov-06Dec-06Jan-07Feb-07Mar-07Apr-07May-07Jun-07Jul-07Aug-07Sep-07Oct-07Nov-07Dec-07Jan-08Feb-08Mar-08Apr-08May-08Jun-08Jul-08Aug-08Sep-08Oct-08Nov-08Dec-08Jan-09Feb-09Mar-09Apr-09May-09Jun-09Jul-09Aug-09Sep-09Oct-09Nov-099000

9200

9400

9600

9800

10000

10200

10400

10600

10800

11000

95

100

105

110

115

120

125

130Thousands

Texas Employmentand TLI Forecast Leading

Index

Index

July 2010

Dallas, Austin and Houston Likely to be Hit Hardest in 2009

Table 1: Texas Major MSA Exposure to Current Recession(Source: TWC 2007 ES202 employment)

Austin Dallas Forth Worth Houston San Antonio El Paso TexasNatural Resources and Mining 0.4 0.4 1.1 2.6 0.5 0.3 1.9Construction 1.2 1.0 1.1 1.4 1.1 1.0 1.2Manufacturing 0.8 1.0 1.1 0.9 0.6 0.8 0.9Trade, Transportation and Utilities 0.9 1.0 1.2 1.0 0.9 1.1 1.0 Wholesale Trade 1.2 1.4 1.1 1.2 0.8 0.9 1.1 Retail Trade 0.9 0.9 1.1 0.9 1.0 1.2 1.0Information 1.3 1.6 0.8 0.7 1.2 0.9 0.9Financial Activities 1.0 1.5 0.9 0.9 1.3 0.7 1.0 Finance and Insurance 0.9 1.6 0.9 0.8 1.3 0.6 1.0 Real Estate and Rental and Leasing 1.1 1.4 1.0 1.3 1.2 1.0 1.1Professional and Business Services 1.1 1.3 0.9 1.1 1.0 0.9 1.0

Safe IndustriesEducation and Health Services 1.0 0.8 0.9 0.9 1.1 1.2 1.0Leisure and Hospitality 1.0 0.9 1.0 0.9 1.2 1.0 1.0Public Administration 1.3 0.5 0.6 0.5 0.8 1.1 0.7

Summary• The U.S. recession should last through end

of year • Texas performed well in the first half of

2008 due to high-tech and energy – but now these sectors are in decline.

• Texas has followed the nation into recession and will likely remain in decline most of the year.

• 2009 Texas job growth will likely be about -3.5 percent (about 370,000 jobs) after growing about 0.7 percent in 2008.

• U.S. financial industry starting to show some signs of improvement but we are not yet out of the woods

• Good news: Not a Depression • The biggest thing we have to fear is fear

itself.

Austin Likely to Decline in ‘09

• High-tech strong in first half of 2008 but now declining– World Economy Weakening– Dollar strengthened since mid-2008– No big new product to drive sales

• Credit Crunch is putting Retail Projects on hold• Construction Prices are down 20 to 30 percent

from 2008 levels• Area School District postponing construction

and scaling back hiring• Office Vacancy rates in the area are the highest

since 2003• Feb. home sales down 28% and new home

construction down 47%• Manufacturing jobs declining

– AMD, Freescale, Samsung, Spansion all planning job cuts

• Job growth in Austin likely to decline about 3.5 to 4.0 percent in 2009

• Long-term growth still strong in Austin

Jobs Market will be very Tight This Year

• Technical skills – math, statistics – and computer skills – Excel, PowerPoint, E-Views, Matlab, SAS – can give you a good edge.

• Board of Governors www.federalreserve.gov and individual District Fed Banks hire a lot of undergrad econ majors as research assistants

• National Association for Business Economics has job postings

• Lots of interest in the economy

2009 Forecast

  Annual Percent Change 2009 from 2008

  Current $ Personal Income Retail Sales Wage & Salary Empl. Population Growth

Single-family Housing Permits

David Hemley  6.2  5.1  1.8  1.7  -5.6

Econoclast  5.9  5.0  1.7  1.8  -12.2

Federal Reserve Bank of Dallas

 2.0  2.5  -1.4  1.6  -12.5

Perryman Group  6.7  6.0  1.9  1.0  -4.9

TX State Comptroller of Public Accounts

 2.2  1.5  -0.5  1.9  -38.9

University of Houston - CPP

 5.9  5.1  1.8  1.7  3.3

University of North Texas  4.5  3.0  -1.0  1.5  -40.0

University of Texas at El Paso

 6.4  5.2  1.8  1.7  -4.8

Wells Fargo & Company - MN

 4.8  4.0  1.2  1.6  -2.2

Consensus - This Month

5.0 4.2 0.8 1.6 -13.1

Consensus - Last Month 5.1 4.5 1.0 1.6 -10.0

Other Forecasters Not as Pessimistic( http://wpcarey.asu.edu/bluechip/western/texas.cfm )

Federal Reserve Bank of Dallas, San Antonio Branch

Texas Jobs Forecasting Model

• Transfer function based on past changes in employment and changes in the leading index

• The transfer function is as either of the following forms where B is the backshift operator :

Federal Reserve Bank of Dallas, San Antonio Branch

Model Fits Data Well• Leading index impact is felt three months later.• Model estimates are .06 for the fixed effect

(intercept) and .88 for the impact coefficient – so shocks in LI are persistent

• T-value on impact coefficient is 43• Has been used since early 1990s with good

results• Closest to actual in 8 out of past 13 years (out

of 8 forecasters in Western Bluechip)

Chart 1Dallas Fed Most Accurate Forecaster of Texas Employment Growth

-1

0

1

2

3

4

5

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Employment Growth (%)

Actual

DallasFed

ConsensusofForecasters

Federal Reserve Bank of Dallas, San Antonio Branch

Forecasting Model Does Well By Standard Measures of Error

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

RMSE U-Stat

Dallas Fed

TX Comptroller

Perryman

Econoclast

McClelland

San Antonio One of the Least Weak Metro Areas in the US

• Toyota propelled manufacturing jobs in 2005 and 2006 (3.7 and 4.9%) but now back to decline

• San Antonio will see gains in construction, research and medical jobs from BRAC

• Construction jobs still increasing due to BRAC, health care and schools

• SA has smaller high-tech share • Health care, and financial services doing well• AT&T loss psychological hit• 2008 job growth about 0.5 percent• Job Growth likely to decline by about 1% in ‘09

Oil Price Decline Puts Downward Pressure on TX Job Growth

Contract Values Decreasing for Private Commercial Buildings

Contact Values Decreasing

TX Job Growth Starting to Sink

Transportation Funds in Texas• The federal supply of funds is not meeting the demand from the growing number

of Texas drivers. For every $1 Texas sends in federal motor fuels tax to Washington D.C., the state receives only 78 cents back. From 2005 through 2009 – an estimated $13.3 billion in Texas’s Highway Trust Fund dollars will be directed elsewhere.

• During the past 25 years, Texas’ population grew 57 percent, road use increased 95 percent, but road capacity increased just 6 percent.

• A study uses the Federal Highway Administration’s model, Highway Economic Requirements System (HERS), as an economic evaluation based on cost-benefit analysis. From 2000-2004, HERS estimates that the optimal investment for highway capital improvements was $38 billion, $25 billion more than what TxDot actually spent.

• During these years, TxDOT allocated 56 percent of funds to urban roads while the model recommends directing around 70-80 percent to urban roads.

• New administration likely to significantly increase spending on U.S. transportation infrastructure but need and efficiency likely will be important. Texas should emphasize its long-term growth, its current spending and national tax refund shortfall. Rural toll roads also efficient way to make funds go further.

Non-ABS Commercial Paper Volumes Recover Most Post-Lehman Declines, While

ABS Bottoms Out