Texas Economic Outlook:

Takes a Licking But Keeps on Ticking

Keith Phillips

Assistant Vice President and Senior Economist

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.

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

• In 2015 and 2016, low oil prices and strong dollar reduced job growth – but Texas doing better than other energy states.

• Service sectors and I-35 corridor not impacted much by energy downturn.

• In 2015, jobs grew 1.3% (155,000 jobs), a drop from 3.7% in 2014. In 2016, growth though September is 1.4% and will likely hold near that pace to finish about 1.5% for the year. 2017 forecast at 1.7%.

Texas Economic Growth Weak in 2015 and 2016, Likely to Pick Up Next Year

Texas Ranked 4th in Job Growth in 2014, Growth in Energy States Varied Widely

-5

-4

-3

-2

-1

0

1

2

3

4

5

NV

ND

CO TX FL GA

OR

UT

WA

CA SC DE

MA

TN ID NC

US

AR

AZ RI

LA OK

MI

NY

OH KY

WY

WI

NM IN IL

MO

MD AL

PA

MN SD KS

CT NJ

NH IA NE

MS

DC

VA

ME

MT HI

VT

AK

WV

Percent Change,Dec. 2013 - Dec. 2014

U.S.

TX

NOTE: Black bars represent major energy-producing states.SOURCE: Bureau of Labor Statistics

Texas Ranked 30th in Job Growth in 2015; Jobs Contracted in Most Energy States

-5

-4

-3

-2

-1

0

1

2

3

4

5

ID UT FL OR

AZ

CA

TN CO

GA SC WA

VA

DE

NV

AR HI

NJ

NC

US

KY

MI

INM

DN

HN

EM

NO

HM

SN

YM

TTX IA

MA RI

SD WI

AL

VT

DC IL

MO PA CT

ME

NM KS

AK

OK LA WV

WY

ND

Percent Change,Dec. 2014 - Dec. 2015

U.S.

TX

NOTE: Black bars represent large energy-producing states.SOURCE: Bureau of Labor Statistics

Texas Growth This Year Remains Positive and Above Other Energy States

-5

-4

-3

-2

-1

0

1

2

3

4

5

FL NV

OR

WA

UT

MA

DC

SD HI

SC CA

GA

CO

NH

MO

NC

DE ID VT

TN US

AZ

VA TX MN

MD MI

NY IA IN IL WI

AL

AR

PA KY

OH

ME RI

NE NJ

CT

MT

MS

WV KS

OK

ND

NM LA AK

WY

Annualized Percent ChangeDec. 2015 - Sept. 2016

U.S. TX

NOTE: Black bars represent large energy-producing states.SOURCE: Bureau of Labor Statistics

2015-16 Texas Job Growth Less Than the Nation

-3.8

0.8

1.6 1.6 1.7

2.22.0

1.5

-3.5

2.1 2.3

3.5

2.7

3.7

1.31.4

-5

-4

-3

-2

-1

0

1

2

3

4

5

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

U.S.

Texas

Percent, Job Growth Y/Y

Note: Striped bars indicate Sept. 2016/Dec. 2015 annualized growth.Source: Bureau of Labor Statistics, Federal Reserve Bank of Dallas

Most Metros Still Growing: Dallas Strong, Houston Weak

1.4

0.0

3.0

2.0

1.4 1.5 1.7

-2.7

-4

-3

-2

-1

0

1

2

3

4

5

6

Texas Houston(24.8%)

Dallas(20.8%)

San Antonio(8.4%)

Fort Worth(8.4%)

Austin(8.2%)

El Paso(2.6%)

CorpusChristi(1.6%)

Job Growth, 2013-2016

Percent, Dec./Dec.

NOTE: Figures in parentheses represent shares of total state employment. Shaded bars indicateSept. 2016/Dec. 2015 annualized growth.SOURCES: Bureau of Labor Statistics, Federal Reserve Bank of Dallas.

Texas Unemployment Rate Rising But Still Below National Rate

(Sept.)4.8

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 2016

Percent, SA

US unemployment rate

Texas unemployment rate(Sept.)

5.0

Source: Bureau of Labor Statistics.

Texas Economy Expanding Near Trend After Weak First Half

Texas Business Cycle Index

-8

-6

-4

-2

0

2

4

6

8

10

12

M/M SAAR

NOTE: Shaded areas represent Texas recessionsSOURCE: Federal Reserve Bank of Dallas

3.7% trend

Service Sectors Continue to Add Jobs

-30

-25

-20

-15

-10

-5

0

5

10

15

20

Trade, Transp& Utilities

(20.1%)

Government(15.7%)

Health &Private

Education(13.6%)

Professional &Business Svcs

(13.6%)

Leisure &Hospitality

(10.8%)

Manufacturing(6.9%)

FinancialActivities

(6.1%)

Construction(5.8%)

NaturalResources &

Mining (1.7%)

Information(1.6%)

(Job Growth 2013-2016)Dec/DecPercent Change

Note: Figures in parentheses represent shares of total nonfarm employment. Shaded bars indicateSept. 2016/Dec. 2015 annualized growth.Source: Bureau of Labor Statistics, adjustments by Federal Reserve Bank of Dallas.

TX Construction Contract Values Weakening

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Real $, Mil5MMA, SA

Residential

Non Residential

Non Building

Total

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

Texas Office Markets Healthy But Vacancy Rate Suggests Slowing

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 '16

Real, Millions $, 5MMA Percent

Office Vacancy Rate

Office and Bank Buildings

Contract Values

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

16%

Texas Residential Construction Indexes Suggest Activity Flattening Out

0

100

200

300

400

500

600

1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Sources: Federal Reserve Bank of Dallas, Texas A&M Real Estate Center.

Index, Jan. 1991 = 100

TX Leading Index forResidential Construction

TX Coincident Index forResidential Construction

TX Manufacturing Indicators Have Improved in Recent Months

-100

-80

-60

-40

-20

0

20

40

60

80

100

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

Production

Volume of New Orders

Company Outlook

Index

Oct. '16

SOURCE: Federal Reserve Bank of Dallas Texas Manufacturing Outlook Survey.

Strong Value of the Dollar Continues to Dampen Exports

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 2016

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 Picking Up in Recent Months

0

20

40

60

80

100

120

140

160

0

100

200

300

400

500

600

700

800

900

1000

Gas price(*10)

Oil price

Rig Count

Sources: Oil and Gas Journal, Baker Hughes.

Number Nominal $

Eagle Ford, Permian Basin Jobs Declining

90

95

100

105

110

115

120

125

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Rest of Texas

Eagle Ford counties

Permian Basin counties

Index, Jan. 2007 = 100*

*Seasonally adjusted.SOURCES: Bureau of Labor Statistics, seasonal and other adjustments by Federal Reserve Bank of Dallas.

Which Metros Are Performing the Best in 2016? Size of Energy Sector Explains a Lot

0 5 10 15 20 25

Midland (-4.7%)Odessa (-4.8%)

Longview (-1.7%)Corpus Christi (-2.7%)

Houston-Baytown-Sugar Land (0%)San Angelo (3.3%)

Wichita Falls (-0.8%)Laredo (2%)

Abilene (1.2%)Tyler (1.8%)

College Station-Bryan (2.9%)Fort Worth-Arlington (1.4%)

McAllen-Edinburg-Mission (2.4%)Beaumont-Port Arthur (-1.3%)

San Antonio (2%)Amarillo (-0.6%)

Sherman-Denison (1.7%)Dallas-Plano-Irving (3%)

Austin-Round Rock (1.5%)Lubbock (0.8%)

Waco (2.2%)Texarkana (3.6%)

Killeen-Temple-Fort Hood (2.2%)Brownsville-Harlingen (0.5%)

El Paso (1.7%)

Mining sector share of total employment

Note: Data in parentheses are annualized total nonfarm job growth Dec. 2015 - Sept. 2016. Mining share data as of 2014.Sources: Texas Workforce Commission, Bureau of Labor Statistics, Federal Reserve Bank of Dallas.

Correlation: -0.76(2015 Correlation -0.88)

Austin-Round Rock (1.5%)Dallas-Plano-Irving (3%)

San Antonio-New Braunfels (2%)

Fort Worth-Arlington (1.4%)

Houston-Baytown-Sugarland (0%)Corpus Christi (-2.7%)

0.00

-0.03

0.11

0.11

0.08

-0.21

0.18

0.11

0.33

-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 Index(July - September)

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

Leading Index Components Weakly Positive

Texas Jobs Forecasted to Grow about 1.5% in 2016, 1.7% in 2017

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

Surveys Suggest that $50-$55 Oil needed to Drill Profitably

53.59(Dec. '17)

29.00(Dec. '17)

99.04(Dec, '17)

0

20

40

60

80

100

120

2014 2015 2016 2017

WTI spot price

WTI futures (Oct 28)

Dollars per barrel

SOURCES: Bloomberg; Energy Information Administration; calculations by the Federal Reserve Bank of Dallas.

95% futures confidence interval

Oil Futures Suggest Flat Prices, But Highly Uncertain

• In past two year Texas weakened sharply but continued to grow - did much better than 1980s and better than other energy states.

• Tight real estate markets and continued growth in sectors such as health care and government are offsetting the decline in energy and manufacturing.

• Despite ongoing weakness, Texas still growing - Texas job growth likely to be about 1.5 percent this year and 1.7 percent next year.

• Biggest risk to the forecast is sharp decline in oil prices.

Summary