Jan 16, 2026

Texas Economic Outlook | January 2026

The U.S. economy continues to expand at a robust pace, despite recent headwinds in the labor market.

Jorge Barro

U.S. Economic Overview

The U.S. economy continues to expand at a robust pace, despite recent headwinds in the labor market. Third quarter 2025 real gross domestic product increased at an annual rate of 4.3 percent, exceeding expectations and increasing from a rate of 3.8 percent in the second quarter 2025. Consumer spending, which historically accounts for roughly two-thirds of real GDP, continued to sustain elevated economic growth in the third quarter with contributions from trade and government spending as well. Within consumer expenditures, healthcare remains a leading contributor to growth. Investment declined slightly, resulting from a decline in inventories.

The U.S. labor market sustained weak growth in December as the U.S. economy added 50,000 jobs. The unemployment rate, however, dipped slightly to 4.4 percent, down from 4.5 percent. Business sentiment in survey data indicates widespread labor market optimism in the coming months. Data from the National Federation of Independent Businesses and the Federal Reserve Banks of Atlanta and Dallas show a trending improvement in expected hiring over the next several months. In the months preceding the COVID pandemic, the unemployment rate had been hovering around 3.5 percent, and labor markets could show some gravitation toward that value.

The Federal Reserve met in December and reduced its key short-term interest rate by 25 basis points to a range of 3.5 to 3.75 percent. Moreover, the Fed reaffirmed its commitment to stabilizing its balance sheet, which could ease financial conditions in short-term debt markets. Despite short-term rates falling, the 10-year Treasury yield increased 14 basis points from 4.02 percent to 4.16 percent in December. The 10-year Treasury rate remains a critical benchmark for long-term interest rates, including mortgage rates.

Stories We’re Following

Sales Revenue Growth Outlook

The issue: The Survey of Business Expectations housed at the Federal Reserve Bank of Atlanta tracks certain aspects of business sentiment and expectations. This survey offers early insights into the near-term U.S. macroeconomic outlook. Two important series provided by the survey are the average expected employment growth rate, which gives an outlook for labor markets, and the sales revenue growth rate, which gives an outlook for private sector economic growth. While the former has been a focus of past Texas Economic Outlook reports, this edition focuses on the latter.
Updates: Expected sales revenue growth surged in December, showing a strong rebound since the start of the global trade war in April of 2025.¹ While the series shown here is a three-month average for smoothing, the unsmoothed series (not shown) reflects the largest increase since June of 2022 when inflation was surging. Now, as inflation trends downward, this improving sales growth outlook shows no signs of a looming economic downturn. Moreover, it could indicate an improvement in the employment outlook and the broader macroeconomic outlook.

Source: Federal Reserve Bank of Atlanta, accessed via FRED

Labor Market Conditions

The issue: Several factors, including policy-related uncertainty and productivity advancements from artificial intelligence, have likely contributed to a slowdown in hiring. Despite the slowdown in hiring, the rate of layoffs has also remained mostly constant in recent months. This slowdown in both hiring and layoffs has coincided with a slow increase in the unemployment rate as the broad labor market cools. Two key factors provide an indication of the labor market outlook: 1) the hiring outlook, which is based on business survey data, and 2) historical pre-recession troughs in the unemployment rate, which shows where the natural rate of unemployment could be, absent any business cycle disruptions.
Updates: As of the end of December 2025, the unemployment rate stands at 4.4 percent. Two key observations show where the unemployment rate could trend towards as the economy recovers from the counter-cyclical monetary policy and broader policy uncertainty. First, in late 2019 and early 2020, before the steep economic effects of the pandemic, the unemployment rate appeared to be stabilizing and converging near 3.5 percent, possibly reflecting the natural rate of unemployment. Then, in April 2023, as the effects of post-pandemic fiscal and monetary stimulus subsided, the unemployment rate again troughed near 3.4 percent before rising again to its current level. Although the unemployment rate could continue to climb, hiring optimism in business surveys and a low natural rate of unemployment indicate the unemployment rate could soon begin gravitating toward its pre-pandemic trend.

Data Center Investment

The issue: Technological advancements and the proliferation of artificial intelligence has required massive investment in data centers throughout the U.S. These data centers provide the critical infrastructure, including servers, storage systems, and other equipment, used to operate digital services. In recent years, the U.S. Bureau of Economic Analysis began itemizing data center structures as a component of its nonresidential fixed investments in offices. Although this only accounts for the building itself and not the hardware and infrastructure held within it, the value serves as an indicator of strong growth in the area.
Updates: Texas has been a major beneficiary of the surge in data center investments. With 405 data centers, Texas is currently second only to Virginia, which has 663 data centers.² Moreover, data center construction in Texas is set to double in the coming years as an additional 442 data centers are currently under construction or planned. This surge in data center construction is expected to have a large economic impact on both the state and the corresponding regions.

Notes: This value shows nonresidential fixed investment in offices that are data centers, which does not include the equipment and infrastructure therein.
Source: U.S. Bureau of Economic Analysis, accessed via FRED

Texas Economic Indicators

The November labor market data showed a steepening deceleration in Texas.³ Year-over-year job growth fell below the national average with losses across several geographies and industries, particularly those that show sensitivity to oil prices (Figure 3). Despite these losses, business sentiment data shows signs of optimism that the broader labor market could rebound in 2026.

Source: U.S. Bureau of Labor Statistics and the Federal Reserve Bank of Dallas

Employment

The November jobs report showed negative growth in Texas, while the broader U.S. grew slightly (Figure 4). Several regions throughout the state, including the Dallas-Fort Worth metropolitan area, experienced job losses. The Austin and Wichita Falls metropolitan areas experienced sizeable gains, while Houston and several other metropolitan areas experienced more moderate gains.

Notes: U.S., Texas, major metropolitan areas, and other metropolitan areas are each shown in different shades of blue.
Source: U.S. Bureau of Labor Statistics and the Federal Reserve Bank of Dallas

The November jobs report showed steep losses in the Texas Mining and Logging sector, likely the result of unusually low oil prices (Figure 5). Construction and manufacturing remained mostly flat in November, while the service sector showed mixed results.

Notes: Goods-producing and service-providing industries are shown in different shades of blue.
Source: U.S. Bureau of Labor Statistics and the Federal Reserve Bank of Dallas

Employment Outlook

The share of Texas firms planning to hire in the next six months rose in services and retail while dipping slightly in the manufacturing sector (Figure 6). Manufacturing and services are still showing improvement, relative to the steep decline experienced in 2025, but the retail employment outlook remains low, despite the uptick. The number of firms planning to decrease employment dipped in manufacturing, while increasing slightly in retail and services. If the share of firms hiring in the next six months continues trending upward, it could confirm an improvement in the outlook for the broader Texas labor market and economy.

Notes: Share of Texas firms planning to increase (top) or decrease (bottom) employment in the next six months, by major sector.
Source: Federal Reserve Bank of Dallas

Housing and Mortgage Rates

Mortgage rates declined in December, as rated fell 7 basis points from 6.23 percent to 6.15 percent (Figure 7). Overall, mortgage rates have trended downward but have stabilized somewhat in recent months. Still, mortgage rates remain elevated, well above pre-pandemic lows, creating a headwind in the residential real estate market.

Notes: House price index data is provided through Q3 2025, and mortgage rate data is provided through the end of December.
Source: FHFA and Freddie Mac, accessed via FRED

The mortgage spread (Figure 8), defined as the premium of mortgage rates over the 10-year Treasury yield, hit a critical benchmark, falling below 200 basis points for the first time since the Fed ceased its purchases of mortgage-backed securities in 2022. The spread fell 22 basis points, from 221 down to 199 basis points (i.e., from 2.21 percentage points to 1.99 percentage points). The mortgage spread, which provides useful context of mortgage rates in broader capital markets, remained elevated compared to the historical range of 150-175 basis points. This suggests that as capital markets normalize, mortgage rates could decline by another 25 basis points, relative to the 10-year Treasury yield.

Notes: The mortgage spread is defined as the 30-year mortgage rate minus 10-year Treasury yield. Its typical range is 1.5 percent to 1.75 percent (150 to 175 basis points).
Source: Freddie Mac, Board of Governors of the Federal Reserve, and author’s calculations; data accessed via FRED

For more information on the Texas housing outlook, read TRERC’s monthly Texas Housing Insight report.

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