Texas Economic Outlook | October 2025

U.S. Economic Overview

Note: Because of the federal government shutdown that started on Oct. 1, 2025, government-provided estimates for the employment situation, inflation, wages, and other statistics were unavailable for this report. These values will be provided again once the data becomes available. Wherever possible, privately-provided estimates will be monitored instead.

Although the federal government shutdown prevented the release of key economic data, the available statistics pointed to mixed implications for the U.S. economy. The August Job Openings and Labor Turnover Survey showed that hiring and job separations both declined by nearly the same amount, keeping job growth implied by the survey slightly positive. The September ADP jobs report, which gained importance in lieu of government-provided estimates, showed a decline of 32,000 private sector jobs. While this indicates a continued decline in jobs growth, it lacks perspective on broad labor market conditions without a read of the unemployment rate. 

The government shutdown itself contributes to near-term risk of macroeconomic deceleration that expands with the duration of the shutdown. Moreover, the end of the federal deferred resignation period on Sept. 30, coupled with any additional layoffs in the federal government, could contribute to a jump in the unemployment rate and a corresponding decline in economic activity. Despite these downside factors, several indicators point to a macroeconomic improvement in the coming months. In particular, business survey data shows an improvement in the hiring outlook, which could cause the employment situation and economic activity to rebound. 

In response to weakening labor markets, the Federal Reserve reduced its key short-term interest rate by 25 basis points during its September meeting. While this rate reduction was widely anticipated, further rate cuts remain uncertain. In reducing rates in September, the Fed prioritized labor market concerns over persistent inflation, which remains nearly a percentage point above the Fed’s 2 percent target. Mortgage rates and the 10-year Treasury yield both fell in September as borrowing costs fell across capital markets.    

Stories We’re Following

Long-term Treasury Yields

• The issue: Activity in the long-term Treasury security market offers insights into movements in mortgage rates. While short-term rates are affected by certain factors, including Fed interest rate changes, long-term rates are affected by the long-term macroeconomic outlook, the inflation outlook, and credit risk over the investment horizon. By studying the changes in long-term rates, along with the factors affecting long-term rates, we can understand how those individual factors might impact mortgage rates and other long-term rates.   
  
• Updates: Over the past few years, the spread between the 10-year and 30-year Treasury yields has been roughly 10-20 basis points. However, since April of 2025, the spread between these securities has risen sharply, nearly reaching 70 basis points in early September. Differences in inflation expectations implied by the inflation-protected Treasury securities do not account for this difference, leaving other factors, like credit risk, the long-term economic outlook, and other market forces to explain this increase.1 If federal credit risk is driving this increase in the yield spread, then this rise in credit risk is unlikely affecting mortgage rates because of the 10-year Treasury yield’s prominence as the benchmark for mortgage rates.

Source: Freddie Mac and the Board of Governors of the Federal Reserve System

Federal Reserve Policy

• The issue: The Fed is tasked with achieving a dual mandate of price stability and full employment. As inflation approaches the Fed’s 2 percent target, the central bank gains support for reducing interest rates to accommodate slowing labor markets. As part of its broader balance sheet operations, the Fed also buys and sells long-term private and public financial assets. Its divestment in mortgage-backed securities has placed upward pressure on mortgage rates, which could continue for as long as the Fed maintains this policy. 
  
• Updates: The Fed reduced its target short term rate by 25 basis points in response to a weakening U.S. labor market. Fed Chair Jerome Powell characterized the rate reduction as a risk management exercise, as the possibility of further deterioration in labor markets outweighs the upside risks to inflation. Meanwhile, the Fed left its balance sheet policy unchanged, which could sustain elevated long-term interest rates, relative to short-term interest rates.  

Recession Likelihood

• The issue: The onset of the global trade war and recent deceleration of the U.S. labor market created concerns that the economy may be entering into a recession. Recessions are broad declines in economic activity typically characterized by a decline in economic growth and a rise in unemployment. They are often triggered by a shock to the economy, such as the global financial crisis in 2008 and 2009 and the COVID-19 pandemic in 2020. Understanding the state of the economy and the nature of economic downturns provides insights into the near-term likelihood of recessions. 
  
• Updates: Although recessions can happen at any time, trends in the durations of economic expansions remain one of the best broad-based measures of recession likelihood. At 5.5 years, the current expansion’s duration would be short, relative to the trending increase in durations over time. A recession now would make the current expansion the shortest in over four decades. Moreover, although the unemployment rate has been slowly rising, economic growth remains elevated, contradicting the pattern typically seen during a recession. These factors show no clear indication that a recession is likely to happen in the coming months, although it’s certainly possible. 

Notes: Expansions are measured from the end date of one recession to the start date of the next recession. The current expansion, which started in May 2020 (shown in green), is still ongoing. 
Source: National Bureau of Economic Research, accessed via FRED 

Texas Economic Indicators

Although the availability of employment data was affected by the federal government shutdown, recent downward revisions to Texas employment show that the state-level economy may be operating at a rate closer to the national-level growth rate than previous estimates indicated. Survey data from the Federal Reserve Bank of Dallas showed continued growth in the share of Texas retail and service sector firms expecting to increase employment. The hiring outlook in the Texas manufacturing sector, however, deteriorated, likely due to the decline in oil prices.

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

Employment 

[Unavailable; will return once the U.S. Bureau of Labor Statistics begins issuing data releases again.] 

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 

[Unavailable; will return once the U.S. Bureau of Labor Statistics begins issuing data releases again.] 

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 continued a strong rebound in the services and retail sectors, while declining in the manufacturing sector (Figure 6). This indicates a broad rebound in business optimism that could lead to a corresponding increase in job growth in the coming months. The number of firms planning to decrease employment rose sharply in the manufacturing sector, while ticking down in the retail sector and remaining mostly flat in the services sector. Overall, the business survey data appears to indicate a labor market improvement in the coming months in the services and retail sectors and a worsening labor market in manufacturing. This employment outlook survey remains a critical indicator of the labor market and economic trajectory.

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 continued falling in September but remained elevated, as rates declined 26 basis points from 6.56 percent to 6.30 percent (Figure 7). Broad-based housing cost measures across the U.S. continued showing deceleration in the housing market, as heightened mortgage rates and a sustained macroeconomic deceleration continue weighing on housing market activity.

As the Federal Reserve pivots to more accommodative policy in the coming months, short-term rates may continue to decline. Long-term rates on certain financial assets, including mortgages, may depend extensively on several factors, including the inflation outlook, the U.S. macroeconomic outlook, and the Fed’s balance sheet policy.  

Notes: House price index data is provided through 2Q2025, and mortgage rate data is provided through the end of September. 
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—continued to decline, falling 17 basis points in September, from 231 to 214 basis points (i.e., from 2.31 percentage points to 2.14 percentage points). The mortgage spread, which provides useful context of mortgage rates in broader capital markets, remains elevated compared to the historical range of 150-175 basis points. This suggests that as capital markets normalize, mortgage rates could decline by another 50 to 75 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.