Texas Economic Outlook | August 2025

U.S. Economic Overview

A growing share of recent economic data shows the U.S. economy decelerating, though no strong evidence indicates a looming recession. This extends a persistent macroeconomic slowdown following the post-pandemic rebound. In the coming months, economic data will likely indicate the economy’s responsiveness to federal policies, including trade policy, tax reform, and immigration policy.  

Second quarter 2025 U.S. real gross domestic product (GDP) rebounded after declining in the first quarter, though much of the variation over these quarters was the result of efforts to mitigate the impact of tariffs. Personal consumption expenditures, which comprise roughly two-thirds of GDP, showed a trending decline, where the year-over-year (YoY) growth rate has fallen roughly one percentage point since late 2024. Business investment also declined—likely another tariff-related response, as businesses continue exhausting pre-tariff stockpiles of imported inventories. 

Although the unemployment rate has remained mostly stable, the monthly jobs report indicated a steep decline in employment growth and sharp downward revisions to the May and June employment numbers. In July, the economy added only 73,000 jobs, while the May and June jobs were revised, respectively, from 144,000 to 19,000 and from 147,000 to 14,000—a combined reduction of 258,000 jobs in those two months.¹ This shows a clear labor market deceleration, which could prompt the Federal Reserve (Fed) to cut short-term interest rates in the coming months. 

During their meeting in late July, Fed officials held interest rates steady while expressing a growing concern over slowing labor markets. The Fed’s policy-voting committee, the Federal Open Market Committee (FOMC), acknowledged the lingering prospect of resurgent inflation caused by tariffs, which could emerge with lags.² However, a growing share of voting members indicated an inclination to continue lowering rates in the coming months as they balance their dual mandate of price stability and full employment. The FOMC meets again in mid-September.  

Stories We’re Following

Trade Policy

• The issue: Since early April, President Trump has engaged in global trade negotiations involving tariffs on global imports and international trade deals. This change in global trade policy has impacted trade and capital markets while adding risk to the macroeconomic outlook. As uncertainty over the duration and magnitude of the tariffs hangs over consumers and businesses, the possibility of sustained tariffs could contribute to a restructuring of economic activity.   
  
• Updates: Continued negotiations with other countries have left U.S. businesses with heightened policy uncertainty. As of early August, the average tariff rate was just above 20 percent with significant trade negotiations remaining (Figure 1). The evolving restructuring of international trade is expected to have disparate impacts on different states, depending on their manufacturing capacity and trade intensity. While the Texas economy could gain from the reallocation of manufacturing, its reliance on international trade creates heightened sensitivity to trade policy.³

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 likely placed upward pressure on mortgage rates, which could continue for as long as the Fed allows the balance sheet roll-off, even if it reduces short-term interest rates. 
  
• Updates: Despite holding the target short-term rate fixed in the July meeting, a growing share of Fed officials showed support of cutting rates in future meetings. A key consideration is the impact of tariffs—how big and how persistent price increases might be, if at all. As a result, some Fed officials favoring delays in cutting rates prefer waiting for more data to determine the impact of tariffs.  

Shelter Inflation 

• The issue: Shelter inflation measures the price increase in the cost of housing. It includes changes in rent prices, as well as owner-equivalent rent—a measure of what owners would pay in rent for their own home under current market conditions. This value not only provides a broad measure of housing costs, but it also comprises approximately one-third of the entire consumer price index. Because of its large impact on inflation measures, the value maintains a large impact on monetary policy. 
  
• Updates: Since reaching a peak in early 2023, this slow-moving value has fallen sharply and continues to decline at nearly a constant rate (Figure 2). Given the persistence of the series, a continued decline could push the overall inflation rate near or below the Fed’s 2-percent target. Moreover, because of the lags in monetary policy effectiveness, the Fed might gain motivation to reduce interest rates sooner and, perhaps, change its balance sheet policy in the coming months. 

Notes: This series is the year-over-year Consumer Price Index for All Urban Consumers: Shelter in U.S. City Average.⁴
Source: U.S. Bureau of Labor Statistics, accessed via FRED

Hiring Outlook

• The issue: Several factors, including a slowing economy and policy-related uncertainty, have contributed to a slowdown in hiring. Despite this slowdown, the rate of layoffs has remained constant (and possibly slightly down) in recent months. This slowdown in both hiring and layoffs has contributed to stability in the unemployment rate despite the broad labor market slowdown. The hiring outlook, based on business survey data, provides a useful indicator of the broader labor market and macroeconomic outlook. 

• Updates: National Federation of Independent Businesses survey data shows that the share of businesses planning to create jobs in the coming months remained low in July compared to recent years.⁵ Other data from The Conference Board, ManpowerGroup, and Federal Reserve district banks confirmed a slowdown in expected hiring—the exception being the Dallas Fed’s survey of Texas firms (discussed in the next section). 

Texas Economic Indicators

The Texas economy showed signs of a recent dip in economic activity, possibly reflecting the impact of the trade war and lower oil prices. Several Texas metropolitan areas, including each of the large metropolitan areas, showed a decline in employment in June. Despite this decline, survey data from the Federal Reserve Bank of Dallas showed a strong rebound in the hiring outlook that spanned each of the major sectors of the Texas economy. Moreover, longer-term measures, including YoY employment growth, still show the Texas economy outperforming the broader U.S. economy (Figure 3). 

Employment 

Texas employment contracted by 0.1 percent in June (Figure 4), falling below the national rate, which was close to zero. Month-over-month (MoM) employment growth fell in every metropolitan area of Texas, with losses offsetting much of the previous month’s gains. Jobs reports were mixed across the other metropolitan regions, with seven regions experiencing gains and the remaining 11 experiencing losses.

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 

Each of the goods-producing industries experienced losses in June, with Mining and Logging experiencing the largest losses—likely due to losses in the energy sector from declining oil prices (Figure 5). MoM employment grew in the Information, Education & Health Services, and Government service industries while declining in the remaining service industries. Gains in Education & Health Services follow broader national trends of gains in these industries. 

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 showed a strong rebound in each of the three major sectors, providing growing evidence of an improvement in the state economic outlook (Figure 6). The number of firms planning to decrease employment fell in July in the manufacturing and retail sectors, while increasing in the services sector. These values, however, remain well below May highs, indicating a moderation in the employment outlook following the onset of the global trade war in April. This employment outlook remains a critical indicator, as a slowdown in hiring could lead to an increase in the unemployment rate.

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 remained elevated but stable in July, as rates fell by 5 basis points from 6.77 percent to 6.72 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. 

The Federal Reserve kept short-term rates fixed in its July meeting, although a growing share of voting members of the FOMC supported future rate cuts. While mortgage rates could be impacted by future Fed short-term interest rate cuts, mortgage rates will also be impacted by the Fed’s balance sheet policy, in which the central bank directly buys and sells mortgage-backed securities. As a result, anticipating changes in mortgage rates requires an understanding of both Fed’s interest rate changes and changes in its balance sheet policy. 

Notes: House price index data is provided through 1Q2025, and mortgage rate data is provided through the end of July.
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—fell 10 basis points in July, from 247 to 237 basis points (i.e., from 2.47 percentage points to 2.37 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 75 to 100 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.

1. https://www.bls.gov/news.release/empsit.nr0.htm [↩]
2. https://www.cnbc.com/2025/07/30/fed-leaves-interest-rates-unchanged-as-expected.html [↩]
3. https://www.ketr.org/news/2025-07-25/august-increase-in-mexico-tariffs-could-strain-texas-economy [↩]
4. For more information, see https://www.dallasfed.org/research/surveys/des/2025/2501. [↩]
5. https://www.nfib.com/wp-content/uploads/2025/07/NFIB-July-2025-Jobs-Report-1.pdf [↩]