Outlook for the Texas Economy | March 2021

Outlook for the Texas Economy summarizes significant state economic activity and trends. All measurements are calculated using seasonally adjusted data, and percentage changes are calculated month over month, unless stated otherwise. Click here to receive email notifications each time this report is published.

Economic activity within Texas moderated during the first quarter of 2021 but remained on the path to recovery despite weather-related disruptions in February. Robust hiring in March resulted in solid first quarter payroll growth, although joblessness in the Lone Star State was still higher than the national average. Moreover, inflation-adjusted headline wage numbers flattened compared with year-ago levels while initial unemployment claims surged unexpectedly. On the bright side, oil prices rebounded, contributing to increased export values.

As Gov. Greg Abbott removed business restrictions amid downward-trending new COVID-19 cases, consumer confidence improved and supported an optimistic outlook on the service-providing sector. The relative health of the state’s economy and favorable business practices attracted migrants and firms from other parts of the country, bolstering population growth and housing demand. Containment of the pandemic is vital as additional waves of infection can weigh on consumer behavior and spending and slow the return to pre-pandemic conditions. However, an increase in infections is becoming less likely as vaccination rates increase.

Texas’ economy extended a ninth-month improvement in March according to the Dallas Fed’s Texas Business-Cycle Index, which rose 7.2 percent on a seasonally adjusted annualized rate (SAAR). Hiring in Central Texas pushed the Austin and San Antonio indexes up 12.5 and 8.1 percent, respectively, exceeding the state growth rate. The metric accelerated 5.4 percent in Houston and maintained a 6.7 percent pace in Dallas. Economic activity was more subdued in Fort Worth as quarterly employment contracted, increasing just 3.8 percent SAAR.

The Texas Leading Economic Index (a measure of future directional changes in the business cycle) ticked up for the 11th straight month, but the growth rate decelerated due to unfavorable currency fluctuations and a surge in initial unemployment claims. On the other hand, the Texas Consumer Confidence Index elevated more than 40 points to its highest level since last March amid downward-trending new COVID 19 cases and the rollback of capacity restrictions for businesses.

Recently released 2020 data revealed Texas’ population rose 1.3 percent compared with nationwide growth of 0.4 percent. The rate of increase, however, has made little headway since decelerating to a three-decade low in 2018. Nevertheless, the Lone Star State ranked fifth in the nation in terms of percentage change (behind much smaller states) and first in number of resident added (374,000). Net domestic migration to Texas accelerated for the third straight year as the state’s economic health and agreeable business policies pulled residents and companies away from other parts of the country. On the other hand, international migration decreased to half of 2015 levels (current cycle peak) amid the global pandemic and the Trump administration’s relatively strict immigration policies.

All of Texas’ major regions matched or exceeded the state’s population growth rate. The Austin Metropolitan Statistical Area (MSA) added 67,200 people, amounting to a 3 percent expansion. Dallas (1.7 percent) and San Antonio (1.6 percent) absorbed 87,800 and 40,600 residents, respectively. The percentage change in Fort Worth and Houston equaled the state average after the local populaces rose by 31,900 in the former and 91,100 in the latter. Houston was the only major metro where the natural increase (births less deaths) constituted more than half of the total gain, but the proportion declined for the second straight year as net domestic migration recovered from the 2017-18 contraction after Hurricane Harvey.

During widespread local and federal foreclosure and eviction moratoria, foreclosure inventories ticked down to 0.3 percent in Texas, lower than the national rate of 0.5 percent, during 1Q2021. The metric, however, is likely to increase in the second half of the year if the Federal Housing Finance Agency foreclosure and REO eviction moratoria for properties owned by Fannie Mae and Freddie Mac (the Enterprises) and the nationwide eviction moratorium for qualifying renters through the Centers for Disease Control and Prevention are not extended. They are currently set to expire June 30, 2021. The Consumer Financial Protection Bureau has proposed a new rule that would block mortgage servicers from starting the foreclosure process until after Dec. 31, 2021, but a final decision has not been made.

The Mortgage Bankers Association’s seriously delinquent rate (mortgages more than 90 days past due) declined within Texas for the first time since 3Q2019 to 5.4 percent, or about 13,700 loans. The number of seriously delinquent loans was equal to 30 percent of the state’s supply of active listings during March in a market with only 1.4 months of inventory. Texas’ delinquency rate for loans less than 90 days past due also decreased in 1Q2021 as the national forbearance rate trended downward during the year. The U.S. Census Bureau’s Household Pulse Survey for Week 27 (March 17 – 29) indicated that roughly 9 percent of leveraged homeowners were behind on payments, and 1 percent see foreclosure as “somewhat likely.”

Climbing oil prices, accelerating vaccination rates, and optimistic national economic data during the first quarter resulted in higher growth and inflation expectations for 2021. The ten-year U.S. Treasury bond yield increased to 1.6 percent2 in March, recovering to pre-pandemic levels. The Federal Home Loan Mortgage Corporation’s 30-year fixed-rate rose for the third straight month from a record low at year end to 3.1 percent (series starting in 1971). Further increases in mortgage rates this year may soften housing demand and slow home-price appreciation.

Within Texas, the median mortgage interest rate inched up to 2.68 and 2.83 percent for GSE and non-GSE loans, respectively, in February3 . Meanwhile, home-purchase applications remained down 12.4 percent year to date (YTD) after just a slight increase in March from reduced activity the month prior during the winter storm. The YOY comparison, however, was still in double-digit growth territory. Refinance applications fell more than 20 percent on both a YTD and YOY basis, being more sensitive to mortgage rate fluctuations. Two factors are likely impacting refinance activity: lenders adding more requisites and the shrinking pool of households able to refinance. (For more information, see Finding a Representative Interest Rate for the Typical Texas Mortgagee at https://www.recenter.tamu.edu/articles/research article/Finding-Representative-Interest-Rate2278.)

Total Texas housing sales fell 6.4 percent in 1Q2021 with respect to the previous quarter amid rising mortgage rates and weather-related disruptions in February, but new-home sales rose 4.6 percent QOQ, suggesting strong demand for new construction. The Texas Residential Construction Cycle (Coincident) Index, which measures current construction levels, increased to its highest level in a year due to improved industry employment, wages, and construction values. Construction activity is expected to remain strong in the coming months as indicated by the Residential Construction Leading Index, which rose to an all time high in March amid elevated weighted building permits and housing starts, offsetting growth in the ten-year real Treasury bill. Similarly, the leading indexes in North and Central Texas trended upward, but Houston’s metric continued to decline, suggesting an impending slowdown in construction. (For additional housing commentary and statistics, see Texas Housing Insight at recenter.tamu.edu.)

The West Texas intermediate (WTI) crude oil spot price exceeded $65 per barrel, its highest level since October 2018. Higher demand expectations due to improving vaccination rates and global economic activity, combined with extended OPEC+ production cuts through April, offset the downward pricing pressures from a stronger dollar and recovering crude inventories after Winter Storm Uri. Crude oil production dropped to 3.8 million barrels per day in February4 due to the weather-related disruption, but Texas’ active rig count rose to 189 in March, indicating a rebound in output during 2Q2021. On the natural gas front, the Henry Hub spot price corrected downward from Uri’s demand shock to $2.65 per million British thermal units (BTUs). Natural gas prices are expected to increase through 2021 and 2022 as liquified natural gas exports outpace production.

Texas nonfarm employment added 99,000 jobs in March, rising 4.3 percent SAAR despite shedding 2,400 jobs in February during Winter Storm Uri. The surprisingly strong gain pushed Dallas Fed’s annual employment forecast up from a 6.0 to 6.6 percent increase to 13.21 million workers. Despite hiring, Texas’ unemployment rate was unchanged at 6.9 percent, still greater than the national rate of 6 percent, as the size of the state’s labor force expanded, pushing the labor force participation rate to 62.3 percent. Joblessness in Houston flattened, albeit at a higher rate of 8.3 percent, while the size of the local labor force expanded for the second straight month. On the other hand, unemployment inched down to 7 percent in Fort Worth and 6.8 and 6.7 percent in San Antonio and Dallas, respectively. The metric remained lowest in Austin, where the jobless rate slid to 5.5 percent.

The number of Texans filing initial unemployment insurance claims shot up to 370,200, its highest level since May 2020, after increasing the last three weeks of the month (Figure 1). The surge was unexpected amid downward-trending new COVID-19 cases and the termination of capacity restrictions for businesses on March 10. Initial claims ended the month higher within the major MSAs as well (Figure 2). Texas’ average weekly continued unemployment insurance claims, however, declined for the eighth consecutive month, suggesting improved conditions for laid-off workers seeking new job opportunities. Nevertheless, the labor market still has a long road to recovery with total claims six-and-a-half times greater than pre pandemic levels a year ago due to the rise in initial claims.

Texas’ average real private hourly earnings flattened relative to last March, falling further behind the national average. Dallas was the only major region with the state where the average wage exceeded the U.S. rate ($29.95) by a considerable amount, paying $31.85 per hour after increasing 4.8 percent YOY after adjusting for inflation. Austin’s hourly earnings ($29.96) were about even with the nation’s despite falling 3.9 percent annually in real terms. Real wages improved 5.7 percent in Fort Worth ($29.64) but were unchanged in Houston ($28.81) and San Antonio ($25.00) compared with year-ago levels.

Hiring in Houston remained robust in the first three months of the year, recovering 34,800 jobs an almost matching the previous quarterly gain. Total payrolls, however, were still 6 percent off from pre-pandemic levels, a greater gap than the other major metros. Austin added 16,700 employees in the first quarter, exceeding the state in terms of SAAR growth (5.5 percent). San Antonio and Dallas registered net quarterly increases of 10,600 and 10,100 workers, respectively. Payroll expansions were largely concentrated in the leisure/hospitality, retail trade, professional/business services, and education/health services industries across the major metros. Only in Fort Worth did employment decline, shedding 2,000 positions during the first quarter due to Winter Storm Uri. Goods-producing employment decreased, but the transportation/utilities sector was the main deterrent to growth.

Texas’ goods-producing sector regained a record-breaking 32,100 positions in March, pushing the first quarter net total to 38,500 workers. Amid increasing oil prices, energy-related employment rose by 10,600 jobs in the first three months of the year but remained more than a fifth below year-ago levels. Recovering global economic conditions supported the state’s manufacturing industry, which added 9,200 employees, nearly half of which were hired in Dallas or San Antonio. Durable-goods payrolls expanded every month in the first quarter, resulting in a 7,900-job gain. The Texas Real Estate Research Center’s Texas Manufactured Housing Survey revealed the overall outlook on industry conditions remained positive in March, but regulation changes, supplier shortages, and higher labor costs contributed to a sluggish start to the spring season. Average hourly manufacturing earnings elevated 7.3 percent YOY after accounting for inflation, while the Dallas Fed’s Manufacturing Outlook Survey corroborated labor-market data. The survey’s production index accelerated to an all-time high as outlook uncertainty decelerated, and all business indicators except for current finished goods inventories increased. Comments, however, revealed some of the March improvement may have been due to catch-up from the weather-related pause in production the previous month. Rising input prices due to supply-chain disruptions and hiring challenges are prominent concerns.

Construction payrolls registered sluggish growth the first two months of the year but accelerated in March, adding 18,700 quarterly jobs. The positions being recovered are likely lower-paying, pulling average real hourly construction earnings down 4.7 percent YOY. Total construction values picked up in March amid additional manpower and a rebound in activity after inclement weather in February, pushing the YTD sum up 2.3 percent from 1Q2020 levels. The value of single-family and duplex groundbreakings over the past three months vastly outnumbered the same metric a year ago, whereas 1Q2021 apartment values increased compared with the quarter prior but fell YOY. Nonresidential construction fell behind last year’s first-quarter pace with reduced office and school values in Austin and Houston and DFW store/restaurant values offsetting library/museum projects in North Texas and widespread warehouse investment.

Despite Texas’ service-providing sector being the hardest-hit major industry last April, employment fell only 3.1 percent relative to the February 2020 peak (compared with the 3.6 percent nonfarm decline) after hiring 97,100 workers in the first quarter. Leisure/hospitality recouped 20,500 jobs in 1Q2021, but arts/entertainment/recreation payrolls remained a fifth below pre-pandemic levels. On the other hand, the transportation/warehousing/utilities industry added 10,700 positions, surpassing year-ago employment by 6.6 percent. The Dallas Fed’s Service Sector Outlook Survey confirmed increased hiring in March as respondents noted improved business conditions and record-low outlook uncertainty (series starting in 2018). The weather-related disruption the previous month appeared to have just a temporary impact on sentiment, while the ongoing vaccine rollouts and repealed business restrictions contributed to the current optimism. Potential implications of new business regulations, supply-chain shortages, and difficulty hiring labor, however, topped the list of concerns. Anecdotal evidence from the survey’s comments section points toward the lack of available applicants and generous unemployment benefits as major impediments in rehiring workers. To eliminate the incentive of remaining unemployed, Texas is opting out of further federal unemployment compensation related to the COVID-19 pandemic effective June 26, 2021. This will reduce minimum unemployment payments from $19,240 a year to $3,640 a year.

Texas retailers added 15,400 positions over the past three months with gains widespread across the industry. Electronics/appliance stores and building material/garden equipment/supplies dealers were the exceptions, shedding 700 and 1,200 jobs in 1Q2021, respectively. Hiring in the former has not regained momentum since the pandemic, but employment in the latter still hovered around record levels, propped up by do-it-yourself demand. Inflation-adjusted retail sales surged 2.1 percent on a monthly basis in March and 9.2 percent YOY as many of the third-round stimulus checks reached their recipients. The annual increase set a six-year high, although some of the growth was attributed to low base effects from suppressed activity last year. Forty-three percent of respondents of the Dallas Fed’s Retail Outlook Survey indicated sales activity strengthened, pushing the index into positive growth territory after two monthly declines. The company outlook and general business activity indexes also snapped multi-month decreases while labor-market metrics improved.

The U.S. Consumer Price Index (CPI) accelerated 2.6 percent annually as transportation prices shot up almost 6 percent YOY relative to the ultralow energy costs this time last year. Despite the higher reading in March, the CPI’s yearlong average was just 1.2 percent, well below the Federal Reserve’s average target rate of 2 percent over time. Meanwhile, core inflation rose just 1.6 percent. There have been concerns that inflation may run rampant in 2021 as the economy recovers, but Federal Reserve Chair Jerome Powell and Treasury Secretary Janet Yellen maintain that while inflation will rise temporarily during the economic recovery, significant long-term risk is unlikely. In Dallas, double-digit transportation price growth contributed to the local CPI rising 3.4 percent, but the region’s core inflation rate was 2.5 percent.

The Texas trade-weighted value of the dollar⁵ was unchanged in February on a monthly and annual basis. Texas’ real commodity exports rose 11.5 percent QOQ compared with 6.4 percent nationally. A considerable amount of the quarterly improvement was due to rebounded oil/gas shipments to Mexico, pushing the country’s share of Texas exports from one-third at year-end to 36.6 percent. Total crude oil exports elevated 9.6 percent in real terms during the first quarter but remained just two-thirds of 1Q2020 values. Quarterly inflation-adjusted manufacturing exports flattened with reduced transportation equipment shipments offsetting increased machinery and energy-related export values.

The Center created a Texas weekly leading index to predict turning points in the Texas economy. (For more information, see COVID-19 Impact Projections on Texas Economy at https://www.recenter.tamu.edu/articles/special-report/COVID-19-Impact-Projections.) The index rose every week during April (Figure 3), indicating higher future economic activity. The improvement was mostly due to the decline in initial unemployment insurance claims after an unexpected surge in March. The number of new business applications fluctuated, but the overall elevated level signaled strong business activity after Gov. Abbott lifted the mask mandate and removed capacity restrictions. Moreover, the real price of WTI oil trended upward through the month, offsetting increases in the real rate for the ten-year Treasury bill (which continues to exhibit a negative return). Prospects for the state’s economic recovery remain dependent on the containment of the pandemic, but low new COVID-19 cases and optimistic consumer behavior paint a positive outlook.