2015 Texas Economic Outlook: Tapping on the Brakes Keith Phillips Sr. Economist and Research Officer The views expressed in this presentation are strictly.

2015 Texas Economic Outlook:Tapping on the Brakes

Keith PhillipsSr. Economist and Research Officer

The views expressed in this presentation are strictly those of the presenter and do not necessarily reflect the positions of theFederal Reserve Bank of Dallas or the Federal Reserve System. Any secondary distribution of this material is strictly prohibited.

• Consumer spending picked up in 2014 as housing prices and stock market improved, and consumer debt fell

• Declining energy prices in second half provided a further boost

• Europe remains a question mark but if energy prices remain low, US economy should pick up further in 2015

National Economy Picking Up

Average Job Growth of 260K per Month in 2014

After 199K in 2013 (2.3% vs 1.8%)

-1000

-800

-600

-400

-200

0

200

400

600

Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15

Thousands,SA

Source: Bureau of Labor Statistics

U.S. Leading Index Suggests Continued

Good Growth over Next 6 Months

-20

-15

-10

-5

0

5

10

15

20

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Annualized% change

12-month6-month

Source: Conference Board, Federal Reserve Bank of Dallas

RGDP Grew 2.5% in 2014, January Blue Chip Survey Projects 2.8% in

2015

-8.2

-5.4

-0.5

1.3

3.9

1.7

3.9

2.7 2.5

-1.5

2.9

0.8

4.6

2.3

1.6

2.5

0.1

2.7

1.8

4.5

3.5

-2.1

4.65.0

2.2

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

SAAR, Percent

2013 3.1% Q4/Q4

2012 2.0% Q4/Q4

2014 2.4% Q4/Q4

Source: Blue Chip Economic Indicators

2015 2.8% Q4/Q4

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

• 2014 growth was broad based across sectors. Energy, construction, business services, health care, exports and tourism strong. Government sector improved.

• In 2015, low oil prices and continued labor market tightness will likely restrain growth. Strong dollar may dampen exports. I expect job growth will slow in 2015 to between 1.0% and 2.0% (from 3.4% in 2014).

TX Economy Has Grown Above Trend and Stronger than Most

States

Texas Economy Growing Well Above Trend

(Texas Business Cycle Index)

-8

-6

-4

-2

0

2

4

6

8

10

12

M/M SAAR

NOTE: Shaded areas represent Texas recession.

2.6% trend

Texas Ranked Sixth in Job Growth in 2014

-0.5

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

ND FL GA UT

NV TX CO OR

WA CA NC SC AR AZ TN US

DE ID KY MA LA WY

MI

WI

OK

NY AL N

MM

D CT IN IA KS OH

NH

MN RI PA IL DC VT AK VA SD MO NJ

NE

MS

MT

ME HI

WV

Percent Change,Dec. 2013 - Dec. 2014

U.S.

TX

Source: Bureau of Labor Statistics

Texas Jobs Growing Faster Than Nation’s

-3.8

0.8

1.6 1.7 1.82.32.1 2.3

3.5

2.7

3.4

-5

-4

-3

-2

-1

0

1

2

3

4

5

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

U.S.

Texas

Percent, Job Growth Y/Y

-3.4

Source: Bureau of Labor Statistics, Federal Reserve Bank of Dallas

Job Growth is Broad-Based AcrossLarge Texas Metro Areas

90

95

100

105

110

115

120

2008 2009 2010 2011 2012 2013 2014 2015

Houston

San Antonio

Ft. Worth

Austin

Dallas

Nonfarm Employment IndexAug. 2008=100

TX

El Paso

Corpus Christi

U.S.*

*Indexed from U.S. Peak Employment in January 2008Source: Bureau of Labor Statistics, Federal Reserve Bank of Dallas

Texas Unemployment Rate Low and Falling

4.4(Jan.)

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

Percent, SA

US unemployment rate

Texas unemployment rate

5.7(Jan.)

Source: Bureau of Labor Statistics, Federal Reserve Bank of Dallas

Job Growth Broad-Based Across Industries

-5

0

5

10

15

20

(Job Growth 2011-2014)

Oil & Gas

Construction

Trade, Transportation,

& Utilities

Manufacturing

Business Services

Finance, Insurance, & Real Estate

Leisure & Hospitality Information

Services Health & Education

Government

(2.6%) (5.5%) (20.1%) (7.6%) (13.4%) (6.1%) (10.3%) (1.8%) (13.2%) (15.9%)

Share of Total Employment

Dec/DecPercent Change

Source: Bureau of Labor Statistics, Federal Reserve Bank of Dallas

Texas Construction Contract ValuesIncreased Strongly Last Year

0

1000

2000

3000

4000

5000

6000

7000

8000

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

Real $, Mil5MMA, SA

Residential

Non Residential

Non Building

Total

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

TX Home Inventories Remainat Historically Low Levels

0

2

4

6

8

10

12

14

16

18

Texas

U.S.

Months

3.4

5.2

Jan. 2014

Source: Multiple Listing Service

Mortgage Foreclosures Back to Normal levels but Delinquencies

Remain Elevated

1.9

0.34

0.46

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

TX Delinquencies TX Foreclosures Started

US Delinquencies US Foreclosures Started

.35

2.1

Source: Mortgage Bankers Association

Low TX Office Vacancy Rate Likely to Motivate Continued Strength in Office

Construction

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

Real, Millions $, 5MMA Percent

Office Vacancy Rate

Office and Bank Buildings

Contract Value

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

TX Manufacturing Production Growth Slow, New Orders Falling

-100

-80

-60

-40

-20

0

20

40

60

80

100

Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15

Production

Volume of New Orders

Index

Feb-15

Texas Exports Have Weakened in Recent Months as Value of the

Dollar has Risen

60.0

65.0

70.0

75.0

80.0

85.0

90.0

95.0

100.0

105.0

110.0

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

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

Oil Prices Low, Drilling Rig CountIn Sharp Decline

0

20

40

60

80

100

120

140

160

200

300

400

500

600

700

800

900

1000

Gas price(*10)

Oil price

Rig Count

Source: Oil and Gas Journal, Baker Hughes

Number

Source: Oil and Gas Journal, Baker Hughes.

Nominal $

• Oil prices have declined over 50% since last July, initial drop from $106 to $80 likely was good for TX economy

• Sustained drop from $80 to $50 will hurt TX economy - $50 is below the breakeven point for majority of shale drilling.

• Texas GDP growth will likely weaken more than jobs as output per worker in mining is about 4.6 times more than average for the state.

Low Oil Prices Will LikelyDampen TX Job Growth in 2015

Energy’s Share of TX EconomyIncreased with Shale Drilling

0

2

4

6

8

10

12

14

16

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Mining as a Share of Total Texas Employment

Mining as a Share of Nominal Texas GDP

Percent, SA Percent

NOTE: GDP values prior to 1997 and employment values prior to 1990 extrapolated from SIC coded data.SOURCES: Bureau of Labor Statistics, Bureau of Economic Analysis, FRB Dallas.

2.7 %

13.5 %

0

20

40

60

80

100

120

140

160

-6

-5

-4

-3

-2

-1

0

1

2

3

4

1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Real Oil Price

Texas Job Growth Relative to U.S.

Percent difference in TX and U.S. growth, 12MMA

Real price, $, monthly average

SOURCES: Wall Street Journal, Bureau of Labor Statistics.

TX Job Growth Relative to NationImpacted by Oil Prices

Recent Weakness in Leading Index Led By Declining Oil Prices and

Rising Dollar

-0.25

0.45

0.15

-0.47

-1.30

-1.41

0.31

-1.03

-3.54

-4.00 -3.50 -3.00 -2.50 -2.00 -1.50 -1.00 -0.50 0.00 0.50 1.00

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

Texas Leading Index Components, 3 month changeNovember -January

Texas Job Growth Likely to be about1.0–2.0% in 2015, down from 3.4%

in 2014

95

100

105

110

115

120

125

130

135

9.0

9.5

10.0

10.5

11.0

11.5

12.0

12.5

Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16

Millions of Jobs Index(1987=100)

Leading Index

Texas Nonfarm Employmentand TLI Forecast (with 80%

confidence band)

Source: Bureau of Labor Statistics, Federal Reserve Bank of Dallas, author's calculations

San Antonio has a Small Share of Jobs in the Oil and Gas Industry

0 5 10 15 20 25 30

MidlandOdessa

LongviewVictoriaAbilene

San AngeloTyler

Corpus ChristiHouston-Baytown-Sugar Land

College Station-BryanAmarillo

LaredoDallas-Fort Worth-Arlington

LubbockAustin-Round Rock

Beaumont-Port ArthurSan Antonio

Sherman-DenisonMcallen-Edinburg-Pharr

Brownsville-HarlingenEl Paso*

Share of Employment in Mining Sector*El Paso data as of 2008. All others as of 2012. Source: Bureau of Economic Analysis

No Clear Boost to San Antonio Job Growth from Eagle Ford

Development

-6

-4

-2

0

2

4

6

8

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

San AntonioTexas

Y/Y job growth

SOURCE: Bureau of Labor Statistics, Federal Reserve Bank of Dallas.

• U.S. economy picked up in 2014 – lower oil prices at year end stimulating further gains in consumer spending

• TX growth was strong and broad-based in 2014 - initial oil price decline from $106 to $80 had positive impact.

• Movement of oil prices from $80 to $50 will have negative impacts but growth likely to remain positive.

• This year Texas job growth likely to moderate to 1.0-2.0%

• Bottom line: Texas likely to continue to grow but not nearly as strongly as last year.

Summary