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Update on the Texas Economy

Mine YĂźcel Senior Vice President and Research Advisor

Federal Reserve Bank of Dallas November 6, 2017

Federal Reserve Bank of Dallas

The Texas Economy • Key factors behind long-term growth • Update on the current state of the Texas economy • Update on the impact of Hurricane Harvey

Texas has been in top 10 for job and output growth Real GDP

Job Growth

Time Period

Percent Change State Ranking

1970’s

4.4

N/A

4.9

1980’s

2.6

2.0

1990’s

4.7

2.9

2000’s

2.5

0.9

2010’s

3.8

2.5

1970-2016

3.4

2.6

NOTES: GDP data only available back to 1971 for Texas and 1977 for all other states. Data are in annualized growth rates. SOURCES: Bureau of Economic Analysis, Bureau of Labor Statistics.

Economic freedom high in Texas Rank (Top 10)

State

Economic Freedom

Rank State (Bottom 10)

Economic Freedom

New Hampshire

8.3

Mississippi

6.4

Florida

8.1

Oregon

6.3

South Dakota

8.0

Minnesota

6.3

Texas

8.0

West Virginia

6.3

Tennessee

7.9

Vermont

6.3

Virginia

7.8

Hawaii

6.2

Georgia

7.4

New Mexico 6.2

Missouri

7.4

Alaska

6.2

Oklahoma

7.4

California

5.9

Arizona

7.4

New York

5.7

SOURCE: Fraser Institute Economic Freedom Network.

Growth in Number of New Establishments Higher in Texas than Nation

Percent change 3.0 2.5

Texas

U.S.

2.0 1.5 1.0 0.5 0.0

1990-2000

2000-2010

NOTE: Annualized percent change in number of establishments. SOURCE: Bureau of Labor Statistics.

2010-2016

Texas education not tops

Study

Texas Ranking

National Assessment of Educational Progress

Education Week Research Center

Wallet Hub

McKinsey Leading States Study â€“ Education index

Texas home affordability still high Share of Affordable Homes (Median-Income Households) MSA

Percent (Q2 2005)

Percent (Q2 2017)

Houston

62.6

Fort Worth

70.7

61.2

San Antonio

64.9

59.3

Austin

61.5

54.8

Dallas

61.9

46.9

New York

8.6

34.6

Miami

34.5

San Diego

5.1

20.1

Los Angeles

3.6

9.9

San Francisco

8.9

7.6

SOURCE: National Association of Home Builders/Wells Fargo.

Texas population growth ahead of national average Percent* 2.5 2.0 1.5

TX natural increase TX international immigration TX domestic inmigration

2.1

US natural increase US international immigration

1.9 1.7

1.5

1.0 0.5 0.0 *Annual average percentage point contribution to population growth. SOURCES: Texas A&M; Census Bureau; adjustments by FRB Dallas.

1.0 0.8

Texas Economic Update • Texas grew moderately in 2017 (ytd) after weaker growth in 2015 and 2016. – Grew 2.2 % , added 200,000 jobs

• Turnaround in manufacturing sector • Energy sector stabilized • Hurricane Harvey caused widespread damage, but overall Texas growth outlook not changed.

Federal Reserve Bank of Dallas

Texas 2017 job growth back above nationâ€™s

Y/Y percent change, SA 5 4

U.S.

Texas

2.2 1.9 1.3 1.61.2 1.3

2 1 0 -1 -2 -3 -4 -5

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

NOTE: Shaded bar represents September 2017/December 2016 growth, annualized rate. SOURCES: Bureau of Labor Statistics, Texas Workforce Commission; FRB Dallas.

Federal Reserve Bank of Dallas

Goods sector employment picks up Goods vs Service Sector

Q/Q employment growth, SAAR 7 6 5 4 3 2 1 0 -1 -2 -3 -4 -5 -6 -7

Goods-producing Service-producing

Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017

SOURCES: Bureau of Labor Statistics; Texas Workforce Commission; FRB Dallas.

Federal Reserve Bank of Dallas

Employment growth rates by sector (NAICS Super Sectors, SA by FRB Dallas)

Percent change, SAAR 30 25

24.9

2017 YTD

Sep. 2017/Aug. 2017

12.7

10 5 0 -5

7.7 2.2 -0.4

0.6

1.2 1.0

2.2 3.1

3.5

1.3

3.8 1.3

3.9

5.7 1.7

-0.8 -4.4

-10 -15 -20

-15.2 Texas Total Trade, Gov. (16%) Educ. & Prof. & Transp. & Health Bus. Util. (20%) Serv. (14%) Serv. (14%)

Leisure & Mfg. (7%) Fin. Act. Hosp. (6%) (11%)

SOURCES: Bureau of Labor Statistics; Texas Workforce Commission; FRB Dallas.

Constr. (6%)

Oil & Gas Extract., Mining Supp. (2%)

Federal Reserve Bank of Dallas

Percent, Y/Y 8

Texas job growth relative to nation swings with oil prices Texas job growth

6 4 2

Real oil price (shifted forward six months)

$ per barrel

Long-term average (1.0%)

160 140 120 100 80

-2

-4

-6

'70 '72 '74 '76 '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16

NOTE: Shaded areas represent U.S. recessions. SOURCES: Oil and Gas Journal, Bureau of Labor Statistics.

Large swings in oil prices impact the Texas economy • Prominence of energy industry has followed the ups and downs of oil prices • Texas #1 producer of oil and gas in the nation • Texas benefits from increases in oil and gas prices • TX downstream energy sector has grown strongly, boosted exports – 30% of U.S. refinery capacity – 60% of U.S. petrochemical production

Texas rig count flattens, but oil production up Texas crude oil production Million barrels per day 4.0 3.5

Texas rig count Number of active rigs 1000 Oct 3.73

800

3.0 2.5 2.0 1.5

900

700 Oct 441

600 500 400 300 200

1.0 100 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 SOURCES: Energy Information Administration; Baker Hughes; Oil and Gas Journal.

Federal Reserve Bank of Dallas

Business activity weakens in Q3 Dallas Fed Energy Survey Percent 100

Increase No change Decrease 26.7 Diffusion index

90 80 70

40.1

41.8

Index 50

37.3 27.3

40 30 20

13.8

-10

-20

-30

10 0

-42.1 2016:Q1

-40 2016:Q2

SOURCE: Federal Reserve Bank of Dallas.

2016:Q3

2016:Q4

2017:Q1

2017:Q2

2017:Q3

-50

Federal Reserve Bank of Dallas

New home construction weakens Index, Jan.â€˜05=100, 5MMA, SA

200 180 160

Multifamily Permits

140 120 Residential Housing Starts

100 80 60

Single Family Permits

40 20 0

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

NOTE: Last data point is August 2017. SOURCE: Bank of Tokyo-Mitsubishi UFJ; U.S. Census Bureau; FRB Dallas.

Federal Reserve Bank of Dallas

Noncurrent C&I loans tick down Texas banks

Percent noncurrent

C&I Residential RE All Loans Consumer Commercial RE

6 5 4 3 2 1 0 2008

2009

2010

2011

2012

2013

NOTE: Includes commercial banks and savings associations, excludes Wells Fargo South Central in Houston. SOURCE: Federal Reserve Bank of Dallas.

2014

2015

2016

2017

2018

Federal Reserve Bank of Dallas

Bulk of District banksâ€™ noncurrent loans is C&I Noncurrent Loans (% of Total Loans) 4 11th District

U.S. Other

Consumer C&I

Commercial RE Residential RE

2013

*As of June 30.

2014

2015

2016

2017*

2013

2014

2015

2016

2017* 19

Hurricane Harvey • Widespread damage and disruption to the Southeast Texas economy • Transitory negative impact on employment, energy sector, exports and retail sales • Severe damage to property and infrastructure • Loss estimates high • Recovery and reconstruction will boost growth and wage inflation in the medium term • Overall Texas growth forecast unchanged

Harvey projected to be costly Cost, billions of real 2017 dollars 180 160

160.0

140 120 100 80 60 40 20 0

Estimates for Harvey range from $76 to $87 70.2 47.8 34.8

27.1

24.3

23.7

21.1

18.2

Katrina Harvey Sandy Andrew Ike Ivan Wilma Rita Charley Hugo (Aug. '05) (Aug. '17) (Oct. '12) (Aug. '92) (Sept. '08) (Sept. '04) (Oct. '05) (Sept. '05) (Aug. '04) (Sept. '89)

NOTE: Costs include loss of personal and commercial property, public and private infrastructure, vehicles, livestock, and time-element losses (i.e. time-cost for businesses and hotel-costs for loss of living quarters). SOURCES: NOAA National Centers for Environmental Information (NCEI); Moody's Analytics.

Employment Impact of Harvey • September Forecast:

– Around 40,000 – 60,000 jobs lost

• September Actual: • - 4,400 jobs lost

• October

– Rebound to above trend growth

• Back to normal in November and December • Does not change employment growth forecast for 2017.

Employment Effect of Hurricane Harvey

Millions of jobs, SA 12.7 12.6 12.5 12.4 12.3 12.2 12.1

Actual employment data (through Sept. 2017) Baseline forecast $68 billion $78 billion

12.0 11.9 11.8 Jan-17

Apr-17

Jul-17

SOURCES: Bureau of Labor Statistics; authors' calculations.

Oct-17

Jan-18

Apr-18

Jul-18

Hurricane Harvey Impacts • Energy sector impact relatively short-lived

– 323,000 b/d of oil (18.5% of GoM) and 611 MMcf (19% of gas) – 14 refineries were shut down • Operations back to normal; one operating at reduced rates

– 80% of ethylene capacity on Gulf was shut down • 15% still shut down

• All 11 ports were closed

– All ports open; one open with restrictions

• Damage to homes (CBRE): – 72,000 Single family – 11,000 multi-family

• Reconstruction could lead to labor shortages and wage increases

Hurricane Nate Peak shut-ins (10/8)

Current (10/13)

1,620,612 b/d

343,539 b/d

Share of Federal Gulf Capacity

92.6%

19.6%

Share of U.S. Capacity*

17.5%

3.7%

2,503 MMcf/d

400 MMcf/d

Share of Federal Gulf Capacity

77.7%

12.4%

Share of U.S. Capacity*

3.2%

0.5%

Share of Gulf capacity

6.0%

3.5%

Share of U.S. capacity**

3.1%

1.8%

Oil production

Natural gas production

Number of refineries

*Assumes July U.S. capacity: Oil: 9,237,613 b/d; Gas: 78,835 MMcf/d **Assumes same ratio as given in August 29 situation report (33.7% Gulf refining = 17.6% US refining) SOURCE: U.S. Department of Energy.

Outlook • Texas in top 10 in terms of long-term job and output growth • Swings in oil prices still affect economy • Texas weathered the oil bust and grew moderately this year. • Energy and manufacturing made a comeback. • Broad based growth in service sectors. • Hurricane Harvey caused serious damage, but did not change growth forecast. • Risks: – Downside: Low oil prices, labor shortages – Upside: Solid growth in national and global economies

• Texas employment growth should be near 2.5% in 2017. Federal Reserve Bank of Dallas

Update on the Texas Economy

Mine YĂźcel Senior Vice President and Research Advisor

Federal Reserve Bank of Dallas November 6, 2017

Federal Reserve Bank of Dallas