June 23, 2022
Economic expansion in Texas remained solid in May, although the pace of growth slowed. Employment growth remained robust. Manufacturing growth accelerated, but service revenue growth slowed. Persistent supply chain disruptions and labor shortages continue to drive up input costs. Businesses, particularly in the service sector, found a reduced ability to pass higher costs on to customers.
Housing market conditions weakened noticeably, with home sales falling although prices remained at record highs. Amid expectations of an impending slowdown, with continued inflation and higher interest rates, optimism about the outlook waned and uncertainty increased.
Employment increases in May
Texas employment rose an annualized 6.2 percent in May, up from April’s 5.2 percent rise and above the US rate of 3.1 percent. Aside from the oil and gas and education and healthcare sectors, employment growth was mostly broad-based. Texas’ unemployment rate fell to 4.2 percent in May, but remained above the US figure (3.6 percent) in part due to stronger labor force growth in the state.
Year-to-date through May, Texas payrolls rose an annualized 5.6 percent (298,400 jobs), with gains in almost every sector outpacing U.S. (Diagram 1). Over the five-month period, growth was strongest in the energy sector (19.1 percent), buoyed by high oil and gas prices.
Expansion in the state’s two largest employment sectors – trade, transportation and utilities, and professional and business services – was strong, exceeding 5.0 percent. The sectors together account for more than a third of the country’s employment. The Dallas Fed forecast calls for 4.0 percent job growth in Texas in 2022, suggesting the rate of expansion will slow in the coming months from its current robust pace.
The labor market remains tight. Texas firms continue to report hiring difficulties and job postings remain well above pre-pandemic levels. However, initial jobless claims in Texas have been rising gradually since early April and in the week ended June 11 had largely returned to levels last seen in early March 2020 at the onset of the COVID-19 pandemic.
Services growth slows; Manufacturing mixed
The Dallas Fed’s Texas Business Outlook Survey (TBOS) results indicate that expansion in the state’s service sector slowed significantly in May. Factory production growth accelerated while demand slowed. New orders indices and the growth rate of new orders fell to two-year lows, signaling an imminent slowdown in production expansion.
In May, the sentiment-based general business activity index for the manufacturing sector turned negative for the first time since July 2020. The services sector index fell to near zero, meaning service firms were broadly divided in their assessment of whether economic activity was deteriorating or deteriorating last month. The outlook for both sectors weakened, uncertainty increased and expectations for production and sales expansion in six months (year-end 2022) were less optimistic.
Bottlenecks in the supply chain persist
Supply chain challenges remain widespread, particularly among companies with international procurement, in part due to added stress from the Ukraine-Russia conflict and COVID-19 lockdowns in China. According to May’s TBOS, 65 percent of companies had supply chain issues — the same proportion as in February. Texas firms with international supply chains were more exposed to disruptions — 87 percent with foreign suppliers experienced disruptions, compared to 42 percent of firms with only domestic suppliers.
The expected timeframe for supply chain normalization continues to lengthen. Of those businesses that faced supply chain disruptions in May, just a quarter expect conditions to normalize within the next six months and 37 percent expect it to take longer than a year.
As of June 2021, nearly half of companies thought these supply issues would be resolved within six months, and just 13 percent said it would take longer than a year. A weighted average of TBOS respondents’ expectations for supply chain resolution shows that the timeframe for normalization has increased from 7.4 months in June 2021 to 9.6 months in May 2022 (Diagram 2).
Expectations for supply chain normalization have deteriorated more for large companies than for small ones, a comparison of the latest TBOS results with those of February 2022 shows. Small businesses (less than 100 employees) were more optimistic about the normalization timeline in May – 31 percent said they expect supply chains to normalize within six months, compared with 19 percent of large businesses (more than 100 employees ). In February, 33 percent of small businesses and 28 percent of large businesses expected supply issues to be resolved in less than six months.
Cost pass through decreases
Price pressures remain elevated, with input and selling prices at or near record highs. But passing on costs has become more difficult for businesses, especially small businesses and companies in the service sector.
Only 24.6 percent of all respondents passed most or all of their higher costs on to customers via price increases, according to the TBOS in May, compared with 35.2 percent in December. Most companies that passed on higher costs did so this year through price increases (85 percent), although 29 percent plan to raise prices next year as well.
Large companies had more leeway — about 30 percent said they could pass on most or all of their increased costs, compared with 21 percent of small companies.
By industry, cost pass-through was weakest in the services sector, particularly professional and technical services, and education and health services (Diagram 3). Respondents in the education and healthcare sectors attribute this to fixed tuition and Medicare and insurance reimbursements. Conversely, manufacturers and wholesalers reported the greatest capacity to pass on costs. According to anecdotal comments from these companies, customers recognize supply chain constraints and rising input costs and are therefore more willing to accept price increases.
Hot housing market cools down
The housing market appears to have reached an inflection point, with the recent rise in mortgage rates and record prices dampening demand. Existing home sales in Texas fell 2.2 percent mom in March and were flat in April. Weekly data from Redfin, a national real estate agent, shows sales continued to trend down through mid-June (Diagram 4).
Traffic from new homebuyers has been disappointing, cancellations are increasing, conversions are taking longer and waiting lists are shrinking. Incentives are being reinstated to boost sales, notably mortgage interest buybacks, interest rate lockouts and closing costs. Some builders are also releasing houses earlier in the construction cycle to allow customers to lock in rates.
The slowdown is most pronounced among entrants, although high interest rates are beginning to affect other segments, such as the US. B. Investors. Despite the slowdown, median home prices continue to rise, setting another record in April.
The pace of price increases is slowing, with contacts noting that bids are getting closer to asking prices, in contrast to the premiums observed previously. Most builders say they have kept base prices stable over the past few weeks. With mortgage rates approaching 6 percent, home sales and price growth will continue to slow.
About the authors
The views expressed are those of the authors and should not be attributed to the Federal Reserve Bank of Dallas or the Federal Reserve System.
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