Texas economy still growing, but expected to slow

The Texas economy, which expanded at solid pace in recent months, is expected to slow through the second half of the year amid the nation’s weakening economic outlook.

A new analysis from the Federal Reserve Bank of Dallas lays out the picture: the nation’s economic recovery from the COVID-19 pandemic is continuing, and Texas is recovering at a faster clip than the nation as a whole. Still, revenue growth among Texas companies remains constrained by supply chain disruptions and labor shortages, and businesses are becoming more pessimistic as inflation remains high and interest rates rise.

“The data still looks pretty healthy, especially on the labor market side,” said Laila Assanie, a senior business economist at the Dallas Fed. “But what has turned is the outlook.”

In a survey of 366 Texas business executives conducted in June, Assanie said, half cited supply chain disruptions as a primary factor constraining their firm’s revenue, and 41 percent pointed to labor shortages as a key issue. Those numbers are consistent with survey results from earlier this year.

But a new issue surfaced in June: 26 percent of the executives cited “weak demand” as affecting their business, up from 15 percent in March. That’s a sign that inflation and the darkening outlook for the economy is leading some customers to spend more speculatively.

The job market, meanwhile, remains tight, with employers across sectors reporting labor shortages. In Texas, Assanie said, employment in most sectors has returned to pre-pandemic levels.

Employment in the state grew at an annualized rate of 6.2 percent in May, double the national rate. The unemployment rate stood at 4.2 percent in May, higher than the national rate of 3.6 percent, but reflecting growth in the state’s labor force.

Housing market cooling

The scorching-hot housing market is finally cooling off in the state’s major metropolitan areas, including Houston, where the median home price recently hit a record $351,000, according to the Dallas Fed. Homebuyers —in recent years reduced to scrapping against other bidders for a chance at a contract—may find themselves being wooed by sellers and lenders in the near future. Incentives such as mortgage-rate buydowns and help with closing costs are being reintroduced.

But housing prices remain high, and renters “may be forced to remain renters,” according to a recent report on the state of housing in Houston and Harris County from Rice University’s Kinder Institute. The region’s affordability gap has widened, as median home prices have risen more sharply than median incomes.

Roughly half of Harris County renters are “cost-burdened,” meaning that they spend more than 30 percent of their income on housing. That’s an issue with implications for the entire regional economy, the report noted.

“If these workers have a difficult time finding homes in Harris County,” Dallas Fed economists wrote, “This may make staffing even more difficult or may burden our already stressed transportation system with even more long-distance commuters.”

Businesses to face higher costs for labor, materials and energy, but small businesses and those in service sector are finding it directly difficult to continue on those pass costs consumers, the Dallas Fed noted. It’s another sign customers are becoming stretched and spending more speculatively.

Had to happen

While leaders across the country are national businessespessimistic about the outlook, the Dalla Fed forecasts that Texas’s economic expansion will continue in the second half of the year, albeit at a slower rate.

“Our growth has been off the charts for the past year-and-a-half,” Assanie said, “and obviously we can’t keep up at that pace.”


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