2015 points to slower growth ahead

Last year, the U.S. job market had its best year of gains since 1999.  Economic activity hit a whopping 5% in the third quarter, the best quarter since 2003. On the other hand, employment is still relatively weak with only 2% of the nation’s counties recovered to prerecession unemployment, GDP, and real estate values.

Unemployment is better and hiring remains strong, but most experts are starting to scale back their growth forecasts. The Federal Reserve has kept rates near zero since 2008 and bought $3.5 trillion in bonds to pull the economy from a recession that had sent joblessness as high as 10%. The good news is that unemployment has now been cut almost in half from the recession, and runs near estimates of full employment, and monthly job growth has averaged 194,000 this year. It has been many years since we have achieved the magical 300,000 jobs per month needed for a healthy economy.

During 2014, jobs grew at a healthy 3.6% and over 409,000 jobs were created with the unemployment rate dropping to the lowest rate since May 2008. While inflation is below target in 2015, oil prices are off their lows of 2014, and the soaring dollar has come down from peaks scaled in March, which should support U.S. prices.

With the slower economy this year, phrases like “secular stagnation” and “new normal” have resurfaced to describe an economy doomed for years of slow growth. The economy is a heck of a lot better now than it was six years ago. But it is definitely not booming.

Federal Reserve chair Janet Yellen summed it up well in a speech March 27 of this year, “If underlying conditions had truly returned to normal, the economy should be booming.” The chairman has said that the economy is better and that unemployment should fall to near 5 percent by the end of the year. She cited the fact that more are quitting their jobs as evidence that people have “greater confidence in their ability to find a new job.” Still, Yellen said continued low wage growth shows that the labor market is “not fully healed” despite unemployment approaching its long-run level.

“Higher wages raise costs for employers of costs, but they also boost the spending and confidence of consumers, and would signal a strengthening of the recovery that would ultimately be good for business,” she explained, adding “nationally there are at least some encouraging signs of a pick up so far this year.”

Economists say there are two main problems. Workers’ wages aren’t growing much, if at all. As a result, Americans aren’t going out and spending much. On top of that, many foreign economies are slowing down, which puts pressure on the American economy. Wall Street and the U.S. government will tell you the economy is doing well, but it won’t feel like it. In fact, according to a national survey, 70% of Americans believe the U.S. economy is permanently damaged, while 84% do not believe the economy has improved since the recession ended in 2009.

Texas

Texas has experienced a great run of economic strength when compared to the rest of the US and world. Texas metros were some of the first out of the recession. But many analysts, including myself, see a slower economy in the coming year. For starters, in March of this year the state ended its 53 month run of job creation, when for the first time it reported job losses on a monthly basis.

At the beginning of the year, the Dallas Federal Reserve warned that with oil prices falling 50% since July 2014, there would be a slowing factor regionally, while nationally oil prices would benefit the national economy as a whole.

Texas added a meager 1,200 jobs in April — better than the 25,200 job losses in March but still weak compared to the past five years, according to data released by the Texas Workforce Commission. Over the past 12 months, Texas has added 287,000 seasonally adjusted jobs. The state’s oil and gas industry lost 8,300 jobs in April, construction lost 5,400, and manufacturing lost 4,300 jobs. The state’s unemployment rate was unchanged at 4.2 percent in April, compared to a nationwide average of 5.4 percent. The job losses in construction and manufacturing this year are tied to the oil slump, causing less need for equipment and buildings. On the plus side, the leisure and hospitality industry gained 6,900 positions and the information services industry gained 3,400 jobs in April.

After a robust growth for the last couple of years, Texas employment slowed in January and February of this year with losses in March. To quote Mine Yucel, Senior Vice president of the Federal Reserve of Dallas, “headwinds for the Texas economy continue to be low oil prices, a strong dollar, and weaker growth in Europe and Asia. The Dallas Federal reserve expects regional employment growth between .5% to 1.5% in 2015 which would amount to 60,000 to 175,000 new jobs.”

Houston

Houston has seen the energy sector consolidate in response to the tightening of the global oil market. Drilling, engineering and service companies are reducing operating budgets and reducing staff by thousands. Not only will the energy sector feel this, but everything from automobile and home sales to shipping activity will be affected. The Houston metro area added an average of 9,000 net new jobs per month through 2014. In January 2015 we saw job losses of 3,700. February then saw a gain of 7,000 and then 4,400 were lost in March of this year. Projections are that Houston will see great job losses this year as the energy industry continues to consolidate.

What does 2015 hold for Houston? The explosive growth of the last few years will slow. Future layoffs within the energy sector will depend on oil prices. Presently wage growth, real estate, and personal income growth will ease through the remainder of the year and into 2016 based on current oil price of around $60/barrel.

Dallas / Ft Worth

Dallas and Fort Worth had strong job growth from last October through January of this year. Through 2014, the D/FW area was adding 11,000 jobs a month. However in January only 2,800 jobs were added to the area. March saw 10,200 lost jobs for the first time since November 2010. This loss was the largest monthly decline since 2009. From my view, one month of bad data does not make a trend. With current real estate development, corporate relocation and consolidation causing value increases north of D/FW in the Plano, Frisco, McKinney areas the remainder of the year should continue to be strong barring a catastrophic economic event. Companies looking for a midcontinent location are finding north Texas very attractive.

Major companies like State Farm, Toyota, Hisun Motors, and FedEx Office have made deals to relocate to the area. Additional companies are also considering the Metroplex as a new place to call home. Tax incentives, a low cost of living, and an abundance of prime building area holds quite an appeal. Raytheon, a major defense contractor already with a heavy North Texas presence, last year moved its Space and Airborne Systems national headquarters from California to the McKinney facility off U.S. Highway 380. Also last year, Emerson Process Management opened its new Regulator Technologies global headquarters at the Gateway site off U.S. Highway 75, where the Sheraton McKinney Hotel is set to open in February.

San Antonio

San Antonio’s real estate market has been buoyed by strong job and income growth. As in other metros within the Texas market, housing inventories are tight. The San Antonio area saw the highest quarterly year over year job growth (3.7%) in nearly a decade in the first quarter of this year.

It is too early to declare that the forces of supply and demand have established equilibrium in oil values, but if prices stay stable or better than $60/barrel then the local economy will find a comfort zone to continue exploration and drilling in the Eagle Ford shale fields.

As in the other markets, the local job market growth may slow slightly. Real estate sales and values will remain positive, but will grow at a slower pace.

Austin

Austin has been a great success story with over 162,000 new jobs since the end of the Great Recession that ended in June 2009. As a result the unemployment rate has declined to 3.3% unemployment, best among the large Texas metros. There has been an average of 27,000 jobs gained annually.

Fueled by strong job growth, the population and income growth in the area has outpaced the national average since 2009. Most of the jobs created (5,200) this last year came in the educational and health services industry, followed closely by trade, transportation and utilities (4,500). Like the other Texas metros, due to the slowing of the national economy, job growth should moderate through 2015 with strength gaining in 2016. Home sales will continue to improve, but at a slower pace.

After all this good news, (I’m joking) should the nation and the Texas region be concerned? Caution is warranted, but realize that over the past 30 years national GDP growth has averaged 1.9% in during the year’s first quarter, and 3.0% in the rest of the year. This suggests there is about a percentage point downward bias in the 1st quarter of every year. So, don’t fret about low first quarter growth – it takes much longer than a quarter to establish a trend.

Non-residential construction will be heavy this year in Texas. Home sales will slow, but be strong compared to the rest of the nation, depending on the impact of oil prices and the strength of healthcare, technology, and education growth in 2015. Obviously Houston, Midland, and a few smaller cities will be more vulnerable to oil values. Home values should continue to appreciate 4 to 8% due to lack of inventory for sale and for rent. Employment growth will be more like the rest of the US, with growth in the 2 to 3% range. This changes with the fortunes of the global oil market.

 

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