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.

 

Economic outlook positive for 2015

The strength of the Lone Star State’s economy has led our national economy through the general gloom of the slowest national economic recovery in modern history. Now, with the price of West Texas Intermediate (WTI) crude oil hovering around $45/barrel, and unleaded gasoline selling for as little as $1.89 a gallon, some worry that the energy dependent Texas economy will lapse into recession. Texas has diversified its economy significantly in the last twenty years, but energy is still king. So when oil prices plunge, it has a ripple effect on the state’s economy.

Texas is America’s second most populous state and the world’s 14th largest economy with a GPD of about $1.5 trillion, representing about one tenth of our national output. Since 2009, the Texas GDP has grown 4.4% per year, about twice the national average. In the same time, Texas has been creating approximately one out of every fou new jobs in the nation. A lot of this energy growth is because of the development of fracking to a level where Texas produces more than one-third of the nation’s oil and has seen its oil production double in three years.

This past year, Texas outpaced U.S. economic growth and led the nation in job growth, setting a state record with 421,900 jobs added for the 12 months through October. In 2015, economists expect Texas’s economic and job growth to slow slightly because of lower oil prices, labor shortages in certain industries, and weaker exports. The Federal Reserve Bank of Dallas expects the Texas economy to grow 3.5% in 2015, down from an estimated 4.5% this year. It expects the state’s employment growth to be 2.5 to 3% percent in 2015 vs. 3.5% in 2014.

With the fall in oil prices, which have plunged nearly 47 percent since last June, there have been concerns about the health of the Texas economy. Texas oil production, which has more than doubled in the last three years, drives much of the state’s economic growth — about 12 percent. And while energy accounts for less than 3 percent of Texas employment, energy employment jumped 11 percent for the 12 months through October, more than any other industry.

Lower oil prices can be a double-edged sword for the economy. A price drop generally benefits the U.S. economy: consumers save money on gas and home heating bills, consumer spending rises, and some businesses benefit from lower transportation and shipping costs. But capital investments could suffer, causing a trickle-down effect on other businesses.

Falling crude oil prices will cost Texas 50,000 to 125,000 jobs by the end of 2015, according to the Dallas Fed. Texas produces 36% of the crude oil in the United States, so Texas will be harder hit than other states. The states of North Dakota, Oklahoma and Louisiana also would be hit hard.

In Texas, it’s unlikely that low oil prices will cause a crisis as they did in the late 1980s, because the state’s economy has diversified so much since then. Still, some fear that a prolonged downturn will hurt energy companies and could spread to other businesses such as real estate, restaurants, and retail that have benefited from the increased energy hiring.

The big question is what oil prices will do in 2015. Oil prices are unsustainably low right now – many high-cost oil producers and oil-producing regions are currently operating in the red. That may work in the short-term, but over the medium and long-term, companies will be forced out of the market, precipitating a price rise. The big question is when they will rise, and by how much.

In the waning days of 2014, the U.S. consumed gasoline at the highest daily rate since 2007. Low prices could spark higher demand, which in turn could send oil prices back up. That said, our large metros have seen little slowdown in demand. Businesses are still cautious, but trying to keep up with demand. Low unemployment and improving wages in Texas are a great example of this. Texas has a broad based economy, but the potential loss of 125,000 jobs this year will have a dampening effect on the regional economy.

For those of us of a certain vintage (Baby Boomers), these are not numbers to brag about. Most of us of that vintage remember the boom and bust cycles of the energy industry. The oil depression era of the late 80’s and early 90’s still brings painful memories when oil brought many industries to their knees and buried one arm of the financial industry. The damage in Texas was immense. In those years, more than 700 banks failed, the savings and loan industry went away, nine out of the top ten national builders went away, and most real estate was worth ten cents on the dollar. In Houston alone there was over 88 million square feet of speculative office space and 400,000+ new homes sitting. The result was economically catastrophic in the region with widespread joblessness, empty buildings of all types, and life changing events for many families.

The Texas economic engine is likely to move at a slower speed in 2015, even as the U.S. economy picks up steam. But it still will be one of the leading states for job formation. Why?

First, Texas today has a high level of intellectual capital. The state’s strong annual employment growth over the last few years is because of the jobs added to professional categories, from architects to technology, from banking to health. Whether it is the numerous startups that become global in Austin, or the undisputed capital of energy Houston, the expertise founded here has worldwide economic effects.

Because of that, Texas currently gains more out-of-state residents than any other state and is a leader in home sales from international buyers. National census reports showed that that more than 584,000 people moved to Texas from out of state in 2013. This is more than any other state. This has lead to growth driven by strong demand for Texas real estate, not speculation. The demand is being driven by the thousands of people who move to the Lone Star State for new jobs or the opportunity to start a business. Job growth in almost all economic channels is apparent, even with the slowing of oil hiring.

Secondly, Texas continues to be one of the top states in median household income growth and new home sales, with the median household income of Texas homebuyers increasing 5.9% year-over-year to $97,500, the 2015 Texas Homebuyers and Sellers Report said. This is more than four times the increase in median household income among homebuyers nationally, which rose 1.4% to $84,500 during the same time frame. Additionally, 28% of Texas homes purchased between July 2013 and June 2014 were new homes, a 1% decrease from the previous time period, yet still nearly double the share of new homes among U.S. home sales during the same time period. Nationally, the share of new home sales remained constant at 16% of all U.S. home purchases

Thirdly, Texas banks and their bankers burned by the freewheeling days of the 80’s are downright conservative and state lending rules reflect those concerns. Home equity as well as development loans are considered harsher in the Texas lending environment than most states.

Texas still struggles in some areas due to increased restrictions in lending standards and rising home prices in certain local markets, which stifles the growth of first-time homebuyers in Texas. The percentage of first-time homebuyers in Texas decreased 4% to 29% of all Texas homebuyers between July 2013 and June 2014. Nationally, the percentage of first-time homebuyers decreased 5% to 33% of all U.S. homebuyers during the same time frame.

Lastly, Texas would be a strong economic leader even without energy. The state continues to thrive because it keeps a tight rein on the size of government, emphasizing smart regulation with a minimum of red tape. This is why so many companies like Occidental, Toyota, and Exxon have located in Texas. Low taxes and cost of living are a welcome relief to the costs of other strong job creation states.
Sure, the world price of oil effects Texas. That is why so many of us follow daily the cost of WTI barrel. But everything else considered, the business friendly public policies and job creation should continue to allow 2015-16 to be great years for our Texas economy.

How would you grade the recovery?

The recession seemed to come on so quickly, and yet the recovery seems to be slow catching on. Why does it feel like we’re still in a recession?

Overall, GDP growth in 2013 was subpar with 2% growth. This is below the historical norm of 3%, and it’s been several years of under 3% growth. As you can see in the chart, last year GDP growth has not been anything to write home about.

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The U.S. economy is expanding, the stock market is breaking records, the global economy is doing better, state economies in the region are doing better, and all that is expected to continue in 2014. So, why do most Americans still think we’re in a recession?

After all, the economy is technically growing — slowly, imperceptibly, like watching grass grow. As you question the recovery, what most are experiencing upon closer inspection is what many analysts call a “balance sheet recession.” That means that just about everybody in the Western World — households, corporations, and even governments – are focused on paying off our balance sheets (paying off debt) at the same time. That’s nice for our balance sheets. But it’s a horrible way to jumpstart a weak economy. The lack of confidence in our economy is apparent as you watch Congressional budget debates, and watch consumer and business spending slow or halt during those discussions. In any type of recovery, physical or economic, slow and steady is the recommended solution. Any exceptions to that tend cause concern, particularly when we are recovering from loss of over $7.8 trillion in net worth nationally. Businesses and consumers are not ready to jump in with both feet it appears.

Remember, between the technology bubble and the housing bubble that book-ended the 2000s, households and business borrowed lots of money, year after year. Then the recession hit, and our incomes fell, and we started savings and running surpluses by saving more of our money. The Baby Boomers were not near the savers their parents and grandparents were until the recession hit. When you are not sure or optimistic about the economic future, we have been taught to save.

Also remember nationally, after the tech bubble, the U.S. economy relied on Americans buying more houses — and more expensive houses — than ever before. Today, Americans are buying the fewest number of homes in 60 years, a fifth of homeowners are underwater, and savings rates have shot up. Deleveraging created a whopping 9-percent-of-GDP shift toward savings in the private sector. Meanwhile, the public sector’s borrowings offset only about two-thirds of that shift.

So what is slowing the recovery? One of the main factors is unemployment, long term and short term. This recovery just does not have the feeling of improvement, even though unemployment has been declining measurably – from 10% at its peak to 6.6%. But if you look at the employment rate – not the unemployment rate – you see how few in the adult population have jobs, and we have not made any progress since the recession began. We are only at 58% of the adult population working now, same as it was in the depth of the recession, and well below the historical trend of 63% nationally.

Unemployment until this last December has been above 7 percent for over 4 years, above pre-recession levels for over 5 years, and isn’t likely to return to those levels for a few more years. Wages are not keeping up with inflation or appreciation. A great example is Austin, where over the last 5 years rents have increased 58%, real estate residential appreciation 38%, while wages have been flat. Austin, as good as it seems to be doing, is a microcosm of the national economic picture. The ability to spend more is tapered by the inability to make more in many jobs.

The U.S. economy continues its slow walk back to pre-recession levels, with unemployment being among the slowest of indicators to return. Household median income has declined over 5 percent since the meltdown. While higher-wage occupations have generally recovered, mid-wage occupations have not. Instead, the growth has been in lower-wage occupations. This is forcing many Americans to lower expectations about lifestyle and living standards.

If you look at the chart below you see that this recovery has been slower and longer than previous economic slowdowns.

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Then there is the consumer spending piece of the puzzle. Consumer spending has been slow. Consumers and most business are still cautious and less confident about the economic recovery. There are plenty of conflicting indicators about what is happening in the U.S. economy, with booming sales of cars and houses seeming to be offset by sluggish spending in retail, stores and restaurants. The good news is that people are showing more confidence in making longer-term, big ticket purchases than they are in loosening up on their day-to-day spending over the last year. But there also is a need nationally for retail spending to pick up.

One of the many economic indicators that I watch personally is how women are spending. Since many women who are married also manage the budget (and even if they don’t), they spend money on themselves last in the family budget. A great example is the lipstick index, first suggested by Leonard Lauder, chairman of Estee Lauder. The index shows that women turn to lipstick instead of more expensive indulgences like handbags and shoes during hard times. You always have your exceptions to every rule, but in my 35+ years of following the economy, when women’s retail chains and stocks begin to pick up, it is a good sign. For most of last year we began to see that spending indicator. Unfortunately beginning with budget impasse, it has plateaued.

That can be seen in business spending, too. Historically business investment should follow profit, but that’s not happening. Profit is up but businesses aren’t spending. It implies that businesses are uncertain about the near future. That said, if you look at small business optimism index, 2014 shows optimism and potential growth (small business make up 80+% of our national GDP). But again, what we are seeing is the lack of confidence in long term economic growth presently.

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Despite the lack of confidence and the hollow unemployment rate improvement, most economists and analysts still expect growth through 2014 into 2015. Just not the robust growth everyone wants and remembers from pre-recession days. The good news is the economy is expanding. Most analysts expect 2.5% GDP growth this year. In the 4th quarter 2013, growth was solid but that was one quarter. We need that rate to be consistent for four quarters.

So, how do we grade out?

Nationwide – C+

The Federal Reserve lowered rates, and is planning to let rates increase as housing and job growth historically follow. When the rates are at zero, the Federal Reserve uses other means, such as quantitative easing (QE) to encourage growth. It has been by most measurements mildly effective. As the Fed reduces stimulus, then rates will rise, which in turn causes concerns on home affordability. Historically as rates rise, sales slow, then pick up as businesses and consumers realize that rates won’t go down much once they begin to rise.

Texas – B+

Supply and demand is in balance, and home/land value appreciation meets or beats inflation. Employment growth, lack of business regulation, and low tax burdens all have helped. The attention Texas has gotten from its economic performance compared to other states means it is being seen as the new ‘land of growth’.

Austin – A

So much has been written about the strength and success of this market. Job creation and housing formation as well as other real estate channel demand exceeds supply. Housing and real estate appreciation is stronger. Most of the area concerns are caused by the strength and demand of the market. After the tech bubble burst, local civic leaders got together to plant a broader economic base for growth. This blueprint has allowed tremendous ‘buzz’ and goodwill in attracting talent and jobs.

Houston – A

Like Austin, after the energy and tech busts, local leaders looked to improve and broaden their economic footprint. What has ensued is a city that has felt very little of the national recession. The housing formation as well as other real estate channel demand exceeds supply. Through 2014-15 housing and real estate appreciation will continue to gain strength.

DFW – B

Dallas / Fort Worth is much more dependent on the national economy, therefore the recession hit them harder than the other city their size in Texas. They just began to feel the recovery in the beginning of 2013, unlike the rest of the state. The good news is that demand has picked up, putting pressure on supply in most channels. Not quite as robust as Houston or Austin, but getting there.

San Antonio – B-

San Antonio had been doing better until last year, when the Congressional sequester and defense budget cuts hit. Over 90,000 civil defense jobs were lost in Texas. This hit El Paso, Killeen and San Antonio hard where there is such a large military presence. That said, they still had a net positive of 8,000 jobs in a market that remains tight in all residential channels. Economic recovery potential remains strong as most brokers see greater housing formation than inventory.

Key indicators are generally positive nationwide, again with the Oklahoma-Texas region leading. Regional GDP will grow, unemployment will continue to decline, business investment and consumer spending will grow, no matter what people are feeling.

Inflation and interest rates will see slight increases. Agricultural production and income will be down slightly in the region while the natural resource sector will likely see a steady rise. Regional wages will also likely be steady to up. Unemployment will continue its slow decline.

This continued level of uncertainty suggests the continued importance of risk management and longer term strategic planning. With 2014 as a mid-term election year, it is unlikely that the rhetoric of politics will be dialed down. Not just the economists and analysts, but all of us will need to be keen on interpreting the facts from spin, and how such information is likely to effect our economic realities.

A closer look at the unemployment picture

We received mixed new on the economy this month. On the one hand, real estate prices are up, GDP growth has improved, and the headline unemployment rate fell to 7.4%. On the other hand, a more detailed look at the unemployment situation reveals that we still have a long way to go to full recovery nationally.

Unemployment has improved but seems to be stuck at 7.4% nationally. Texas is faring better – the state unemployment rate is at 6.5%, Austin 5.4%, Houston 6.1%, DFW 6.6%, and San Antonio 6.7%. In July, only 92,000 of the 266,000 jobs created were full-time — just 35% of the total. You may wonder why the total number of jobs created isn’t 162,000, the number commonly used by news services. That number is calculated from the Labor Department’s survey of employers. The 266,000 is calculated from the department’s household survey. For the year through July, 953,000 jobs have been created, but only 222,000 were full-time – representing just 23% of the total job gains.

This caused a spike of 0.5 percentage points in U6 (considered a truer unemployment picture than what the media reports) to 14.3%. National GDP is up by to 1.7%

The headline job number doesn’t matter – what matters is the Fed’s reaction to the number. Federal Reserve policy is working, but not as much as everyone wants it to. Judging by GDP and wages, it isn’t working to stimulate economic growth. Corporate profits have improved dramatically, but most of America has not felt it in their pocket book. Quantitative easing has kept rates artificially low, which helps keep the interest cost on the record U.S. debt at affordable levels. That said, there is really nothing the Fed has done that has impacted job growth, and that is without question the most important factor in continued economic growth. The good news is that the unemployment rate has improved. But does the consumer believe it has improved?

As has been the case for almost three years, gains in private employment have been partly offset by losses in public employment, especially in state and local governments. Government payrolls continue to fall. Here in Texas, it is estimated we will lose close to 160,000 government jobs because of the sequester, around 99,000 in defense cuts and 60,500 in non-defense spending, and they have fallen about 18,000 a month since June. Over that period the drop in government employment has offset about 13% of the payroll job gains that have occurred in the private sector.

To put it in perspective, if the economy adds about 208,000 jobs per month, which was the average monthly rate for the best year of job creation in the 2000s, then it will take until February 2024—almost eleven years—to close the job gap. Given a more optimistic rate of 321,000 jobs per month, which was the average monthly rate for the best year of job creation in the 1990s, the economy will reach pre-recession employment levels by December 2016—over three and a half years from now. That type of growth would definitely show that the economy is back on a quicker mend.

As stated, the jobs recovery has not been as robust. Rather, it’s been a slow, long haul. The U.S. economy lost nearly 8.8 million jobs between January 2008 and February 2010, but has since gained back only about 6.2 million jobs, still about 2.6 million below pre-recession levels. Meanwhile, the population has grown, and some jobseekers have given up. The percentage of workers staying unemployed an extended period of time is the highest it has been since the Great Depression.

If we look at our large metros nationally, eemployment has rebounded from its low point in 92 of the 100 largest metropolitan areas by the second quarter of 2011 according to BLS, but Of the 100 largest metro areas, 65 saw their unemployment rates decline during the first quarter 2013, versus 35 in which the rate rose. Forty-two (42) metro areas experienced unemployment rate declines during each of the last four quarters. In no large metro area, however, was the unemployment rate in the first quarter of 2013 below its pre-recession low, and rates remain above 6 percent in all but 16 large metro areas. Only four cities nationally made a complete jobs recovery: El Paso, Houston, Austin, and San Antonio.

Texas is recovering more quickly for several reasons. First, the region lost a smaller portion of its employment during the recession. When the recovery began, Texas had less ground to make up. Second, Texas’ core industries – oil, gas and technology – are booming again. Employment in oil and gas extraction passed its pre-recession peak in June 2010. Nearly all the jobs lost in equipment manufacturing have been recovered. 100% have been recouped in oilfield services. And third, the region continues to draw residents from other states—some with jobs, some looking for jobs and others looking to start businesses here. Texas’s job growth and population growth is driving the demand for consumer goods and services, creating jobs and opportunities along the way.

Another indicator that the state’s economy has been comparatively healthy comes from the U.S. Census Bureau 2010 report that Texas added more people (nearly 4.3 million) than any other state between the census counts of 2000 and 2010. If Texas’ population base weren’t growing, the region wouldn’t be generating jobs in health care, personal services, retail trade, accommodation, food services, and educational services. A growing population translates into an expanding consumer market. Those transplanted workers are spending their paychecks in local stores, restaurants, theatres and housing communities.

What’s drawing people to Texas? Not any one factor. If one lives in an expensive metro such as New York, Los Angeles or San Francisco, the region’s low cost of living, especially moderately priced housing, may be the draw. If one lives in an area with harsh winters, such as Chicago or Pittsburgh, the region’s mild climate may be the draw. If one lives in a city with limited job opportunities, such as Detroit or Buffalo, the region’s growing economy may be the draw. If one lives in a rural area or small metro, Texas’s offering of rural plus cosmopolitan nature may be the draw.

So what are the take-aways of all this?

1) There is not a quick fix for the economy nationally. Texas will be OK and projected to continue to have a healthy economy. And based on projected population growth and job creation will remain in a growth mode for the next 3 to 5 years.

2) Texas continues with strong job and population growth; however everything is tied to the national and international economy. The Texas region cannot continue to have strong growth with the national and global economy in turmoil.

3) Although employment numbers have started recovery in the Texas region; housing, construction and government employment growth still lag behind and are a good 24+ months from recovering presently. As housing and construction continue to turn strong, the Texas market should rebound stronger than the rest of the country because of the pent up demand and continued growth. The Texas unemployment rate has been at or below the national rate for 78 consecutive months.

4) Texas’s growth is in the urban metros with just under 65% of the state’s population in the big four metros. Remember D/FW and Houston would be ranked by themselves as one of the 20 most populous states nationally, (numbers 17 and 19, respectively). Economies in all 4 cities were in the top 20 best performing in the nation.

5) Consumer confidence continues to erode nationally. Pre-recession, the Conference Board index stayed healthy in the 90 range. Today, the U.S. consumer confidence index stays unexpectedly cooled in July as Americans became less optimistic about the outlook for the economy. The U.S. consumer confidence index was 80.3 in July 2013, down 2.2 percent from June 2013, but 22.8 percent higher than one year ago. Analysts median forecast in a Bloomberg business survey called for a gain to 84.7. The gauge reached an almost six-year high of 84.5 in May. Potentially the recent increases in mortgage rates and prices at the gas pump may have restrained consumers’ views on the economy in the next six months. The Texas region’s consumer confidence index was 106.3 in July 2013, up 7.5 percent from June 2013, and 14.8 percent higher than one year ago. So clearly consumers in Texas are more optimistic than the rest of the nation. Which in turn translates to better consumer spending in our state.

6) True job creation and wage improvement at a national level will be paramount in the recovery. It doesn’t take a rocket scientist to understand that. However the continued lack of confidence nationally shown in the economy continues to hold back business expansion. As Ben Bernanke said in the summer of 2011, “Until we see a period of sustained job creation, we cannot consider the recovery to be truly established.”

All this said, Texas sits better positioned than most states as the national economy continues along the bottom. Austin, Houston and San Antonio have a leg up, having turned positive in the last 18 months. All three see stronger real estate and economic absorptions across all channels. D/FW has begun to see improvement the last 180 days, and should begin to be as strong as the other Texas metros shortly.

Texas vs. California (Part 3)

This is our third installment in a series discussing Texas and California. We have written about why businesses and individuals seem to be leaving CA for TX. One in five Americans calls California or Texas home. The two most populous states have a lot in common: a long coast, a sunny climate, a diverse population, plenty of oil in the ground, and Mexico to the south. Where the states really diverge is in their governance.

Let’s look at population, GDP, and the states’ respective budgets. We will use budget data from the Census Annual Survey of State Government Finances and job and per capita income data from the Bureau of Economic Analysis.

Last year (2012), California had a population about 30% larger than Texas, a deficit 210% higher, and state debt 380% higher. It’s safe to say that low-tax Texas appears to be in a better fiscal shape.

California earned the name “The Golden State” and adopted the motto in 1968. The nickname’s origins are from the discovery of gold in 1848, and the expansive fields of poppies and many opportunities present in the state. In 1950 the Golden State had 40% higher per capita income than Texas. In 1970, the advantage was still over 30%. By 2009, the difference had shrunk to only 10%, without taking into account the higher cost of living in California.

As we have discussed the last couple of weeks, it appears that Texas is doing better than California not only fiscally, but also in terms of aggregate job and income growth.

One thing I would warn about is exaggerating California’s debt problem. It’s true that they have mismanaged their finances, and expanded government seemingly beyond what they can afford. However, California is still extremely wealthy, with a total GDP of about $1.8 trillion dollars in 2011. This is bigger than Brazil and Russia ($1.6 trillion) and almost as large as Italy ($2.3 trillion). Texas is $1.2 trillion in comparison. So while their tax base may appear narrow, their entire economic base is very wide. The debt to GDP ratio for California alone is still below 10% (or 80%, if you add the national debt).

Also, let’s not make too strong policy-inference from the short-term (less than ten years) mortgage-bubble that is currently distressing California. Policy should be based on evaluations of long term performance. We would argue above that the long term trend also favors Texas.

There are many other reasons why Texas is thriving while other states flail.

Rising oil prices

A boon for Texas, California not so much.

In 2012, the Brent crude oil spot price averaged $112 per barrel, and rose to $119 a barrel in early February. Even though we have seen an unexplained surge at the pumps lately, the Energy Information Administration is projecting an average price of $109 a barrel. Crude prices peaked at $134.02 per barrel in June 2008. Those rising oil prices may have been bad news for drivers, but they helped out the Texas and California economy, which rank #1 and 3 respectively in oil output.

When oil prices are high, job growth in Texas historically has exceeded that of the nation. Texas entered the recession late and came out early, mirroring trends in oil prices, which rose towards the beginning of the recession, fell in 2009, but have been steadily rising since.

The states that are expanding economically are almost all energy states. Based on Dallas Federal Reserve research, a 10 percent increase in oil prices leads to a 0.3 percent rise in employment and a 0.5 percent rise in GDP for the state of Texas.

One of the big differences between the two states has been the introduction of fracking. New recovery techniques, such as steam injection and later hydraulic fracturing (fracking), changed the industry and lessened our reliance on other countries oil production. A decade ago, Texas oil engineers decided to combine horizontal drilling with a process called hydraulic fracturing, which injects chemical-laced water into the shale to push out the minerals. The system has been effective in releasing previously untapped pockets of natural gas in shale formations, such as the Eagle Ford shale formation in South Texas. In 2000, 1 percent of the U.S. gas supplies were from shale, but now the figure is 25 percent. And as a result of the new technology, Texas is home to some of the most prosperous new oil fields in the country.

Fracking has opened up the Eagle Ford formation to tremendous economic opportunity. This region of south Texas was a sparsely populated area that has not historically been very economically strong. Fracking has breathed new life into the area and has not only brought jobs but has also created a new set of millionaires whose land has sky rocketed in value.

In California, fracking has kept older fields open, particularly those in Kern County, and has preserved CA’s place as the nation’s third largest petroleum producer. But to this point, fracking has not been used for new fields due to environmental and regulatory concerns. Meanwhile, oil production is booming in other states, principally North Dakota and Texas, due to extensive use of fracking to tap into deposits in shale — so much so that the U.S. may soon become an exporter again.

But what about California? It’s been estimated that deep shale deposits in California, particularly those along California’s Central Coast and in the Central Valley, contain as much as 400 billion barrels of oil, equivalent to half of Saudi Arabia’s oil fields. But whether California experiences a new oil boom similar to one it saw in the early 20th century depends on whether the state’s extraordinarily sensitive environmental conscious can tolerate more fracking, particularly along the coast.

So will California see a new oil boom? Not immediately, but the potential is there to help improve a somewhat stagnant economy, create many thousands of jobs, and pump billions into state and local government coffers. The question is at what cost?

Housing costs

Texas has been referred to as one of the remarkable economic stories of the last decade. But its growth isn’t due to the wealthy fleeing to places with the lowest tax rates. If you look closer at the data, the people moving out of the state are wealthier than those moving in — so the lower housing costs and living expenses in Texas is a major magnet.

We all are aware of the ramifications of runaway real estate appreciation. From 2000 to 2006 as California experienced over 250% appreciation of real estate assets (Source: OFHEO). At the same time Texas was 50th in appreciation with less than 3% annual appreciation annually.

This lack of appreciation in Texas helped the state escape the foreclosure bust that crippled other states’ economies —less than 2 percent of Texas mortgage borrowers are in or near foreclosure, according to the Mortgage Bankers Association, while the national average is nearly 10 percent. States like Arizona, Florida, and Nevada faced mortgage borrower foreclosure rates of 13, 12, and 19 percent, respectively, in 2012. Texas’s relatively stable market may have been a factor in preventing housing prices from climbing. California and Nevada have been helped by investors shoring up prices. As of December, 10% of Florida’s home loans were still in some stage of foreclosure, the highest percentage in the nation. Behind it were New Jersey (7%), New York (5%), Nevada (4.7%), and Illinois (4.5 percent), according to CoreLogic. Among the five, only Nevada is a non-judicial foreclosure state.

Some credit Texas’s stability to state regulations on cash-out and home equity loans, which don’t allow borrowers to take out loans that total more than 80 percent of a home’s appraised value. California, Florida, and many other states had a run of 100% refinances with borrowers sometimes refinancing two or three times in a couple of years to retrieve money from their over-appreciated homes. These cash-out loans allowed borrows in other places to refinance their homes for more than their original mortgage value — driving up home prices and contributing to the eventual burst of the housing bubble.

Another factor in Texas that prevented housing prices from rising dramatically during the housing boom is the abundance of cheap, open land and easier building regulations. Look at land values on both coasts as well as the length of the entitlement process (the process from purchase through engineering to the start of development). 6 months to 2.5 years in Texas is a walk in the park compared to 7 to 10 years in California, Florida, Arizona and other ‘boom’ states.

Affordable homes are one of the key reasons Texas continues to thrive. The California average home price is $738,526 and the median price is $452,000. Texas is significantly less expensive with a $283,137 average price and a $144,900 median price. Affordable land and limited municipal and state regulation allow for less expensive homes. In Texas the cost of the home is traditionally 5x the price of the lot, or 3x the price of the lot in more desirable areas. In California, it is the opposite, where the land is typically the largest cost.

Cost of labor

Immigrant workers make up the majority of migrant farm workers in places such as California’s Central Valley and southern Texas doing seasonal work such as fruit picking and sorting. Seventy five percent of crop workers in certain areas are from Mexico and about half are undocumented, according to a 2011 U.S. Department of Labor survey. Immigrant workers make up a vital part of the construction workforce. In California, Nevada, Texas and Arizona, it is estimated a third of all construction workers are immigrants. Twenty percent of construction workers nationally were born abroad. Of these figures, more than half came from Mexico and another 25 percent from Latin American countries.

Both states have a pool of cheap, unskilled labor. However, skilled labor is another story. Businesses are moving away from areas with a high concentration of unionized skilled labor. As Dr. Mark Dotzsour from Texas A&M said, ‘Let’s face it. Employers come to Texas and other southern locations because they feel that they can make a higher profit. Taxes are a major consideration. So is the cost of labor. Clearly businesses are moving away from areas with a high concentration of unionized labor.’

The Bureau of Labor Statistics puts out information about the percentage of all workers in each state that are represented by a labor union. Here are the states with the highest concentration:

• New York, 24.9%

• Alaska, 23.9%

• Hawaii, 23.2%

• Washington, 19.5%

• Rhode Island, 18.4%

• California, 18.4%

• Michigan, 17.1%

• New Jersey, 16.8%

• Massachusetts, 16.2%

• Illinois, 15.5%

Here are the states with the lowest concentration:

• Arkansas, 3.7%

• North Carolina, 4.3%

• South Carolina, 4.6%

• Georgia, 5.4%

• Virginia, 5.5%

• Minnesota, 5.7%

• Tennessee, 5.9%

• Texas, 6.8%

Many companies like the flexibility associated with the ability to freely make decisions without the pressure of a union, so states with a low percentage of a unionized private sector labor force ranked near the top for many business owners and CEO’s. That coupled with a lower cost of living for a company’s workers has made moving companies to Texas more attractive.

The ability to make money motivates workers, suggesting an advantage for places with higher pay. The nation’s leaders in earnings per job were found in the Northeast, led by New York, Connecticut, Massachusetts and New Jersey. California, on the other side of the country, comes next. These states lost some of their appeal because steep living costs and taxes ate into the higher pay. Texas, a state with low living costs and taxes, ranked a respectable 13th in earnings.

As we have discussed the last few weeks, both states (California and Texas) have their strengths and weaknesses. Each has had their chance for their day in the economic sun. The question is what will the next decade bring? The strength of less regulation and lower taxes or the need for more government services? California’s habit of raising taxes to fund a burgeoning regulatory state isn’t without impact on its economy. Californians fork over about 10.6 percent of their income to state and local governments, above the U.S. average of 9.8 percent. Texans pay 7.9 percent. This affects the bottom line of both consumers and businesses.

Presently Texas seems to be the people’s choice.

The Best Economic News in a Long Time

Last week’s national housing starts and permits report is the best economic news in a long time. Why? Because housing always leads the economy, and the direction of that lead lasts a year or two into the future. And at this point, the positive trend in housing construction is strongly established.

The most important measure of housing construction isn’t how much of a recovery there has been relative to the last peak, but how many additional houses are being built now compared with the last measurement period. For example, going from 0 to 200,000 new houses in a year adds just as much new employment as going from 2,000,000 to 2,200,000 new houses. The same amount of new construction workers are needed to build those 200,000 additional houses, the same amount of appliances and furniture will be bought to fill them, etc.

This isn’t just theory; it’s backed up by the data. Here are some graphs to drive the point home. First, here is a graph of the year over year change in the number of houses built (blue) vs. the year over year percentage change in GDP since 1983 (red).

[dottoro_gallery image_id=”13391″ align=”” add_to_gallery=”false” show_hoverelem=”true”][/dottoro_gallery]

For every 200,000 additional houses built, GDP consistently increases over trend by 1%, with a variable lead time of several quarters to several years. Of course, GDP growth is an imperfect measure of workers’ economic well-being. What the next graph shows is that GDP growth (red) consistently leads job growth (black).

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Because increased housing construction consistently leads to GDP growth, and GDP growth leads to job growth, it should be no surprise that housing construction (blue) increases lead to job growth (black).

[dottoro_gallery image_id=”13393″ align=”” add_to_gallery=”false” show_hoverelem=”true”][/dottoro_gallery]

This week’s data shows us the best housing construction growth in eight years, and equal to the best growth in over 25 years! This rate of growth in construction is associated with a subsequent 4-5% year over year GDP growth, and with 2% or 3% jobs growth within the next year or two.

In other words, the best national economic news in a long time.

While I’m at it, there is more good economic news in car and light truck sales. This shows that small business (85+% share of US GDP) have improved confidence in their future business. The average age of trucks and cars on the road is over ten years old, which is a strong indicator that consumers have been putting off new vehicle purchases.

[dottoro_gallery image_id=”13394″ align=”” add_to_gallery=”false” show_hoverelem=”true”][/dottoro_gallery]

Another piece of positive data is that consumer credit has been growing fairly consistently since reaching a low point in 2010. The chart below shows that the average consumer has increased their spending in the last couple of months. When you look at this realize that consumer credit has been virtually non-existent since the recession. The unemployed or those facing foreclosure spend very little on retail purchases

Most in the real estate business are aware that retail nationally has been challenged over the last few years. Real retail sales are the “holy grail” leading indicator for jobs over the next six months or so. Measure consumer credit levels year over year and then divide by two, and you usually get a pretty good idea of national job growth in the near future. The trend in growth had been declining but has now rebounded.

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We have begun to see the re-accelerating of retail sales growth. Americans may have slowed their spending in September 2012 after splurging in the month before during the busy back-to-school shopping season. But more importantly, they are still spending. Still, given the economic and political uncertainty that weighs on many Americans right now before the election, analysts say the results are an encouraging sign for stores as they head into what’s traditionally the busiest shopping period of the year in November and December.

Right now consumer confidence is at a seven-month high as people are feeling better about rising home prices and a rebounding stock market. Still job growth remains weak and prices for everything from food to gas are higher. On top of that, there’s a worry that the U.S. economy will fall into another recession next year no matter who is elected. That’s when tax increases and deep government spending cuts will take effect unless Congress reaches a budget deal.

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Because of economic and political uncertainty, The National Retail Federation, the nation’s largest retail trade group, tempered its expectations for the winter holidays. The group said early this month that it expects sales for the November and December period to rise 4.1 percent.

That’s more than a percentage point lower than the growth in each of the past years and the smallest increase since 2009 when sales were up just 0.3 percent. But the retail forecast still is higher than the 3.5 percent average over the past 10 years.

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Another indicator I became aware of many years ago was how restaurants are doing. When I first got into looking at market indicators for housing, I was told by one of my mentors (Nash Phillips and Clyde Copus) to talk to the dry cleaners to see if the use of nice tablecloths and napkins was on the rise. Now, having just received a degree at the University of Texas, it didn’t seem right to use what I saw as a silly indicator ……Guess what? We still look at what local restaurants as well as national restaurant chains are doing as an indicator of national and local economic strength.

Below you can see that restaurant owners are saw a recent spike up in their outlook. (They’re a great measure of consumer discretionary spending).

[dottoro_gallery image_id=”13398″ align=”” add_to_gallery=”false” show_hoverelem=”true”][/dottoro_gallery]

Looking locally in our Texas metros, we have seen aggressive expansion of local and national restaurant groups. In Austin, Larry Maguire has opened three new restaurants (Fresa’s Chicken Al Carbon, Clarks, Elizabeth Street Café) in the last eight months to strong acclaim. San Antonio and Houston are seeing the same level of expansion of the local national chains. These expansions are taken lightly in light of the last five years of closing many stores.

Another indicator that always has been a bellwether to better home sales is home improvement stores performance. With the surge in construction, you can see below Home Depot continues to improve People tend to either fix up their old house to live there longer or sale to move up. Home Depot performance shows continued strength for an extended period.

[dottoro_gallery image_id=”13399″ align=”” add_to_gallery=”false” show_hoverelem=”true”][/dottoro_gallery]

The unemployment rate is improving. Both the headline rate (U3 BLS) and the “true unemployment rate” (U6 BLS) of unemployed and underemployed are declining. With the continued confidence, businesses should continue hiring and employment rates should continue to improve. Is the worst behind us? There will always be some concern after such a long recession and loss of personal wealth in real estate and investments. But again most indicators seem to have turned upward away from the bottom.

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[dottoro_gallery image_id=”13401″ align=”” add_to_gallery=”false” show_hoverelem=”true”][/dottoro_gallery]

The takeaway from this analysis is that both the long leading indicator of housing and the short leading indicator of consumer spending are pointing to an improving jobs picture in the near future.
Take these indicators with a healthy dose of caution. Most of the nation’s metros and states are five to ten years from full recovery, and some areas are 20+ years (think of Texas in the 90’s). Further, the financial constraints of Dodd-Franks and Basel III will put a damper on this growth nationally.
Then again, if you’re reading this you probably live in Texas, where one out of four jobs since the recession is created. What Texas has to worry about is where we are going to put all the people moving here – a good problem to have.

So what does this mean for us in Texas? Hopefully continued employment growth. According to data from Texas A&M Real Estate Center, Texas real estate has increase 240% over the last 5 years for a total value of $1.6 Trillion. All channels, residential, commercial, industrial, and ranch have increased in value and should continue to appreciate.

If you are thinking you should wait to buy or till rates get better, I think based on the data you better hurry…we have long passed bottom in this state.