Oiled Up

The state’s economy continues to move ahead, buoyed by higher oil prices, but faces headwinds in a tight labor supply and inflation, the Dallas Fed Bank says.

Texas’ economy continues to move ahead, propelled by oil prices above $60 per barrel, rising exports, and business optimism over the new federal tax law and economic strength, the Federal Reserve Bank of Dallas says in its latest Business Outlook Survey.

Texas employment growth “accelerated in the fourth quarter and was strong across most metros and industries,” the Fed Bank said.

“Headwinds include uncertainty about North American Free Trade Agreement renegotiations and a tight labor supply damping the potential for even stronger economic growth going forward,” the Fed Bank said.

Texas added jobs at a 2.4 percent rate in 2017, ranking No. 4 nationally after falling below the U.S. average in 2015 and 2016, the Fed Bank said. The Dallas Fed forecasts a 2.8 percent increase in 2018 Texas job growth.

Texas’ fourth-quarter job growth was “robust and far-reaching, spanning all major metros and industries and indicating economic strength beyond the temporary boost from Hurricane Harvey recovery efforts,” the Fed Bank said.

“Energy sector expansion moderated,” the Fed Bank said. “Still, the energy sector experienced the greatest 2017 growth (9 percent) among major industries after two years of decline due to the oil bust,” the Fed Bank said. “Job growth picked up notably in professional and business services in the fourth quarter and surged in leisure and hospitality and in construction — two sectors benefiting from hurricane recovery.”

In manufacturing, “new orders and general business activity indexes surged to 11-year highs in December,” the Fed Bank said. “The new orders index edged down in January but remained at its highest point since mid-2006, while the general business activity index strengthened further to its highest level since late 2005.”

Texas firms’ optimism “picked up notably at year end,” the Fed Bank said. “In January, the service-sector company outlook index advanced for a second month, while the manufacturing sector company outlook index ticked down but remained elevated. Additionally, a sharp rise in firms’ capital spending plans was seen in the December [survey] and was sustained in the January readings.”

The Fed Bank said the December survey collection period covered the days that led up to and included the passage of the federal tax code revision.

Looking ahead, “a key question facing the Texas economy entering 2018 is the extent to which the state can add jobs when the labor market is very tight. The state unemployment rate is near its all-time low at 3.9 percent, and firms responding to [the survey] report that labor shortages are impairing their growth.”

A measure of Texas unemployment that includes “marginally attached” workers and those employed part time for economic reasons “has receded to near prerecession lows, suggesting slack in the broader labor market has largely been absorbed,” the Fed Bank said.

“The wages and benefits indexes … remain above average, as an increasingly tight labor market continues to translate into wage inflation,” the Fed Bank said. “Manufacturers are more bullish about future wages. Sixty percent of firms expect wages and benefits will be higher six months from now, pushing the future wages and benefits index to 56.9 in January, its second-highest reading since the series began in 2004 and more than 20 points above its postrecession average.”

Texas inflation “will likely continue rising,” the Fed Bank said. “The manufacturing survey’s six-months-ahead future selling prices index remained elevated in January after reaching a 10-year high in December. The service sector survey’s future selling prices index rose for the third month in January, also reaching a 10-year high.”