Texas economy

Texas economy strengthens as Omicron fades; Costs and wages are still rising


Regional

Jesus Canas and James Lee

March 24, 2022

Texas’ economy, paced by service-sector expansion, grew strongly in February as the impact of the omicron variant of COVID-19 faded, according to data from the Business Outlook Surveys. Texas (TBOS). Wage and price pressures have continued and, together with recent geopolitical events, are challenging the outlook for businesses.

Manufacturing activity slowed slightly in February, but still posted above-average output growth. Employment in Texas grew at an annualized rate of 3.6% month-over-month in January, significantly above the long-term average job growth of 2% in Texas, but more slower than the 5.4% pace in 2021 (Chart 1).

Chart 1: Texas job growth in January exceeds the state's long-term average of 2%

Downloadable Grid | Chart data

Goods-producing employment fell slightly, with construction employment down 5.3% and manufacturing employment up only 0.9%. Employment in the energy sector grew by an impressive 18.1%.

Employment in services is accelerating growth

Employment in the services sector increased by 4.2% in January, against 2.5% in December. Expansion was broad-based, with leisure and hospitality growing by 7.9% and trade and transport by 5.4%.

The Federal Reserve Bank of Dallas employment forecast for 2022 (December to December) estimates that the number of jobs in Texas will increase by 2.9% in 2022, or 382,000 new positions. However, growing uncertainty due to ongoing supply chain issues, high inflation and the prospect of additional problems resulting from Russia’s invasion of Ukraine could present future challenges.

Supply chain issues persist

Supply chain issues persist, respondents to the February TBOS special questions said. There was an improvement in the services sector, as 55% of respondents experienced supply chain disruptions or delays, up from 62% in November.

However, manufacturers reported no improvement: 92% of respondents continue to experience supply chain disruptions or delays (Chart 2).

Chart 2: Supply chain disruptions continue among manufacturing companies

Downloadable Grid | Chart data

Texas companies with international supply chains are more prone to disruptions: 93% of TBOS companies with foreign suppliers experience supply chain disruptions, compared to 34% of companies with only domestic suppliers.

Affected companies are trying to expand their supply base, looking for alternatives on the domestic market, substituting other inputs and increasing their inventories. Several respondents noted that costs will increase accordingly.

The expected timeline for supply chain standardization continues to lengthen. Only 30% of companies expect their supply chains to return to normal within the next six months; 43% expect the process to take seven to 12 months and 27% say it will take more than a year. In June 2021, 41% of respondents expected normalcy within six months, 35% in seven to 12 months and 22% in more than a year.

Disruptions in the supply chain are likely to worsen due to the conflict between Ukraine and Russia and will drive prices up. Risk factors include further disruptions to global manufacturing logistics networks affecting, among other things, supplies of wires and plastics, coils, capacitors and ignition systems.

As a result, Texas electronics-related production may continue to slow. Electronics shipments account for about 25% of the state’s total exports. Conversely, Texas energy production and oil and gas exports could increase if global demand for US energy products increases due to the conflict in Ukraine and reduced Russian oil and gas exports.

Persistent price increases

Supply chain disruptions and labor shortages continue to drive up prices and wages. Pressures on selling prices and on input prices increased again in February for the manufacturing sector and remained close to record levels for services (Chart 3). Growth in wages and benefits also remained strong (Chart 4).

Chart 3: Price growth accelerates in February and hovers around record highs

Downloadable Grid | Chart data

Chart 4: Wage growth, benefits cut in February, still high

Downloadable Grid | Chart data

Price pressures vary by metro

High regional inflation has been accompanied by a persistent rise in prices and wages. However, price growth in Texas is not evenly distributed across regions.

While Consumer Price Index inflation in the Dallas-Fort Worth area is higher than the nationwide, inflation in Houston is lower (Chart 5).

Chart 5: DFW inflation growth outpaces US Houston rates

Downloadable Grid | Chart data

Housing and housing-related costs are largely responsible for the price growth gap between DFW and Houston. Overall housing costs, which include housing, utilities and rent, account for about one-third of overall household expenditures.

Year-over-year housing inflation was 6.8% in DFW and 4.2% in Houston in January.



about the authors

Jesus Canas

Cañas is a senior business economist in the research department of the Federal Reserve Bank of Dallas.

James Lee

Lee is a research analyst in the research department of the Federal Reserve Bank of Dallas.

The opinions 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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