The Beacon Outlook: Texas
Welcome to The Beacon Outlook
This succinct, quarterly outlook delivers up-to-date analysis of leading indicators driving the national and state economies, including GDP growth, employment, housing and commercial real estate markets, taxable sales, international trade, and more.
A DIFFERENT TYPE OF BUSINESS CYCLE
The COVID recession of 2020 differed significantly from most downturns with some portions of the economy suffering rapid losses while others went unscathed, and even flourished during the pandemic. Although labor markets in both Texas and across the United States remain historically weak, other parts of the economy show little signs of strain.
WEAK CRUDE DEMAND IS LONE ROUGH SPOT IN ROBUST TEXAS RECOVERY
Texas’s comparatively laissez faire approach to the pandemic has helped the state’s overall economic output recover almost back to where it was at the end of 2019, prior to the crisis. The one exception is the state’s critical oil industry, which is expected to remain subdued for at least the next year given weak global demand.
HOUSING ON FIRE
Record personal savings and a decline in mortgage rates over the past year caused Texas housing market activity to surge throughout the pandemic. This includes jumps in home prices, sales, and building permits.
Building Activity Explodes
Building permit applications in Texas grew to a record high level at the end of 2020 and into 2021; applications expanded by 9.8% from 2019 through 2020.
Labor Market Lag
Texas’ payrolls are currently 3.6% below their pre-pandemic peak and the state has recovered just 68% of the jobs lost during the pandemic.
The Risks Of Excessive Stimulus
If the latest infrastructure spending proposal is approved, pandemic-related Federal stimulus will hit $7 trillion, a potential over stimulus that could cause inflation, raise interest rates, intensify the Federal debt crisis, and lead to another major asset bubble.
TEXAS TOTAL VACCINATIONS
TEXAS MEDIAN HOME PRICE AND SALES
TEXAS FORECAST – KEY INDICATORS
THE LONE STAR STATE OUTLOOK
The consensus forecast for the economy at the start of the COVID-19 pandemic missed the mark badly. Most recessions are driven by demand shocks which tend to have long-run consequences. The COVID recession, on the other hand, was a relatively short-run supply shock that simply shifted demand from some parts of the economy to others. While labor markets in both Texas and nationally remain historically weak, other parts of the economy show little sign of strain. In a number of industries, job openings are at record high levels, and among workers who were not laid off throughout the crisis, earnings growth has not slowed. Global trade of goods and merchandise has surpassed pre-pandemic levels, and there is almost no sign of any problematic imbalances or issues in either consumer or business debt. In all, the COVID recession was a very different type of business cycle than has previously been seen in U.S. history.
Currently, the U.S. economy continues to gain momentum, a rebuilding that began at the start of the year. At the national level, the 4th quarter of 2020 showed a sharp slowing in economic activity in response to a record surge in new cases of the COVID-19 virus. The rollout of effective vaccines that began in 2021 has reversed that trend. Growth in the U.S. economy hit 6.4% in the 1st quarter and Beacon Economics is forecasting double digit growth in the second. This outlook anticipates strong growth in both business investment and consumer spending in the second half of the year, buoyed by a massive build-up in consumer savings and excess commercial bank deposits that have accumulated throughout the pandemic. The output gap that formed at the start of the crisis should be completely erased by the beginning of next year.
Texas Ahead Of The Curve… Mostly
Texas’s relatively light-handed policy approach to the pandemic did not cost it from a case load perspective—roughly 10% of the state’s population is confirmed to have been exposed to the virus, roughly the same as in New York or California. Moreover, Texas’s approach certainly helped from an economic standpoint, with the state’s overall output at the end of 2020 almost back to where it was at the end of 2019. The one exception is the oil industry which weighed heavily on the economy as well as on public revenues. While prices for crude have returned to pre-pandemic levels, output, refining, and exploration will remain subdued for at least the next year given weak global energy demand.
The Manufacturing and Technology sectors in Texas have emerged as particular bright spots. The recent manufacturing production outlook from the Dallas Federal Reserve shows manufacturing activity in Texas at a record high level despite weakness in the oil industry. This is indicative of how well the state has diversified its supply chain away from commodities. Similarly, Texas had a record year for venture capital investment, and jobs in the Information and Professional Services sectors are up from where they were pre-pandemic. In the short run, however, the weak global economy and the impact that is having on Texas exports will continue to partially offset the strength seen in other parts of the economy.
Another red-hot growth sector has been housing. Record savings and the decline in mortgage rates over the past year have caused a surge in housing market activity, including jumps in home prices, sales, and building permits. Single-family home prices in Texas increased 13.1% and sales rose 10.0% from the 1st quarter of 2020 to the 1st quarter of 2021. Additionally, building permits escalated to a record high level at the end of 2020 and into 2021, with applications growing 9.8% from 2019 through 2020. The virtuous cycle of tight inventories pushing greater demand implies that the state’s housing market will remain strong throughout 2022. Housing production will also support the continued movement of people to Texas from the nation’s coasts, attracted by both quality of life and job opportunities.
Like other states and the nation as a whole, the pandemic did its worst damage in the Texas labor market. The state shed 1,452,600 jobs from February 2020 to April 2020 and, currently, payrolls are 3.6% below their pre-pandemic peak. Relative to the nation overall, Texas is outperforming having recovered 68% of the jobs lost during the pandemic compared to 62% in the United States as a whole.
The losses are most pronounced in the Leisure and Hospitality (-181,400 jobs or -12.8%) and Other Services (-50,800 jobs or -11.2%) sectors, which largely rely on face-to-face interactions with customers. Other sectors such as Transportation, Warehousing, and Utilities (41,000 jobs or 6.9%) experienced significant growth during the pandemic as consumers moved towards e-commerce. Beacon Economics forecasts that the Texas labor market recovery will continue at a steady pace in 2021, with the state’s unemployment rate falling to 5.9% in the 2nd quarter of 2021 and to 4.3% by the end of the year.
Although the short-term outlook is upbeat, longer term risks exist – particularly in the form of excessive stimulus. The strength of the recovery from the COVID induced recession was already apparent in U.S. economic data towards the end of 2020. Despite this, the Federal government passed two more “relief” bills bringing the total level of pandemic related fiscal stimulus to over $5 trillion. The current administration is now pushing for another $2 trillion in new spending on infrastructure. Equivalently, the Federal Reserve has expanded the money supply more in the last year than ever before and has signaled that it has no plans to shrink its balance sheet anytime in the near future.
The perils of excessive stimulus include higher interest rates, a growing Federal debt crisis, the potential for inflation, and the risk of another major asset bubble—the stock market currently has the 2nd highest P/E ratio ever. This will inject turbulence into the next expansion and ultimately could be at the heart of the next U.S. recession. But these issues will not be apparent until 2023 or beyond. In the meantime, Beacon Economics anticipates multiple years of greater than normal growth for both Texas and the United States overall.
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