2017 Texas Economic Outlook: Shifting Into Second Gear

Assistant Vice President and Senior Economist Keith Phillips

The views expressed in this presentation are strictly those of the presenter and do not necessarily reflect the positions of the Federal Reserve Bank of Dallas or the Federal Reserve System. Any secondary distribution of this material is strictly prohibited.

Jobs grew 1.6% in 2016, and 1.3% so far this year, while RGDP growth has remained near trend at about 2.0%.

Manufacturing sector is improving this year after being hit last year by global weakness and strong dollar.

Retail and leisure and hospitality has remained healthy, but positive impact of lower energy prices smaller than expected.

Labor market near full employment at 4.3% unemployment rate – inflation rising toward two percent

RGDP growth expected to pick up slightly in 2017.

National Economy Growing Moderately

2

Job Growth Averaging 162K Per Month this year, Slightly Slower than 2016

3

-1000

-800

-600

-400

-200

0

200

400

600

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Thousands,SA

SOURCE: Bureau of Labor Statistics

20012060

U.S. Leading Index Suggests Continued Growth in Months Ahead

4

-20

-15

-10

-5

0

5

10

15

20

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Percent change, annualized

12-month6-month

NOTE: Shaded areas represent U.S. recessions.SOURCES: Conference Board, Federal Reserve Bank of Dallas.

May Blue Chip Survey Projects 2.1% in 2017

5

3.9

1.7

3.9

2.72.5

-1.5

2.9

0.8

4.6

2.7

1.9

0.50.1

2.8

0.8

3.1

4.0

-1.2

4.0

5.0

2.32.0

2.62.0

0.90.8

1.4

3.5

2.1

1.2

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Percent, SAAR

2013 2.5% Q4/Q4

2014 2.5% Q4/Q4

SOURCES: Bureau of Economic Analysis; Blue Chip Economic Indicators.

2015 1.9% Q4/Q4

2016 2.0% Q4/Q4

2017 2.1% Q4/Q4

In five years prior to 2015, growth in energy, construction and exports provided a strong stimulus to Texas.

In 2015 and 2016, low oil prices and strong dollar reduced job growth – Energy and manufacturing improving this year and overall job growth is picking up.

Service sectors and I-35 corridor not impacted much by energy downturn.

In 2016, jobs grew 1.2% (149,000 jobs), about the same as 2015. Through April 2017, growth has been 2.5%, above its long term average of 2.1%.

2017 job forecast is 2.4%

Texas Economic Growth Weak in 2015 and 2016, Picking Up This Year

6

Texas Ranked 4th in Job Growth in 2014, Growth in Energy States Varied Widely

7

-5

-4

-3

-2

-1

0

1

2

3

4

5

NV ND CO TX FL GA OR UT WA CA SC DE MA TN ID NC US AR AZ RI LA OK MI

NY OH KY WY WI

NM IN ILM

OM

D AL PA MN SD KS CT NJ NH IA NE MS DC VA ME

MT HI VT AK WV

Percent Change,Dec. 2013 - Dec. 2014

U.S.

TX

NOTE: Black bars represent major energy-producing states.SOURCE: Bureau of Labor Statistics

Texas Ranked 31st in Job Growth in 2015; Jobs Contracted in Most Energy States

8

-6

-4

-2

0

2

4

6

UT FL NV OR CA ID SC VA HI GA TN WA DC AZ CO NC MT

MO AR US NH MD IN NY DE MA KY MS NE IL

MN TX WI

MI NJ AL RI OH SD M

E KS IA PA CT VT NM OK AK LA WV

WY

ND

Percent Change,Dec. 2014 - Dec. 2015

U.S.TX

NOTE: Black bars represent large energy-producing states.SOURCE: Bureau of Labor Statistics

-5

-4

-3

-2

-1

0

1

2

3

4

5

ID UT WA NV FL GA AZ OR NC CA MI

TN CO MO NH SC MN KY IN MA US MT NJ NY MD TX AR AL SD DC HI NM PA NE OH WI

VA DE VT ME RI IA IL MS KS CT OK WV LA ND AK WY

Percent Change,Dec. 2015 - Dec. 2016

U.S.TX

NOTE: Black bars represent large energy-producing states.SOURCE: Bureau of Labor Statistics.

2016 Texas Growth Was Still Below National Average

9

-2

-1

0

1

2

3

4

NV UT SD WI

OR TX MT

WY

MN ND NH AL FL GA ME CO RI MD

MA TN IA WA VA AR MI

US NM KY AZ CT NY NJ DE ID HI LA SC CA NE OH VT PA IL OK MS

WV NC IN MO DC KS AK

Percent Change,Dec. 2016 - Apr. 2017

U.S.

TX

NOTE: Black bars represent large energy-producing states.SOURCE: Bureau of Labor Statistics.

Texas Back Above Nation, Ranked 6th in Growth So Far This Year

10

Texas Job Growth Above the Nation So Far in 2017

11

-3.8

0.8

1.6 1.6 1.72.2

1.9 1.61.4

-3.5

2.1 2.3

3.5

2.7

3.7

1.3 1.2

2.5

-5

-4

-3

-2

-1

0

1

2

3

4

5

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

U.S.

Texas

Percent, Y/Y

NOTE: Striped bars represent Apr. 2017/Dec. 2016 annualized growth.SOURCES: Bureau of Labor Statistics, Federal Reserve Bank of Dallas.

Texas Economy Expanding Above Trend After Weak First Half of 2016

(Texas Business-Cycle Index)

12

-8

-6

-4

-2

0

2

4

6

8

10

12Percent, M/M SAAR

NOTE: Shaded areas represent Texas recessionsSOURCE: Federal Reserve Bank of Dallas

3.8% trend

Most Metros Still Growing: I-35 Corridor Continues to Grow, Houston Picking Up

13

1.2

2.5

0.0

3.1

3.9

1.0

2.7

1.2

1.9

3.0 3.12.6

2.0

2.9

-0.9

1.6

-2

-1

0

1

2

3

4

5

Texas Houston(24.7%)

Dallas(21%)

San Antonio(8.5%)

Fort Worth(8.5%)

Austin(8.4%)

El Paso(2.6%)

CorpusChristi(1.6%)

Job Growth, 2014-2017Percent, Dec./Dec.

NOTE: Striped bars represent annualized growth Apr. 2017/Dec. 2016. Figures in parentheses represent shares of total state employment. SOURCES: Bureau of Labor Statistics, Federal Reserve Bank of Dallas.

Texas Unemployment Rate Above National Average

14

(Apr.)5.0

3.5

4.5

5.5

6.5

7.5

8.5

9.5

10.5

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Percent, SA

US unemployment rate

Texas unemployment rate

(Apr.)4.4

SOURCE: Bureau of Labor Statistics.

Energy and Manufacturing Rebounding So Far in 2017

15

-30

-25

-20

-15

-10

-5

0

5

10

15

20

Trade, Transp& Utilities

(20%)

Government(15.9%)

Health &Private

Education(13.7%)

Professional &Business Svcs

(13.5%)

Leisure &Hospitality

(10.7%)

Manufacturing(7%)

FinancialActivities

(6.1%)

Construction(5.7%)

NaturalResources &

Mining (1.7%)

Information(1.5%)

(Job Growth 2014-2017)Dec/DecPercent Change

NOTE: Striped bars are annualized growth Apr. 2017/Dec. 2016. Figures in parentheses represent shares of total nonfarm employment. SOURCES: Bureau of Labor Statistics, adjustments by Federal Reserve Bank of Dallas.

65.0

70.0

75.0

80.0

85.0

90.0

95.0

100.0

105.0

110.0

115.0

80

100

120

140

160

180

200

220

240

260

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

U.S. minus Texas

Texas

Index, SA, RealJan. 2000=100

Texas Value of the Dollar

SOURCES: U.S. Census, Bureau of Labor Statistics, WISERtrade, Federal Reserve Bank of Dallas.

IndexJan. 1988=100

Exports Strengthening in Recent Months; Dollar Weakening

16

Share of Texas Jobs Tied To Exports 3rd Highest Among States in 2015

17

0

2

4

6

8

10

12

AK WA TX SC LA ND KY IA MI IN NE IL SD TN DE AL OH MS

GA OR WV CA MN WI

CT KS AR UT VT AZ NC NJ NY PA MA

MO ID FL ME

NH NV MT VA RI WY

NM MD OK CO HI DC

Percent

SOURCES: International Trade Administration; WISERtrade; Bureau of Economic Analysis.

TX

Mexico38%

European Union11%

Canada10%China

5%

South Korea3%

Other33%

Destination of Texas Exports, 2015

Drilling Rig Count Picking Up Since May 2016

18

0

20

40

60

80

100

120

140

160

0

100

200

300

400

500

600

700

800

900

1000

Gas price(*10)

Oil price

Rig Count

NOTE: Data are weekly, last data point is the week of Jun. 2, 2017.SOURCES: Oil and Gas Journal, Baker Hughes.

Number Nominal $

Energy Survey Shows Resurgent Optimism in Energy Sector

19

-20

-10

0

10

20

30

40

50

60

70

Business Activity CapitalExpenditures

Employment Employee Hours Wages andBenefits

Company Outlook

Q3 2016 Q4 2016 Q1 2017

Index

SOURCE: Federal Reserve Bank of Dallas.

1.05

1.16

-0.2

0

0.2

0.4

0.6

0.8

1

1.2

1.4

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017*

11th District

U.S.

Percent, Return on Assets

*2017 data are through March 31st, annualized.SOURCE: Quarterly Reports of Conditions and Income, Federal Financial Institutions Examination Council.

11th District Loan Profitability Up So Far This Year

20

0

1

2

3

4

5

6

'06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17* '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17*

Other

Consumer

Commercial & Industrial

Commercial RE

Residential RE

U.S. 11th District

Percent of Total Loans

1.32

1.00

*2017 data are through March 31st.SOURCE: Quarterly Reports of Conditions and Income, Federal Financial Institutions Examination Council.

Despite Increase in Noncurrent C&I Loans, Asset Quality Remains Better in 11th District than U.S.

21

-5 -4 -3 -2 -1 0 1 2 3 4 5

Odessa (13.7%)Longview (6.1%)Midland (22.4%)

Beaumont-Port Arthur (0.7%)Wichita Falls (2.4%)

Corpus Christi (3.1%)San Angelo (3.6%)

Abilene (2.4%)Houston-Baytown-Sugar Land (3.4%)

Texarkana (0.2%)Amarillo (0.6%)

Sherman-Denison (0.7%)Tyler (2.1%)

Laredo (2.5%)Fort Worth-Arlington (1.8%)

Brownsville-Harlingen (0.1%)College Station-Bryan (2.2%)

El Paso (0%)Killeen-Temple-Fort Hood (0.2%)

Waco (0.3%)McAllen-Edinburg-Mission (1%)

San Antonio (0.9%)Austin-Round Rock (0.4%)

Lubbock (0.3%)Dallas-Plano-Irving (0.4%)

2016 Job GrowthNote: Data in parentheses are mining share of total employment in 2015.Sources: Texas Workforce Commission, Bureau of Labor Statistics, Federal Reserve Bank of Dallas.

Dallas-Plano-Irving (0.4%)

San Antonio (0.9%)

Houston-Baytown-Sugarland (3.4%)

Correlation: -0.68(2015 Correlation: -0.88)

Fort Worth-Arlington (1.8%)

Austin-Round Rock (0.4%)

Which Metros Performed the Best in 2016? Size of Energy Sector Explains a Lot

22

0.00

-0.26

0.15

0.33

-0.07

-0.07

0.35

1.05

1.48

-0.4 -0.2 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6

Average Weekly Hours

Help Wanted Index

Texas Stock Index

New Unemployment Claims

Well Permits

Real Oil Price

U.S. Leading Index

Texas Value of the Dollar

Net Change in Texas Leading Index

NOTE: Seasonally adjusted.SOURCE: Federal Reserve Bank of Dallas.

Net contributions to change in the Texas Leading Index(Feb. - Apr. 2017)

Texas Leading Index Components Mostly Positive

23

Texas Jobs Forecasted to Grow 2.0% to 3.0% in 2017

24

90

95

100

105

110

115

120

125

130

135

140

9.0

9.5

10.0

10.5

11.0

11.5

12.0

12.5

13.0

13.5

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18

Index, 1987=100

Leading Index

Texas nonfarm employmentand forecast

(with 80% confidence band)

SOURCES: Bureau of Labor Statistics; Texas Workforce Commission; Federal Reserve Bank of Dallas.

Millions, seasonally adjusted

53.05(Dec. '17)

33.17(Dec. '17)

84.86(Dec. '17)

0

20

40

60

80

100

Jan 2015 Jul 2015 Jan 2016 Jul 2016 Jan 2017 Jul 2017

WTI spot price

Futures prices (Mar 17)

95% futures confidence interval

SOURCES: Bloomberg; Energy Information Administration; calculations by FRB Dallas.

Dollars per barrel

Oil Futures Suggest Flat Prices, But Highly Uncertain

25

San Antonio Economy Remained Healthy in 2016, Modest So Far in 2017

26

-10

-5

0

5

10

15

2014 2015 2016 2017*

Total JobsHealthcareLeisure & HospitalityFederal Govt.

*Data is annualized Apr. 2017/Dec. 2016 SOURCES: Bureau of Labor Statistics; adjustments by FRB Dallas.

% Growth Dec./Dec. 2017 job growth 1.2% so far after 2.7% in 2016

Federal govt. weak, health care very strong over the last several years.

Leisure and hospitality soft so far after strong growth in prior years.

Despite a weak start, overall job growth in San Antonio likely to be 2.5% – 3.5% in 2017

How Did The Forecast Do Last Year?

27

90

95

100

105

110

115

120

125

130

135

140

9.0

9.5

10.0

10.5

11.0

11.5

12.0

12.5

13.0

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17

Index, 1987=100

Leading Index

Texas nonfarm employment, actual growth,and forecast

(with 80% confidence band)

SOURCES: Bureau of Labor Statistics; Texas Workforce Commission; Federal Reserve Bank of Dallas.

Millions, seasonally adjusted

Actual Growth of 1.2% Was Within 1.0-2.0% Range Predicted

In past two year Texas weakened sharply but continued to grow - did much better than 1980s and better than other energy states.

In second half of 2016 energy and manufacturing sectors stabilized and job growth picked up slightly.

Recently, more optimism in energy sector and a recovery in manufacturing.

Lots of uncertainty with new administration and trade impacts. Texas job growth likely to pick up in 2017.

Biggest risk to the forecast is sharp decline in oil prices or exports.

Summary

29

Public Resources from the Dallas Fed:

• Southwest Economy • Regional Economic Updates • San Antonio and Austin Economic Indicators • Texas Business Outlook Surveys • Energy Survey • National Economic Updates • International Economic Updates • Additional Research Publications and Data

Dallas Fed Publications

30