Is Texas immune if the rest of the nation goes into a recession in 2023?

Texas was one of the big winners of the pandemic economy, recovering its lost jobs faster than most and luring tens of thousands of workers and businesses from other states.

Its job growth has regularly surpassed the nation’s, usually by a healthy margin.

But this year’s edge turns out to be not as great as advertised, not after the numbers were revised and benchmarked by the Federal Reserve Bank of Dallas. That has implications for 2023, suggesting that Texas doesn’t have special immunity from broader economic threats.

“We’re not protected from a downshift in the U.S. economy,” said Luis Torres, senior business economist for the Federal Reserve Bank of Dallas. “We don’t have the extra buffer that we thought.”

Monthly jobs reports have shown employment growing over 50% faster in Texas than the U.S. overall. But after revisions, including a major adjustment from a second quarter census of employment and wages, the gap between Texas and the nation was just 0.3 percentage points this year.

“We’re not as cool as we thought we were,” Torres said.

While the energy sector remains a strength, there are major headwinds from inflation, higher interest rates and the slowdown in the housing market, he said. He and others expect Texas to follow its historical trend — growing jobs by about 2.1% or slightly less in 2023, down from 3.5% growth so far this year.

Signs of trouble have emerged, and Torres pointed to the Dallas Fed’s survey of Texas manufacturers. The survey’s new order index has been in negative territory for six straight months. In November, 37% of manufacturers reported a decline in new orders — twice as many as those reporting an increase — and that kind of negativity usually foreshadows a major slowdown in the state, he said.

So is Texas headed for recession? “It depends on what happens to the national economy,” Torres said. “But we’re definitely slowing down more than we thought.”

Comerica Bank’s Texas index declined a bit, down 0.6% on an annualized basis, for the three months ended in September. That compares with a 7% gain for the period a year earlier.

“2023 is going to be a below-trend year for the U.S., and Texas can’t escape that,” said William Adams, Comerica’s chief economist.

Rising interest rates have slowed migration from other states, he said, and domestic migration was a key contributor to Texas’ outsized growth.

“If a family in California can’t sell their house because it’s too expensive to afford, that makes it harder for them to move here,” Adams said.

The growth in Texas’ labor force has flattened since summer, and Adams expects Texas’ unemployment rate to rise in 2023 because businesses are starting to throttle back hiring.

Statewide, jobs in transportation and warehousing grew fast during the pandemic. But they peaked in July and have been flat for several months, another sign of the economy slowing since the Federal Reserve started jacking up interest rates.

“The story of 2023 will be all about the Fed — how far are they going to go?” said John Diamond, director of the Center for Public Finance at Rice University’s Baker Institute. “If they overshoot, they may tilt the economy into a recession.”

Even in that scenario, he believes Texas’ major metros will do OK — maybe rack up modest growth or at least avoid a large contraction. Texas remains an affordable option for workers and their companies, and its growth record is still a big draw.

“You benefit by being around other companies that are growing,” Diamond said. “It’s the talent, the human capital — and it’s more important than ever.”