The Texas economy is heading for a “soft landing” this year with slower-than-normal job growth, according to a forecast by the Federal Reserve Bank of Dallas.
The bank is predicting a below-trend 1.4% increase in jobs in the Lone Star State this year – a significant slowing from last year’s 3.5% pace. Texas’ annual job growth is typically around 2%.
“That is consistent with a soft landing,” said Dallas Fed vice president and senior economist Pia Orrenius during a Friday webcast on the Texas economy.
The Dallas Fed expects Texas employers to create 193,000 new jobs this year, with an estimated 13.7 million Texans working by year’s end.
In 2022, the state added 650,100 jobs with 14 million Texans working at year’s end, according to U.S. Bureau of Labor Statistics. BLS is likely to report revisions to those totals in the coming months.
The Fed, which benchmarks the data and makes seasonal adjustments more frequently than BLS, pegged the state’s jobs gain at 452,000 jobs in 2022 with 13.5 million in the labor force at the end of the year.
The bank’s outlook for 2023 took into account the state’s decelerating month-over-month job growth last year, as well as slowing growth in both the manufacturing and services sectors.
“The summary is that the Fed’s speed bumps are having the intended effect,” Orrenius said, referencing the Federal Reserve’s interest rate hikes intended to slow the U.S. economy and tamp down inflation.
“Although with the caveat of [Friday’s] jobs report, perhaps,” she added.
Friday’s U.S. jobs report showed a hot labor market, with a surprisingly robust 517,000 jobs added by America’s employers in January.
In Texas, the sector with the greatest job growth last year was oil and gas, which grew 12.7% but is still not back to pre-pandemic levels, Orrenius said.
“Difficulty finding workers is a theme,” she said, noting that workers are increasingly looking for work-from-home jobs while employers are increasingly searching for workers who want to come into an office.
Among the state’s big metro areas, Austin was 2022′s overachiever, recording a 4.2% job growth rate, followed by Houston at 3.7% and Dallas-Fort Worth at 3.4%.
There aren’t many measures for consumer demand at the state level, Orrenius pointed out.
But the state’s sales tax revenue slowed sharply in mid-2022 as a result of Fed rate hikes and a slowing economy, she said. In general, loan volumes are down as well due to weaker demand and tighter credit standards.
Home sales and prices also indicate a slowing economy, with prices having peaked in mid-2022, she said.
“We’ve never seen a decline in home sales to the extent we’re seeing now both in terms of magnitude and rapidity,” Orrenius said.
But after the sharp increase in home prices during the pandemic, there was room for prices to come down, meaning the decline shouldn’t cause panic, she said. Rent, which shot up during the pandemic, is coming down as well, she said.
“Real estate is an interest rate sensitive sector and so they’re going to be the most impacted by rate hikes and we’re certainly seeing it in the single-family home market,” she said.
Inflation is coming down on a month-to-month basis but is still too high, far above the 2% target and the highest it has been since the early 1980s, Orrenius said. Inflation tends to be higher in Texas because the state grows at a faster rate than the nation.
Texas expands about a percentage point faster than the nation in job growth, partly due to strong migration into the state, she said.
“Inflation erodes the purchasing power of your paycheck,” she said. “It’s that insidious tax on individuals, especially workers or people on a fixed income, so I think that’s why the Fed is so focused on inflation.”
If the U.S. goes into a full-blown recession, Texas typically isn’t immune, she said. If it’s a mild recession, there’s a chance Texas will sidestep it because it has a “growth premium over the nation” that’s highly reliant on people moving here, she said.
And when a downturn comes, migration to Texas will fall and act as a “shock absorber,” she said.
“But if the U.S. were to go into a deep recession, then the story would be different,” she said. “We would surely follow.”
Correction: An earlier version of this story contained an incorrect reference to next year in the first paragraph. The forecast is for this year.