Texas Economy Strengthens as Omicron Fades; Costs and Wages Rise Further

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The Texas economy, paced by expansion within the service sector, grew strongly in February as the impact of the omicron variant of COVID-19 faded, data from the Texas Business Outlook Surveys ("TBOS") indicated. Wage and price pressures continued and, together with recent geopolitical events, challenge firms’ outlooks.

Manufacturing activity decelerated slightly in February but still exhibited above-average output growth. Texas employment grew at a 3.6 percent month-over-month annualized rate in January, considerably above Texas’ average long-run job growth of 2 percent but slower than the 5.4 percent pace in 2021 (Chart 1).

Goods-producing employment fell slightly as construction jobs declined 5.3 percent and manufacturing employment increased just 0.9 percent. Energy employment grew an impressive 18.1 percent.

Services Employment Paces Growth

Service sector employment grew 4.2 percent in January, up from 2.5 percent in December. The expansion was widespread, with leisure and hospitality rising 7.9 percent and trade and transportation up 5.4 percent.

 The Federal Reserve Bank of Dallas employment forecast for 2022 (December to December) estimates the number of jobs in Texas will increase 2.9 percent in 2022, amounting to 382,000 new positions. However, increasing uncertainty due to persistent supply-chain woes, high inflation and the prospect of additional problems arising from Russia’s invasion of Ukraine may present future challenges.

Supply-Chain Problems Endure

Supply-chain issues continue, respondents to February’s TBOS special questions indicated. There was improvement within the service sector, as 55 percent of respondents experienced supply-chain disruptions or delays compared with 62 percent in November.

However, manufacturers indicated no improvement—92 percent of respondents continue to experience supply-chain disruptions or delays (Chart 2).

Texas firms with international supply chains are more exposed to disruptions—93 percent of TBOS firms with foreign suppliers are experiencing supply-chain disruptions, compared with 34 percent of firms with only domestic suppliers.

Affected companies are attempting to broaden their supply base, looking domestically for alternatives, substituting other inputs and increasing inventories. Several respondents noted that costs will rise as a result.

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

Supply-chain disruptions are likely to worsen because of the Ukraine–Russia conflict and will push prices higher. Risk factors include further disruptions to global manufacturing logistics networks affecting, among other items, supplies for wire and plastics, coils, capacitors and ignition systems.

As a result, Texas’ electronics-related production may continue slowing. Deliveries of electronics represent about 25 percent of the state’s total exports. Conversely, Texas energy-related production and oil and gas exports may increase if global demand for U.S. energy products rises because of the conflict in Ukraine and reduced Russian oil and gas exports.

Persistent Price Increases

Supply-chain disruptions and labor shortages continue pushing prices and wages higher. Selling-price and input-price pressures again increased in February for manufacturing and remained near record levels for services (Chart 3). Wage and benefit growth also remained elevated (Chart 4).

Price Pressures Vary Across Metros

High regional inflation has accompanied persistently rising 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 in the nation, inflation in Houston is lower (Chart 5).

Housing and housing-related costs are largely responsible for the price growth differential between DFW and Houston. Overall housing costs—which includes shelter, utilities and rent—represents about one-third of overall household expenditures.

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

About the Authors

Jesus Cañas

Cañas is a senior business economist in the Research Department at the Federal Reserve Bank of Dallas.

James Lee

Lee is a research analyst in the Research Department at the Federal Reserve Bank of Dallas.