Economist Keith Phillips of the Federal Reserve Bank of Dallas dismissed fears of a recession coming on the heels of a strong economy the past few years but said a slowdown seems to be on the horizon.
San Antonio business, banking, and community leaders had a front-row seat Tuesday for the unveiling of the state’s yearly economic outlook. Phillips, a 35-year Dallas Fed staffer, is based in the San Antonio office of the economic research and policy agency and delivered his predictions for 2019 during the annual economic outlook luncheon hosted here.
“Conditions have changed so it’s interesting to see where we’re headed,” Phillips said. “It seems like there’s been greater interest in what’s going on the last couple months with oil prices falling and stock market volatility we’re facing. Those types of things have gotten people a little bit nervous about what lies ahead after several years of growth.”
Phillips opened his presentation with a brief overview of national economic conditions, saying that only when oil prices swing very high or very low does the state differ much from the overall U.S. economy.
“The U.S. economy has been very strong and one reason why Texas has done well,” he said. “Texas usually grows, in terms of job growth, one percentage-point faster than the nation. Despite the uncertainty and volatility in the stock markets, and narrowing of the yield spread, most economists still expect the economy to continue to do well this year, just not as well as last year.”
In 2017, oil prices stabilized and the energy and manufacturing sectors began to improve, and that spurred a pickup of job growth in Texas.
Houston’s strong economy and the oil industry have been contributing to statewide job growth in 2018. Tight labor markets in Dallas and San Antonio account for Texas’ slowing job growth, but Phillips was quick to add that the data is from June of last year and results could change when numbers from the last half of the year are analyzed.
“The [cities] that have the lowest unemployment rates have seen the greatest slowing,” he said. “The only exception to that is Austin. That’s because Austin can attract workers more easily than San Antonio, even Dallas probably, although Dallas has been attracting a lot of corporate moves lately.”
Trade battles with China and Mexico also may continue to impact the Texas economy. Texas is the largest export state and has the fourth-highest percentage of jobs tied to exports of any state. In 2018, Texas export numbers continued to climb.
“But with things going on in terms of trade policy, tariffs are going to have impacts on the cities of Texas due to the importance of trade to our economy,” Phillips said. “And if the dollar remains as strong as it is, then I expect some weakening in the growth of exports.”
Phillips also said construction activity in the state has continued to grow well, though there’s been some weakening in residential construction, such as in single-family home starts and multifamily permits.
If mortgage rates keep dropping, it could provide some stimulus in that sector. “But home price increases in the last 10 years have pushed affordability down, and we think that’s going to have an effect on overall building activity in residential,” Phillips said.
Phillips again turned to the decline in oil prices, calling them “the big elephant in the room,” a trend that began occurring in late December. In the Dallas Fed’s annual energy survey, the largest in the country, oil and gas company executives said they expected that business activity would drop off in the fourth quarter of 2018.
Historically, there has been a three-month lead time between oil prices and the rig count, a leading indicator of oil consumption and demand. “So I think it’s reasonable to expect … slower job growth from oil prices in the second quarter of this year,” Phillips said. “If energy doesn’t grow as much as last year, there will be a dampening effect of overall job growth.”
If you live in Texas, you are impacted by the energy sector, Phillips noted, and a recession in Texas would likely occur only if the price per barrel dropped from its current $50 to $20 or $30. “And that’s because Texas is quite diverse – we have a lot of other things going on,” he said.
In those other sectors, he said, positive job growth will continue, just not as strong.
“Overall, we’ve seen a decline in the Texas leading index,” he said. “But some of the dampening of job growth hasn’t been because of demand or oil prices. It’s simply because we don’t have enough workers.”
All in all, Phillips said, he thinks 2019 is going to be a good year for the state of Texas and San Antonio.
“San Antonio remained healthy last year,” he said. Though some sectors were weak due to the tight jobs market, “overall job growth in San Antonio will be similar to the state as a whole, somewhere between 1 and 2 percent.”
Yet unemployment can be a problem when it comes to economic development, said Jenna Saucedo-Herrera, president of the San Antonio Economic Development Foundation. In some of the city’s industries, especially tech and manufacturing, there aren’t enough qualified workers for the number of job openings that exist.
“His comments on the low unemployment rate and that being a challenge for job growth are significant,” she said. “The challenge is going to be, with our population growth, figuring out a way to capitalize on it and align the organic growth, developing our local workforce and of course, the new traffic in San Antonio, with the target industries we’re focused on.”