Texas economy sees mixed recovery as service sector slows while manufacturing expands

While the Texas economy continues to recover amid the grueling coronavirus pandemic, there are signs that the state's service sector still faces challenges.

That's the upshot of a new survey from the Federal Reserve Bank of Dallas indicating the performance of the service sector fell notably in January.

However, manufacturing activity in the state continued to increase, albeit it at a slower pace, according to business executives responding to a similar Dallas Fed survey of the manufacturing sector.

The Texas service sector — which includes retail and hospitality-related businesses as well as professional and technical services — has experienced an up-and-down performance in recent months, with the pace of expansion slowing in January, according to the Dallas Fed's latest reading.

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Private service-providing companies account for nearly 70% of the state's economy and employ about 8.6 million workers, according to the Dallas Fed.

“Growth in Texas service sector activity slowed sharply in January, with revenue and labor indicators decelerating compared with December,” said Christopher Slijk, a Dallas Fed associate economist. “Price pressures advanced from last month’s already-elevated levels, and wage pressures increased to a record high for the survey. Outlook uncertainty increased sharply.”

The state revenue index, a key measure of the service sector, declined 18 points to 2.8, its lowest reading since early 2021. A March 2020 reading of negative 66 was the lowest since 2007.

Positive readings indicate expansion, while negative readings indicate contraction.

Currently, labor market indicators suggest slower job growth and a lengthening of average hours worked by employees, according to the survey.

"Sales volume is low," said one respondent to the anonymous survey, who works for a financial firm. "Employees are leaving for so-called better wages. It is hard to hire any kind of replacements with skills."

The Dallas Fed survey of the service sector includes a retail section based exclusively on information from respondents in retail and wholesale businesses.

“Texas retail activity plunged in January, with the survey’s sales index falling to a three-month low,” Slijk said. “Employment grew at a slower pace, and retailers’ outlooks were pessimistic.”

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On a brighter note, Central Texas is currently undergoing a manufacturing boom, led by electric automaker Tesla, which has made Austin its headquarters. The company is building a $1.1 billion manufacturing facility in southeast Travis County, where it recently began production of its Model Y electric SUVs.

In addition, tech giant Samsung recently picked a site near Taylor to build a $17 billion semiconductor manufacturing facility.

Among the takeaways from the Dallas Fed survey of manufacturers statewide:

• The production index, a key barometer of manufacturing activity, came in at 16.6. That marks an eight-month low but still indicates above-average growth.

• The new orders index held steady at 20, suggesting a continuation of elevated growth in demand.

• Labor market measures indicated robust employment growth and longer work weeks.

• The general business activity index remained positive but eased six points to 2.0.

“Expansion in the Texas manufacturing sector continued but at a slower clip this month. Demand and employment growth remained elevated, as did wages and prices,” said Emily Kerr, Dallas Fed senior business economist. “Outlooks improved modestly, with the index coming in slightly above zero, though uncertainty escalated amid the omicron surge.”

For many manufacturers in the state, difficulties remain.

"We are at capacity, people and equipment wise," said a survey respondent from the fabricated metal industry. "Retirements (two out of 31 employees, with no replacements currently available) and very few new applicants have affected productivity."

A transportation equipment manufacturing executive added: "COVID was a plus and minus. It boosted market demand for our products, but supply and personnel problems increased our costs and inhibited our ability to supply the demand."

Meanwhile, the Dallas Fed also released a new report this week forecasting that job growth in the state will climb 3% in 2022. Employment last year climbed 5.1%, on the heels of a 4.5% decline in 2020 when the initial blow from the coronavirus pandemic first slammed the economy.

Based on the forecast for this year, 389,300 jobs will be added in the state and employment in December 2022 will total 13.4 million.

The Dallas Fed said job growth statewide slowed in December amid surging COVID-19 cases but is poised to pick up in the first quarter this year because infections from the omicron variant appear to be peaking.

In the Austin area, the unemployment rate recently slipped below 3% for the first time since the coronavirus pandemic began, coming in at 2.9% in December as the surging local economy continued to buck the damper of the fast-spreading omicron variant of the virus.

But the latest local figures did include signs that omicron could be having a negative impact on some business activity in the region — with jobs in the leisure and hospitality sector dropping slightly for the first time in five months and the labor force down by a small amount overall compared with November.

On the whole, however, economists called the sub-3% jobless rate the latest indication that the Austin area is booming and that local employers in many industries are hiring new workers as fast as they can find them.

"Austin is still the hottest job market in the country, perhaps of any major metro area," said Peter Rodriguez, dean of Rice University's Jones Graduate School of Business. "It is hard to imagine a major metro market with the ability to run any hotter than Austin is right now."

Statesman reporter Bob Sechler contributed to this report.