South Texas Economy Showing Resilience to Energy Downturn

Keith Phillips Assistant Vice President and Senior Economist

The views expressed in this presentation are strictly those of the presenter and do not necessarily reflect the positions of the Federal Reserve Bank of Dallas or the Federal Reserve System. Any secondary distribution of this material is strictly prohibited. South Texas Economy Diverse

• Divide region into three key areas – The South Texas Border, San Antonio and Austin. Each has its own industry makeup and key drivers. • In general this area is less sensitive to energy extraction and manufacturing and more sensitive to government spending. • During most of expansion, region slightly lagged state with exception of Austin. This year better than state due to less sensitivity to oil industry.

Since 1990, South Texas Has Added Jobs Faster Than The Rest of Texas

Index, Jan. 1990 = 100, SA 280

260 Austin

McAllen 240 Laredo 220

200 Brownsville

180 San Antonio

160 Rest of Texas 140

U.S. 120

100

80 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 SOURCES: Bureau of Labor Statistics, Federal Reserve Bank of Dallas. Besides Austin, Job Growth Near or Below Rest of TX During Pre-2015 Recovery

Index, Nov. 2009 = 100, SA 135

130 Austin

125

120 San Antonio Laredo Rest of Texas 115 McAllen Brownsville 110 U.S.

105

100

95 2010 2011 2012 2013 2014 2015 2016 SOURCES: Texas Workforce Commission, Bureau of Labor Statistics, Federal Reserve Bank of Dallas. Service-Producing Sectors an Important Source of South Texas Economic Growth

Austin Brownsville Laredo McAllen San Antonio Rest of TX Mining 0.82 0.20 4.59 1.76 1.57 5.02 Manufacturing 0.72 0.50 0.09 0.31 0.56 0.95 Retail 0.98 1.24 1.22 1.38 1.06 1.00 Transportation and Warehousing 0.54 0.96 4.31 1.02 0.90 1.32 Professional and technical services 1.59 0.29 0.41 0.31 0.80 1.01 Computer systems design and related svcs 2.46 0.06 0.05 0.07 0.55 0.99 Management and technical consulting svcs 1.86 0.28 0.99 0.35 0.89 1.16 Leisure and hospitality 1.17 1.00 1.03 0.87 1.22 0.96 Health care and social assistance 0.85 2.04 1.20 1.94 1.22 0.97 Home health care services 0.77 11.75 6.32 10.14 2.76 2.07 Federal Government 0.66 1.22 1.69 0.84 1.87 0.76 State and Local Gov't 1.20 1.46 1.41 1.56 1.00 0.98 NOTE: Data from 2015; location quotients measure the ratio of employment share locally to employment share nationally. SOURCE: Texas Workforce Commission; Bureau of Labor Statistics; Federal Reserve Bank of Dallas. Historically Federal Government Civilian Jobs Have Grown Strongly on Border

Index, Jan. 1995 = 100, SA 300

Laredo 250 Brownsville McAllen

200

150

Austin

100 Rest of Texas San Antonio

50

Note: Data adjusted to exclude temporary Census workers. Sources: Texas Workforce Commission, Bureau of Labor Statistics, Federal Reserve Bank of Dallas. This Year Most of South Texas Growing Faster than Rest of State

• Energy and manufacturing Percent, Annualized YTD decline hitting other areas 3.0 much harder 2.5 • Health care strong along the border, weak in Austin and San 2.0 Austin Antonio San Antonio 1.5 Brownsville • Federal government stronger Laredo this year 1.0 McAllen Rest of TX 0.5 • With the exception of Brownsville, metros’ growth 0.0 outpacing the rest of the state Job Growth this year SOURCES: Bureau of Labor Statistics, FRB Dallas.

South Texas Border Home Health Care Big Part of Border Job Growth From Early 1990s to About 2012

Percent Share of Total Jobs, SA 12

Brownsville 10.6% 10 McAllen 9.3%

8

6 Laredo 5.1% 4

2 Rest of Texas 1.9%

0

Note: Data are adjusted for annual BLS occupational reclassifications. Sources: Bureau of Labor Statistics; Texas Workforce Commission; Federal Reserve Bank of Dallas. Weak Peso Has Been A Drag on Border Retail Sales

Percent Change, Y/Y Real Exchange Rate 20 0.5

15 Border Retail Sales 0.6 Dollar/Peso Real Exchange Rate (Inverted) 0.7 10

0.8 5

0.9 0 1

-5 1.1

-10 1.2

-15 1.3

-20 1.4 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 Tight Credit Conditions Likely Impacting Housing Growth in South Texas Border

Total TX Permits, Total Border Permits, 5MMA, SA 5MMA, SA 20,000 1,400

18,000 1,200 16,000

14,000 Rest of Texas 1,000

12,000 800

10,000 Brownsville, 600 8,000 Laredo, McAllen

6,000 400

4,000 200 2,000

0 0

Sources: Census Bureau; Haver Analytics; Federal Reserve Bank of Dallas. Growth in Northern Mexico Likely Source of Strength for Border Region

Index, Jul. 2007 = 100 120

South Texas Border 110 Employment

100 Northern Mexico Border Employment

90

80

70

60 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 NOTE: South Texas includes Laredo, Brownsville, and McAllen. Northern Mexico Border includes Nuevo Laredo, Matamoros, and Reynosa. SOURCE: INEGI, Bureau of Labor Statistics, adjustments by FRB Dallas. Border Economy Improving in 2016

• 2016 job growth accelerating in Laredo and McAllen, slowing in % Growth, Dec/Dec 4.5 Brownsville. 4 • Education and health care jobs 3.5 Brownsville continuing to grow strongly this year. 3 Laredo • Federal gov’t picking up sharply after 2.5 McAllen weakness over the past several years. 2

1.5 • Retail jobs remain weak; very slow 1 growth since the strengthening of the dollar began mid-2014. 0.5 0 • Growth in South Texas border MSAs 2014 2015 2016* likely to average around 1.5% – 2.5% *Annualized through Sept 2016 this year, 2.0 – 3.0% in 2017. San Antonio Energy Activity has Less Impact on San Antonio than Rest of State

Y/Y job growth Number 5 300

Texas 4

250 3 San Antonio 2 200

1

0 150

-1

100 -2 Eagle Ford Rig Count -3 50

-4

-5 0 2004 2006 2008 2010 2012 2014 2016 NOTE: Eagle Ford rig count data not available prior to 2007. SOURCE: Bureau of Labor Statistics, Baker Hughes, Federal Reserve Bank of Dallas. San Antonio Economy Softening Somewhat in 2016

% Growth Dec./Dec. • 2016 job growth at 2.0% so far after 2.8% in 2015 10 Total Jobs Healthcare • Federal govt. accelerating this year. 8 Construction Federal Govt. 6 • Health care and construction holding steady after strong expansion in last 4 two years. 2 • Retail, leisure and hospitality weaker, possible spillover effects from Eagle 0 Ford. -2 • Overall job growth in San Antonio -4 likely to be 2.0 – 2.5% this year and 2.5 – 3.0% in 2017 2014 2015 2016* *Annualized through Sept. 2016 Austin Austin Technology Services Employment Continues to Outpace Overall Job Growth

Index, Jan. 2005 = 100 200

High-tech services

180

160

Total nonfarm

140

120

100 High-tech manufacturing

80

60 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 NOTE: Data are seasonally adjusted, dashed lines represent estimates based on broader industry data. SOURCE: Texas Workforce Commission; Bureau of Labor Statistics; adjustments by Dallas Fed. Austin Economy Slowing in 2016

• 2016 job growth down to 1.5% so far this year from 4.6% last year. % Growth Dec./Dec. 15 • High tech services growth slowing but remain strong. 10

• Finance and government accelerating 5 from last year.

0 • Manufacturing, health care shedding jobs; leisure and hospitality and retail Total jobs -5 still growing but are very weak Manufacturing Prof., scientific, & tech. svcs -10 Leisure and hospitality • Overall job growth likely to be about 2.0% this year – 3.0 to 4.0% next year -15 2014 2015 2016* *Annualized through Sept. 2016

Summary and Conclusions

• Historically job growth has been strong in South Texas • Metros areas in region have common and unique features • This year, Austin and San Antonio slowing • South Texas Border improved but still below long- term trend. • Despite current weakness, outlook is generally good: job growth in the major regions of South Texas will surpass the rest of the state in 2016 and 2017 – exception is counties in the Eagle Ford