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 Showing

Resilience to Energy Downturn

Keith Phillips

Assistant Vice President and Senior Economist

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

80

100

120

140

160

180

200

220

240

260

280

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Austin

McAllen

Laredo

San Antonio

Brownsville

Rest of Texas

U.S.

Index, Jan. 1990 = 100, SA

SOURCES: Bureau of Labor Statistics, Federal Reserve Bank of Dallas.

95

100

105

110

115

120

125

130

135

2010 2011 2012 2013 2014 2015 2016

Austin

McAllen

LaredoSan Antonio

Brownsville

Rest of Texas

U.S.

SOURCES: Texas Workforce Commission, Bureau of Labor Statistics, Federal Reserve Bank of Dallas.

Index, Nov. 2009 = 100, SA

Besides Austin, Job Growth Near or Below Rest of TX During Pre-2015 Recovery

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.

50

100

150

200

250

300

Note: Data adjusted to exclude temporary Census workers.Sources: Texas Workforce Commission, Bureau of Labor Statistics, Federal Reserve Bank of Dallas.

Index,Jan. 1995 = 100, SA

McAllen

Laredo

Brownsville

Rest of Texas

Austin

San Antonio

Historically Federal Government Civilian Jobs Have Grown Strongly on Border

This Year Most of South Texas Growing

Faster than Rest of State

• Energy and manufacturing decline hitting other areas much harder

• Health care strong along the

border, weak in Austin and San Antonio

• Federal government stronger

this year • With the exception of

Brownsville, metros’ growth outpacing the rest of the state this year

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Job Growth

Austin

San Antonio

Brownsville

Laredo

McAllen

Rest of TX

Percent, Annualized YTD

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

0

2

4

6

8

10

12

Note: Data are adjusted for annual BLS occupational reclassifications.Sources: Bureau of Labor Statistics; Texas Workforce Commission; Federal Reserve Bank of Dallas.

Percent Share of Total Jobs, SA

McAllen

Laredo

Brownsville

Rest of Texas

10.6%

5.1%

9.3%

1.9%

Weak Peso Has Been A Drag on Border Retail Sales

0.5

0.6

0.7

0.8

0.9

1

1.1

1.2

1.3

1.4-20

-15

-10

-5

0

5

10

15

20

1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Border Retail Sales

Percent Change, Y/Y

Dollar/Peso Real Exchange Rate (Inverted)

Real Exchange Rate

Tight Credit Conditions Likely Impacting Housing Growth in South Texas Border

0

200

400

600

800

1,000

1,200

1,400

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

Total TX Permits,5MMA, SA

Total Border Permits,5MMA, SA

Brownsville,Laredo, McAllen

Rest of Texas

Sources: Census Bureau; Haver Analytics; Federal Reserve Bank of Dallas.

Growth in Northern Mexico Likely Source of Strength for Border Region

60

70

80

90

100

110

120

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Index, Jul. 2007 = 100

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.

South Texas Border Employment

Northern Mexico Border Employment

• 2016 job growth accelerating in Laredo and McAllen, slowing in Brownsville.

• Education and health care jobs continuing to grow strongly this year.

• Federal gov’t picking up sharply after weakness over the past several years.

• Retail jobs remain weak; very slow growth since the strengthening of the dollar began mid-2014.

• Growth in South Texas border MSAs likely to average around 1.5% – 2.5% this year, 2.0 – 3.0% in 2017.

Border Economy Improving in 2016

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

2014 2015 2016*

Brownsville

Laredo

McAllen

% Growth, Dec/Dec

*Annualized through Sept 2016

San Antonio

Energy Activity has Less Impact on San Antonio than Rest of State

0

50

100

150

200

250

300

-5

-4

-3

-2

-1

0

1

2

3

4

5

2004 2006 2008 2010 2012 2014 2016

San Antonio

Texas

Y/Y job growth

NOTE: Eagle Ford rig count data not available prior to 2007.SOURCE: Bureau of Labor Statistics, Baker Hughes, Federal Reserve Bank of Dallas.

Eagle Ford Rig Count

Number

• 2016 job growth at 2.0% so far after 2.8% in 2015

• Federal govt. accelerating this year.

• Health care and construction holding steady after strong expansion in last two years.

• Retail, leisure and hospitality weaker, possible spillover effects from Eagle Ford.

• Overall job growth in San Antonio likely to be 2.0 – 2.5% this year and 2.5 – 3.0% in 2017

-4

-2

0

2

4

6

8

10

2014 2015 2016*

Total Jobs

Healthcare

Construction

Federal Govt.

*Annualized through Sept. 2016

San Antonio Economy Softening Somewhat in 2016

% Growth Dec./Dec.

Austin

Austin Technology Services Employment Continues to Outpace Overall Job Growth

60

80

100

120

140

160

180

200

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.

High-tech services

Index, Jan. 2005 = 100

Total nonfarm

High-tech manufacturing

• 2016 job growth down to 1.5% so far this year from 4.6% last year.

• High tech services growth slowing but remain strong.

• Finance and government accelerating from last year.

• Manufacturing, health care shedding jobs; leisure and hospitality and retail still growing but are very weak

• Overall job growth likely to be about 2.0% this year – 3.0 to 4.0% next year

Austin Economy Slowing in 2016

-15

-10

-5

0

5

10

15

2014 2015 2016*

*Annualized through Sept. 2016

% Growth Dec./Dec.

Total jobs

Manufacturing

Prof., scientific, & tech. svcs

Leisure and hospitality

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