Texas’ economy continues to bounce back with strength in manufacturing, service sectors

As the Texas economy continues to bounce back from pandemic turmoil, there are signs that the state’s service and manufacturing sectors are making solid progress.

That’s the upshot from new surveys from the Federal Reserve Bank of Dallas indicating that both sectors did well in March.

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. The sector accounts for nearly 70% of the state’s economy and employs about 8.6 million workers, according to the Dallas Fed.

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“Texas service sector growth continued at a robust pace in March, as revenue and labor market indicators remained at elevated levels,” said Christopher Slijk, Dallas Fed associate economist.

However, “price and wage pressures accelerated, and both the input and selling price indexes reached all-time highs for the survey,” he said. “Business sentiment on current conditions remained positive, although outlook uncertainty surged.”

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The state revenue index, a key measure of the service sector, inched up slightly to 23.4, its best reading since last fall. Positive readings indicate expansion, while negative readings indicate contraction. In March 2020, in the early days of the pandemic, the index slumped to a reading of negative 66, its lowest since 2007.

“Higher energy prices usually translate to increased profitability for energy companies, which results in more engineering work,” said one respondent to the anonymous survey, who works in the professional services industry.

But challenges remain. “I use natural gas in my restaurant,” said a respondent. “I used to pay $420 per month on average, today I am paying $748 on average.”

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Another executive in restaurant services added: “Living again in uncertain times, price increases again, gasoline price increase affects everything, all my vendors increase prices because of the high price in gasoline, gasoline prices drive all the other items up.”

The Dallas Fed survey of the service sector includes a retail section, focused on information from respondents in retail and wholesale businesses. The retail survey found business stalled in March.

“Texas retailers reported weakness in March, with the survey’s sales index suggesting a slight decline in activity,” Slijk said. “Labor market indicators softened but were positive, and expectations were pessimistic compared with February.”

Despite a rise in uncertainty, retail respondents’ expectations regarding future business activity continued to reflect optimism, the report said.

“Future service sector activity indexes such as employment and capital expenditures increased or remained elevated, suggesting robust growth over the next six months,” it said.

Manufacturing still going strong

Meanwhile, manufacturing activity in the state continued its strong recovery, according to the Dallas Fed.

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.

This comes as the unemployment rate in the Austin metro area came in at 3.3% in February, identical to January and indicative of an environment in which businesses are struggling to hire and retain enough workers to keep up with booming demand. Economists said most people who want a job likely have one.

“Most of the employers that I interact with, their biggest concern is they can’t find enough people to do the jobs —  they need more people,” said Jason Schenker, president of Austin-based Prestige Economics. “The Austin job market is exceptionally strong right now” for people looking for work.

But Austin’s labor force has increased by several thousand people since December amid what has been huge demand for workers locally and a continuing influx of new businesses and residents to the area.

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

  • The production index, a key barometer of manufacturing activity, came in at 13.2, indicative of slightly above-average output growth.
  • Labor market measures indicated robust employment growth and longer work weeks.
  • The new orders index held steady at 20, suggesting a continuation of elevated growth in demand.
  • The general business activity index fell five points to 8.7, a reading still well above average.

“Expansion continued this month in the Texas manufacturing sector despite significant headwinds from supply-chain disruptions,” said Emily Kerr, Dallas Fed senior business economist. “Hiring picked up notably, and wage growth soared to new highs amid continued labor market tightness.”

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Fuel prices and inflation continue to affect the industry, and executives said there is no end in sight.

“Shipping charges increase the price of everything on top of existing price increases,” said one respondent in computer and electronic product manufacturing.

A respondent in transportation equipment manufacturing said: “Our customers are owners of ambulance fleets, and a significant portion of their operating costs is fuel. So rising gas prices are causing our customers to reallocate fixed budgets, resulting in a loss of new orders for ambulances and related parts and services.”

American-Statesman reporter Bob Sechler contributed to this report.

Read More: Texas’ economy continues to bounce back with strength in manufacturing, service sectors

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