Unemployment Rate in San Antonio at Its Floor

The unemployment rate in San Antonio in July was at a seasonally adjusted rate of 3.2%. Since May 2017, it has been in the range of 3.1-3.5% each month. This is about as low as the unemployment rate has ever been in San Antonio since January 1990, as far back as the data goes. The lowest it ever got was in March and May 1999 when it reached 2.9% in each of those months.

As shown in the graph, for about the past year, the unemployment rate has been near the level it was during the dot come bubble leading into the recession in 2000 and about one-half to almost a full percentage point lower than the unemployment rate during the housing bubble preceding the Great Recession.

It seems to me that the San Antonio economy has been at its full-employment level of unemployment, so it is most likely the unemployment rate will only be going up over the next year or so. It may continue to hover in the aforementioned range for several months, but it appears to have hit its floor.

 

Unemployment SA July 2018

 

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Yield Curve Continues to Trend Toward Inverting – Strong Indicator of Recession

Yesterday The New York Times published an article titled, “What’s the Yield Curve? ‘A Powerful Signal of Recessions’ Has Wall Street’s Attention” (https://www.nytimes.com/2018/06/25/business/what-is-yield-curve-recession-prediction.html). If you have the time, it is worth a read because the author, Matt Phillips, discusses the importance of the yield as a predictor of recessions. As I have discussed in at least one previous blog post, the yield curve is one of the best indicators of recessions. As Phillips notes, “every recession of the past 60 years has been preceded by an inverted yield curve, according to research from the San Francisco Fed.”

The graph below shows the yield curve through June 25, 2018. The gray bars indicate recessions, so the relationship between the inversion of the yield curve and recessions is pretty clear. It is also pretty clear that the yield curve is trending toward flattening (i.e., approaching zero in the graph). As noted in the article, the inversion of the yield curve does not give much of an indication of when the recession will occur, except that it will be in the fairly near future. As I have mentioned before, I think we will see the U.S. economy dip into recession by late 2019 at the earliest or sometime in 2020.

Yield curve thru 6-25-18

 

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U.S. Economic Expansion Now Second Longest in History

The U.S. economic expansion is now the second longest in history at 107 months.

Of course, this is great, but I think we also have to consider the possibility that the economy is going to run out of steam in the near future and start to go in another direction.

My thought is that by the end of 2019 or at least in 2020, this will start to occur. As shown in the following table, the expansion will be the longest in history if it keeps going through the middle of next year. Despite the nonsense spewed by some renowned economists before the Great Recession, we were reminded that expansions do not go on forever.

The business cycle is clearly not dead, and this expansion is likely to end in the near future.

US Economic Expansion thru May 2018

Forecast of the San Antonio Economy as Presented to the GFOAT

I gave a speech today to the San Antonio chapter of the Government Finance Officers Association of Texas on the San Antonio economy. I will pull out specific charts and talk about them in detail over the next couple of weeks, but here is the entire speech for now. In short, the economy looks strong and should continue to be strong for the next year or so, but I think the probability of another recession starting within the next couple of years is pretty high.

Steve

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Credit Cycle Starting to Worsen

I have been saying for the past few months that I think we are likely to have a recession within the next couple of years. One reason for this is that it seems the credit cycle is starting to reverse itself, especially as it relates to consumer credit.

The following four graphs pulled from the Federal Reserve Economic Database give some indication of this. As shown in Charts 1-3, delinquency rates for other consumer loans, credit card loans, and consumer loans declined pretty steadily since the economic recovery began, but since 2015, the delinquency rates have started to rise.

Furthermore, the increase in delinquencies seems to pick up pace in 2016 for all of the categories of loans with consumer loans and credit card loans maintaining the increase through 2017. Delinquencies in automobile loans have also been rising (see here).

On the positive side, delinquency rates on single-family mortgages appear to continue to decline (see Chart 4). This might just indicate that consumers are clearly financially stressed, but they are continuing to pay their mortgages on time in an attempt to at least keep their homes. If the economy does go into recession, we will see delinquency rates rise on mortgages, as well.

Consumers under financial stress are not likely to maintain their strong spending patterns, and since consumer spending is two-thirds of gross domestic product, a slowdown in consumer spending is not going to bode well for continued economic growth.

On the commercial side, the credit market seems to be fairly strong as delinquency rates are continuing to fall. It is just a matter of time, though, before this trend reverses course, too. If consumer spending starts to decline, this means goods and services will go unsold, eventually causing businesses to decrease production as inventories increase and demand for services falls. With less revenues flowing into the business, we will likely see delinquency rates start to rise. A recession cannot be far away at this point.

Chart 1. Delinquency Rate on Other Consumer Loans, All Commercial Banks (Seasonally Adjusted – gray bars indicate recessions)

Delinqunecy Rate on Other Consumer Loans All Commercial Banks

Chart 2. Delinquency Rate on Credit Card Loans, All Commercial Banks (Seasonally Adjusted – gray bars indicate recessions)

Delinquency Rate on Credit Card Loans All Commercial Banks

Chart 3. Delinquency Rate on Consumer Loans, All Commercial Banks (Seasonally Adjusted – gray bars indicate recessions)

Delinquency Rate on Consumer Loans All Commercial Banks

Chart 4. Delinquency Rate on Single-Family Residential Mortgages, All Commercial Banks (Seasonally Adjusted – gray bars indicate recessions)

Delinquency Rate on SF Mortgages All Commercial Banks

Maybe this is all just a regression to the historical mean, but I think these trends are a bit concerning and worth watching.

Steve

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San Antonio 2018 Economic Forecast

I had the pleasure and honor of being on a panel at an event this past Friday hosted by Texas CEO Magazine in partnership with the Bill Greehey School of Business at St. Mary’s University in which I presented my economic forecast for the San Antonio economy in 2018.

The presentation can be found here.

Employment growth in San Antonio remains healthy but has been slowing a bit over the past twelve months, which follows a similar pattern to the other major metropolitan economies across the state through August. Given the length of the economic expansion, growth rates have regressed toward the long-term average. The unemployment rate in San Antonio is still quite low at 4.1% in August, but it has started to tick up over the past year.

Again, a similar pattern is occurring across the other major metropolitan areas, too. We are at the point in this phase of expansion where the economy is at or very near full employment, so growth is going to be driven by population growth and/or growth in productivity, so it is difficult to see that growth will be much greater than average, if it is at all in 2018. For next year, I believe we continue to see growth in San Antonio with employment increasing in the range 2.25-2.50%, which is around the historical average growth rate of 2.43%. I project that the unemployment rate in 2018 will probably be in the range of 4.00-4.25% in San Antonio in 2018.

You will also see in the slides that I think we need to consider the possibility of the U.S. economy going into recession in the next two to three years. This is simply due to the fact that the current expansion is already 100 months old, which makes it the third longest in history. If growth continues over the next two to three years, it will become the longest expansion in history.

If we learned anything in the last recession, it is that growth does not go on forever. The expansion is long in the tooth. As already mentioned, growth in the foreseeable future is going to come from population growth and/or higher levels of productivity. Given the trends in demographics with the aging baby boomer generation and limitations being put on immigration, it is difficult to see where the population growth is going to come from in the next few years. Boosts in productivity are, in part, going to be driven by technological change, and while that is exceedingly difficult to forecast, it is hard to envision from where the boost in productivity will come in the near future. With this in mind, it seems that the odds are pretty high that the economy will run out of steam within the next two to three years.

Of course, all of this is contingent on various risks, and the biggest risk I see at this point is political risk. The national and global political situation has injected a massive amount of uncertainty into the business and economic environment. This, in and of itself, can be a deterrent to economic growth, but it certainly makes economic forecasts more difficult.

Steve

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Broad-Based Growth Continues in San Antonio

With the exception of the information sector, growth continues across all other sectors of the San Antonio economy through June of this year. The growth is lead by large increases in the construction, mining, and natural resources sector (just indicated as construction/mining in the chart) and the education and health sector. I suspect most of the employment gains in the former sector has probably come from the construction industry, but with the recovery of oil prices and activity beginning to pick-up in the Eagle Ford Shale area, the mining and natural resources industries have likely contributed their parts as well.

Growth in the education and health sector is probably driven by the continued strong expansion in the healthcare industry in San Antonio. Professional and business services (indicated as prof. services in the chart) has also shown some nice increases in employment growth this year.

The question is whether or not these sectors will continue to show strong growth.

As long as the economy keeps humming along, the construction industry is probably going to continue to grow, but there are indications that the economy is reaching capacity (as noted in my previous post) and housing prices are starting to move beyond the level of affordability for many folks.

Regarding the mining and natural resources industry growth, this is going to be driven, in part, by what oil prices do. I do not think anybody really knows where oil prices are headed over the next few years, but I think the experts feel like there will be some increase.

It seems to be a safe bet that the healthcare industry will continue to grow. However, many of the healthcare organizations in San Antonio receive a large portion of their revenues from federal government sources, so the wild card is what ultimately happens with healthcare policy and the federal budget. That may be more difficult to predict than oil prices.

Employment Growth by Industry San Antonio June 2017

NOTE: TTU is the trade, transportation, and utilities sector.

 

Feel free to contact me with any questions.

Steve

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Texas Metropolitan Economies Growing but Reaching Capacity

In June employment in the San Antonio metropolitan economy grew 2.22% compared to June of last year. The growth in the region trailed the growth in Dallas, the fastest growing region in June, Fort Worth, Austin, and Texas. All of the metro areas with the exception of Houston and the state continue to see growth rates that exceed the national rate of growth in employment.

Employment Growth June 2017

The trend in growth rates is shown in the following chart and provides some insights into what is happening in these economies. The year-over-year growth rates cover the period since June 2009 (the trough of the Great Recession) to June 2017. It is very clear that while Houston’s employment growth has not quite yet recovered to the level of the other major metro areas in the state, the economy is well into a recovery driven, at least in part, by the increase in oil prices. Fort Worth has also seen nice increases in growth rates, also probably in response to rising oil prices. These increase have also pushed up the growth rate in the state. However, growth rates in San Antonio, Austin, El Paso, and Dallas appear to be on a downward trend. Since January of this year, employment growth in the San Antonio economy dipped below its historical average growth rate of 2.42%. All of these economies are probably seeing slower growth because they have reached, or are very close to, their full-employment levels. I suspect we also see similar trends in Houston, Fort Worth, and across the state over the next year or two. This means that growth is going to be driven by increases in population (more specifically, the labor force) and gains in productivity. While projections are for increasing population of approximately 2% across the state into the foreseeable future (more on this in a future post), overall demographic trends will likely constrain labor force growth. This leaves productivity gains as possibly the main driver of economic growth over the next few years.

Employment Growth Trends June 2017

Steve

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Growth Slowing in Texas and Its Major Metropolitan Economies

I recently gave a speech to the Rotary Club of Seguin titled, “Past, Present, and Future of the Central Texas Economy,” in which I discussed the current economic situation in Texas and across the major metropolitan economies in the state. Growth across the state and in these metropolitan economies has been slowing this year, as expected, but over the past few months, the rates of growth have dipped below long-term trends for San Antonio and below growth rates for the U.S. and even below 1% growth year-over-year in some of the other areas (See chart below). With employment growth of 2.55% in August, Dallas leads the way.

august-2016-employment-growth

There are several factors that play into this. Houston has seen its economy fall into recession since the decline in oil prices, and as the state’s largest metropolitan economy, this downturn ripples through other local economies. Another big factor is that labor markets in these economies are very tight, and there just might not be enough labor to fuel the continued growth we have seen over the past few years. I believe this is especially acute in Austin but could also be playing an important role in San Antonio and other areas.

Additionally, slowing growth around the globe and the continued strength of the dollar have certainly negatively impacted exports, and I can’t help but wonder if uncertainty around the U.S. presidential election has caused at least a bit of the slowdown. I still need to assess the prospects for 2017, but I want to see the results of the presidential election. Regardless of that result, though, it seems likely that some of these headwinds will continue into next year.

If you’d like to see the presentation, it can be downloaded here.

Steve

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San Antonio Economic Forecast Update

I recently presented an update to my 2016 forecast for the San Antonio economy.

Please find the full presentation slides here.

In short, the growth in the San Antonio economy has slowed this year as anticipated. As shown in the following two graphs, through July, employment had grown 2.15% compared to July of 2015 and unemployment was at 2.8% (seasonally adjusted). My forecast for San Antonio this year was for employment growth between 2.25-2.75% and an unemployment rate in the range of 3.5-3.7%. While the July figures are slightly outside these ranges, I am leaving my forecast as is with the recognition that employment growth may end the year a bit lower than 2.25% and unemployment may come in at a rate slightly above 3.7%.

Unemployment rate as of July 2016Employment growth through July 2016

Please feel free to contact me with any questions regarding the report.

Steve

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