The unemployment rate continued its decline in August across the major metropolitan economies in Texas and across the State and U.S. as the recovery from the economic effects of the pandemic continue (see Chart 1). In San Antonio, the unemployment rate declined to 4.8%, This is 1.8 percentage points above the pre-pandemic level, so while the economy is certainly recovering, there is still a ways to go. San Antonio has the third lowest unemployment rate compared to the other major metropolitan economies in Texas with Austin having the lowest at 3.8%. The unemployment rate in Texas stood at 5.9%, a bit higher than the unemployment rate for the U.S. at 5.2%.
However, the total level of employment in San Antonio declined in July and August, as shown in Chart 2. This indicates to me that at least part of the decline in the unemployment rate in San Antonio may be due to people dropping out of the labor force and therefore, no longer being counted in the unemployment rate. This is also occurring in some of the other major metropolitan economies across the state.
While there have been monthly declines in total employment the past couple of months, the year-over-year growth rates in employment continued to be strong in August with growth in San Antonio coming in at 3.94% (see Chart 3), a good bit above the average historical growth rate in the region of about 2.3%. However, these growth rates continue to decline across most regions in the state, as well as across the entire state of Texas and the U.S. This is likely due to a regression to the mean as the recovery continues and some pull back in consumer spending due to the Delta variant. Another possible factor is the lag in business travel due to the pandemic. This especially affects those local economies with large leisure and hospitality industries like San Antonio because the convention activity is not filling in for the decline in leisure travel as the new school year began.
If we can keep making strides against the pandemic, growth should continue into the near future. This does not mean the year-over-year growth rates will increase, as they will likely tend to move more toward their long-term average rates in the respective areas as the economy gets closer to full employment. The sustained growth will also continue to push the unemployment rates down, especially as the structural unemployment is reduced.
Employment in the San Antonio economy actually declined in July compared to June, as shown in the following table. Compared to the employment level in Feb. 2020, the month before the pandemic hit, employment in San Antonio was still down 25,500 jobs as of June and then in July decreased another 900 jobs to now being off by 26,400 jobs. The employment situation worsened in August as total employment was down 29,200 jobs compared to February 2020. These trends are probably reflecting many novel factors at play in the labor market, not only in San Antonio but across the U.S. and the world.
The unemployment rate in San Antonio has declined from 5.5% in June to 5.1% in July, and now it is sits at 4.8% in August. If the unemployment rate is going down while employment levels are also going down, this seems to me to indicate that the decline in the unemployment rate is due to people dropping out of the labor force instead of finding jobs. This may be due, in part, to the reduction/expiration of unemployment benefits, but it does not seem to indicate that the removal of those benefits had the large impacts on employment that some believed would be the case. Other factors seem to be driving workers’ decisions. Dr. David Autor puts forth an interesting explanation of what may be happening in his New York Times opinion piece (Autor, 2021). Regarding the effects of unemployment benefits, he refers to research showing that states which dropped the federal unemployment benefits this summer have seen very small declines in their unemployment rates. The Financial Times also recently published research on this same phenomenon (Smith and Zhang, 2021). Furthermore, Autor points out that Europe and Britain did not expand their unemployment benefits in a substantial way, and yet, they are also experiencing a labor shortage, too (Autor, 2021).
Having to put your son or daughter in child care has also been put forth as a possible explanation for the labor shortage, but as Autor notes, “women with children have since returned to work at almost the same rate as women without children, meaning access to child care isn’t the main culprit” (Autor, 2021).
He argues that the main reason for the labor shortage is “people’s valuation of their own time has changed.” In other words, many potential workers have decided that it is no longer worth working in a low wage job where they are also likely to be without benefits. As shown in the table above, those industries where wages are lowest are also those where there is high person-to-person interaction and thus, where workers are at increased risk of exposure to COVID. Instead, some are choosing to spend more time with their family and pursue other leisure activities that enhance their standard of living even if it reduces their incomes and consumption (Autor, 2021).
In addition to the explanation put forth by Autor, other factors may also explain what is happening in the labor market in San Antonio. It is clear in the table above that the leisure and hospitality industry and the education and health industry account for most of these job losses. As of June, leisure and hospitality accounted for 17,900 of the decline in jobs, and 8,600 of the jobs lost were in education and health. The employment situation improved in the leisure and hospitality industry in July where the reduction in employment compared to Feb. 2020 declined to 15,800, but the employment level worsened in August to 18,000 jobs. I think this may be due to the rather robust summer vacation season coming to an end followed by convention activity that is still depressed due to the pandemic. The situation got a bit worse in the education and health industry with employment being down 12,100 in July over this same time period but improved in August as the decline reduced to 10,200 jobs. The leisure and hospitality industry and education and health comprise a large part of the San Antonio economy. Besides the shift from leisure visitors to conventions as summer has ended that is possibly affecting employment in the leisure and hospitality industry, there is also much anecdotal evidence of workers in the leisure and hospitality and education and health industries leaving their jobs to seek employment in other industries for many of the reasons already stated. I suspect other metropolitan areas where these industries are a big component of the local economy are seeing similar effects.
It is also worth noting that in the industry that has shown the largest growth since Feb. 2020 by a wide margin, professional and business services, the growth declined from being up 9,900 jobs in June to only being up 6,300 jobs in July. Looking at the data on this industry in more detail, most of the decline occurred in the administration and waste services industry, for which I do not have an explanation. Employment levels did improve a bit in August with total employment in this industry being 7,100 jobs above the February 2020 level.
It is also important to keep in mind the wage levels of the workers most impacted by the economic effects of the pandemic. The average wage is presented in the table above and is calculated using data from the Quarterly Census of Employment and Wages for Bexar County. The average wage across all industries is $56,126 as of 2019, and of the four industries with below average wages, three of those industries are also the three most impacted by the pandemic in terms of declines in employment. This is no surprise as we have known that the economic effects of the pandemic have disproportionately fallen on those at the lower end of the income scale. As mentioned earlier, these are also likely to be the people most impacted by the loss of unemployment benefits, and given the other aforementioned factors at play in this labor market, it may also be deleterious to the overall economic recovery as their spending and engagement in the economy possibly declines.
Even more so, the adjustments happening on the supply-side of the labor market as discussed above indicate that the persistent labor shortage is due to structural changes, as workers reassess the value of their time and/or seek to transition to employment in different industries or different jobs in the same industry. The upshot is that the recovery back to pre-pandemic employment levels will take longer than if these effects were not occurring. This means that facilitating these adjustments is of utmost importance to helping those seeking to transition to new careers, but it is also vital to reducing the time it takes the economy to fully recover.
With the United Kingdom voting to leave the European Union, it is worth considering the impact it might have on the San Antonio economy. This basically translates to how it might affect the U.S. and Texas economies because I don’t think it will have any direct effects on the San Antonio economy since there is not a very strong connection between the San Antonio and United Kingdom economies. However, there is a reasonable chance that the uncertainty and chaos caused by Brexit throws the United Kingdom and European Union economies into recession. The best I think we can hope for it that it has no effect. I can’t envision a scenario where Brexit increases economic growth in the U.K or the E.U.
While the United Kingdom’s economy is not big enough to throw the U.S.into recession, according to The Economist, “…Britain is big enough for a recession there to have a meaningful effect on Europe’s economy. As a rule of thumb, whatever the reduction in Britain’s GDP growth, Europe’s economy will suffer a drop of about half as much.”
If a recession in Britain does drag Europe into a recession, the ripples across the pond could drag the U.S. economy into a period of slower growth possibly leading to a recession because the European Union taken together is the largest economy in the world. GDP in the European Union was $18.51 trillion in 2014 compared to GDP in the United States of $17.42 trillion in 2014.
In 2015, U.S. exports to the European Union amounted to $272 billion which equated to 13.36% of all exports (See Trade data). This makes the European Union the second largest export market for the U.S. behind Canada at $281 billion. Mexico is the third largest export market receiving $236 billion in exports from U.S. companies. Exports to the United Kingdom were $56 billion in 2015 (2.76% of all exports). While Texas has the largest volume of exports among all states (See Exports by state 2015), the United Kingdom accounted for 1.8% of total exports from Texas in 2015. This relatively low volume of trade does not mean Texas and the San Antonio economies will be immune from the effects of Brexit. If growth in the U.S. economy slows, it is likely that growth in the Texas and San Antonio economies will follow suit.
This past Tuesday, June 23, I gave a speech to a gathering of bankSNB directors and clients on the San Antonio regional economy. I provided an update on how the San Antonio economy is doing through April and compared it to the U.S., Texas, and other major metropolitan economies in the state. In short, San Antonio’s economy continues to grow at a healthy clip, and I expect the growth to continue through the rest of the year. One graphic that really jumped out to me was the rapid rate of increase in single-family housing prices, especially in Dallas and Fort Worth. This is certainly something worth watching going forward. If you are interested in looking at the presentation, it can be found here.
I released my 2015 economic forecast for the San Antonio economy yesterday. I am projecting employment growth in the range 2.25-3.0% and a reduction in the unemployment rate to 3.4-3.8%. The employment growth forecast is down a bit from the growth San Antonio experienced in 2014 at 3.26%, but it is still a healthy growth rate for San Antonio and will continue to push unemployment down from its December rate at 3.9%. Keith Phillips, senior economist at the Federal Reserve Bank of Dallas, projects employment growth for Texas to be in the range of 1.0-2.0% in 2015. Employment across the state grew at a rate of 3.23% in 2014, so while it is projected that the state will continue to see growth, it is a fairly sizable reduction.
The reductions in projected growth rates for 2015 are mainly due to the impacts on the Texas and San Antonio economies, but the divergence in the size of the decreases in the growth rates between Texas and San Antonio is due to the differing impacts on the respective economies. The energy industry is a big (and increasing) part of the Texas economy, so while there will likely be a boost in consumer spending due to lower fuel prices, areas like Houston, Dallas, Ft. Worth, Midland/Odessa, Corpus Christi, and Longview are still likely to be hit pretty hard, since the energy industry is a large part of their regional economies.
However, while the San Antonio economy will be negatively affected by the downward pressure from slowing growth across the state, it has some unique characteristics that will minimize the impact. One key characteristic is that the mining industry is only about 3% of the San Antonio economy. Additionally, much of that industry in San Antonio is focused on refining, so it will actually benefit from the low oil prices. There has also been some concern that the slowing activity in the Eagle Ford shale area will have a big impact on San Antonio. There will certainly be a negative impact, but the vast majority of the activity in the Eagle Ford area is south of San Antonio. Thus, while the San Antonio economy certainly benefited from the Eagle Ford shale play, the impact on growth was not substantial, and as such, I don’t think the negative impact will be very large, either. Another unique characteristic is that the reduction in employment that will continue as Eagle Ford drilling activity decreases will likely be absorbed by the construction industry in San Antonio. It is not unique to San Antonio that the housing market is very strong, as the housing market is tight across the state. As the Eagle Ford hiring activity increased a few years ago, we saw workers leave the construction industry in San Antonio to work in the Eagle Ford area for much higher wages, but that flow of labor will most likely reverse itself this year. With the tight housing market, construction activity is likely to increase this year, so as employment in Eagle Ford continues to decline, many of these workers but the close proximity of San Antonio to Eagle Ford means that many of these workers will possibly be able to find employment in the construction industry. Lastly, much of the tourism business in San Antonio comes from visitors who drive to the area, so the lower gas prices making it cheaper to drive and providing additional disposable income could cause a boost in tourism in San Antonio.
Other risks to the forecast include slowing growth around the world and the strong dollar. The impact of the strong dollar is already starting to show its effects on the San Antonio economy, but I do not think this will be a large negative impact. It does contribute some to the slowing growth as indicated in the forecast.
If the forecasts come to fruition, growth in Texas will likely fall below that of the U.S., but San Antonio will at least see growth at its historical average rate. However you look at it, 2015 will still be a year of growth.