Economy facing more challenges

More challenges are arising for the Texas economy, both in the manufacturing and service sectors, according to new reports from the Federal Reserve Bank of Dallas.

The state's manufacturing activity declined in November, according to business executives responding to the Texas Manufacturing Survey Outlook, with a drop in new orders and some companies starting to cut jobs.

"This month's survey painted an ominous picture for Texas manufacturing — production was flat and new orders declined sharply. Job growth has slowed and a rising share of firms noted layoffs," said Emily Kerr, Dallas Fed senior business economist. "An increasing share of manufacturers said it is now harder to pass increased costs on to customers than it was six months ago. As such, 60% said their operating margins have declined from six months ago. Outlooks worsened further amid heightened uncertainty."

The anonymous Texas Business Outlook Survey received feedback from 397 business executives Nov. 14-22.

According to responses, the November index for general business activity, which measures broader business conditions, posted a seventh consecutive negative reading, but still managed to move up five points from October to minus 14.

The new orders index plummeted to minus 21 — its sixth month in a row in negative territory and lowest reading since May 2020. The company outlook index also pushed down, dropping minus 9 to minus 15.

"It is difficult to raise prices in certain markets due to the onslaught of imports from other countries," said an executive in metal manufacturing.

An executive in food manufacturing said: "Operating margins are lower than pre-COVID. We have some pricing power on some products but not on all products."

Austin could be an exception to the slowdown in factory production. Central Texas is experiencing a manufacturing boom, led by automaker Tesla, which has made Austin its headquarters. The company opened a $1.1 billion manufacturing facility in southeastern Travis County, where it is producing its Model Y electric SUVs.

In addition, tech giant Samsung is building a $17 billion semiconductor manufacturing facility in Taylor. According to documents filed with the state, Samsung is considering building 11 chipmaking facilities in the Austin area over the next two decades, a move that could lead to nearly $200 billion in new investment and create more than 10,000 jobs for the technology giant.

Ray Perryman, a Waco-based economist, said that if Samsung carries through with plans to build all or most of the 11 fabs in the Austin area, it would be among the biggest wins in the history of Austin's technology sector. He compared it to Austin landing the research consortiums MCC and Sematech in the 1980s, which helped lay the foundation for Austin to become a technology hub.

"If this entire program comes to fruition, it would dwarf any prior locations and rank with the attraction of MCC and Sematech in the 1980s as the most important milestones in cementing the Austin area as a major force in the global technology complex," Perryman said.

However, Perryman said Austin and Texas economies cannot escape a broader economic slowdown.

"Like everywhere, the Texas economy is facing headwinds from inflation, uncertainty regarding global growth, recovery from the lingering effects of the pandemic such as supply chain issues, and labor shortages. We aren't immune to these ills," Perryman said.

"However, Texas is in a better position to work through most of them. For example, high cost for fuels is bad for many businesses, but also spurs activity in industries where Texas has a sizable presence. Job growth has also remained solid. We also have a larger population of young people and movement to Texas from other areas continues," he said.

Another thing that Austin has working in its favor is its unemployment rate, which came in at 2.8% in October, according to data from the Texas Workforce Commission. That number is identical to September and a level that economists generally consider so low that it means most people who want a job have one.

Slower growth in service sector, retail

Meanwhile, activity in the Texas service sector — which includes retail and hospitality-related businesses as well as technical services — increased at a slower pace in November, according to the Dallas Fed.

The outlook uncertainty index fell four points to a reading of 23 in November.

"Selling and input price growth continued to moderate, but wage pressures picked up slightly," said Jesus Cañas, Dallas Fed senior business economist. "Perceptions of broader business conditions remained negative."

The service sector accounts for nearly 70% of the state's economy and employs about 9.5 million workers, according to the Dallas Fed.

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 that sales deteriorated in November.

"Retailers noted declining sales for the ninth consecutive month and retail employment contracted," Cañas said.

Of those surveyed, 82% said they raised prices this year and 35% said they plan to raise prices in 2023.

"As input costs rise, our margins get squeezed," a wholesaler said. "We try to claw back some of the lost margin, but there is real resistance to any additional price increases."