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Dallas Fed: Texas Economy in Good Shape, But Higher Oil Prices Wouldn’t Hurt

CC0 / / Dallas, Texas
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The economy of Texas is gaining momentum as macro fundamentals for December exceeded expectations and reflected a robust post-hurricane recovery, marred somewhat by the uncertain outlook on the global oil market.

Kristian Rouz The Federal Reserve Bank of Dallas says the Texas economy has improved across-the-board as retail sales and manufacturing posted upbeat figures at the yearend. However, central bankers say crude prices still aren’t high enough for the drillers to boost production, restraining the Lone Star State's oil production capacity.

A new report from the Dallas Fed says Texas manufacturing accelerated in December, with factory activity having reached its 11-year highest. According to the latest Texas Manufacturing Outlook Survey, state manufacturers are more optimistic regarding the overall economic environment amid solid consumer demand and a tight labor market.

The benchmark Production Index surged 18 points to reach 32.8 compared to 15.1 last month, driven by the expansion in new orders and order rates. This suggests higher projected demand for manufactured goods next year.

READ MORE: Another New Normal: US Retail Hysteria Sees Bonfires Set Inside Texas Walmart

“With the passage of the tax relief bill, my feeling is that the manufacturing segment of the economy will continue to grow at a faster pace. The biggest problem for most manufacturing companies will be finding and hiring competent employees,” an anonymous Dallas Fed survey participant said as cited in the bank’s report.

Shipments of already-produced goods increased to 21.5 points in the index, an almost 5-point increase from November. Meanwhile, the capacity utilization rate index rose 9 points to 26.3 in December, reflecting an improvement in potential manufacturing output.

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These figures suggest a rapid expansion on both the demand and supply sides of the Texan manufacturing sector.

In 2016 alone, Texas manufacturers produced $226 bln worth of goods as contribution to US GDP, while $210 bln worth of US exports originated from Texas that year.
In a separate poll, the Dallas Fed found that retailer sentiment is also optimistic, as the post-hurricane recovery in the fourth quarter drove household spending and consumer demand. The Christmas holiday season also produced substantial revenues for Texan retailers.

READ MORE: US Senate Dems Introduce Legislation to Ban Assault Weapons After Texas Shooting

"Strength in retail continued despite a slightly slower pace of sales growth in November," Dallas Fed assistant economist Amy Jordan said.

The state's retail sector was also buoyed by the strengthening labor market, as many businesses opted to step up full-time hiring rather than recruit temporary personnel. Both state employment and hours worked indices increased, lifting the disposable incomes of households.

"If you look at 2017 on the whole, we had faster growth on average than in 2016," Mrs. Jordan said.

However, the Texas oil industry is still facing multiple challenges, hindering its growth capacity. Oil drillers require higher crude prices in order to step-up drilling and extraction activities without hurting their own revenues, Dallas Fed said in a yet another report.

This comes as US companies have increased their overall drilling to record-high levels over this outgoing year, as oil prices have increased from $26/bbl in early 2016 to over $60/bbl currently.

Extraction costs in Texas are higher than in North Dakota, where most of the expansion in drilling took place over the past 18 months. Texan oil producers say they can’t boost output unless there is solid evidence that global oil prices have settled above $60/bbl.

This as WTI oil traded just below $60/bbl this week in New York.

The total US oilrig count has increased to 931 this year, a 43-percent increase from 2016, according to data from Baker Hughes. Texan producers expect the rig count to extend its increase into the coming six months, albeit at a slower pace due to uncertainty regarding future oil price fluctuations.

The acceleration in Texan manufacturing could boost US energy prices, alleviating some of the oil producers’ concern. Additionally, the projected increase in US crude oil exports could help boost Texas production.

Oilrig servicing company Keane Group reported it had placed orders for three new fracking fleets, reflecting oil producer optimism regarding the expected demand for energy.

However, the outlook on oil prices in 2018 remains uncertain, as the expansion in US manufacturing and the rising demand for oil overseas could be offset by the expected expansion in US output from its current 9.75 mln bpd to over 10 mln bpd next year.

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